Business

Partners’ gain hurt by drop in swaps

Down 24 percent from 1st quarter in previous year

Partners HealthCare System Inc. reported that its first-quarter financial gain fell 24 percent from a year earlier as a drop in investment earnings offset higher operating income for its hospitals and doctors in the three months ended Dec. 31.

While financial markets were strong during the October-to-December period, Partners’ investment portfolio was hurt by a decline in the value of financial hedges, called interest-rate swaps, it purchased to lock in future rates for debt financing. The financial instruments traded currently low variable-rate interest for higher fixed rates.

The overall Partners’ financial gain for the first quarter was $127.6 million, down from the $167.9 million gain it recorded for the same period a year before.

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Partners, the region’s largest health care provider, posted income from operations of $72 million in the first quarter, more than triple the $22.9 million it registered in the corresponding period of 2010. Most of that increase was due to a $40 million accounting charge the Boston-based system recorded in the year-ago quarter when it set aside money to fulfill its pledge to ease health insurance premiums for employers and individuals.

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Since then, Partners, which owns Massachusetts General and Brigham and Women’s hospitals in Boston, has renegotiated multiyear contracts with insurers Blue Cross Blue Shield of Massachusetts and Tufts Health Plan. Partners will be paid $95 million less in 2012 under the new pacts than it would have been under the previous ones.

Perhaps more important, Partners agreed to shift some of its health care payments to risk-based contracts in which its hospitals and physicians will be given fixed budgets to treat patients instead of being reimbursed for visits, tests, and procedures.

Despite the drop in nonoperating income to $55.6 million, from $145.5 million the prior year, Partners remains financially strong, said its vice president of finance, Peter K. Markell. He cited incentive payments from commercial and government insurers for meeting quality and efficiency targets along with continued strength in the “case mix’’ at its Harvard-affiliated teaching hospitals where income from more complex procedures has boosted revenues at a time when overall health care use has tapered off.

Indeed, operating revenue climbed 9 percent to $2.2 billion in the first quarter, as Partners hospitals and physicians rang up a 10 percent increase in patient service sales.

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“It was a reasonably good quarter,’’ Markell said. “[Patient] volume is holding its own. We continue to focus on cost management. The big challenge now is we are in these risk contracts, and that means we’re going to get relatively fixed payments. So we’re going to have to make that work.’’

Partners has been renegotiating its contract with a third health insurer, Harvard Pilgrim Health Care, but Markell said no deal is imminent. “We’re in good intensive discussions [with Harvard Pilgrim], and we’ll see if we get there or not,’’ he said.

In addition to the challenge of managing risk-based contracts, which are expected to represent between a third and a half of Partners’ overall business within the next two years, the system is bracing for more reimbursement cuts from Medicare and Medicaid, the federal health insurance programs for older and low-income patients.

Partners absorbed a $239 million shortfall in government payments in the last three months of 2011, about $3 million more than its quarterly shortfall the year before.

Robert Weisman can be reached at weisman@globe.com.