Partners posts $108m operating loss, its largest

Partners HealthCare posted the biggest annual operating loss in its 22-year history. Lane Turner/Globe Staff/File/Globe Staff

Partners HealthCare posted the biggest annual operating loss in its 22-year history, driven by red ink at Neighborhood Health Plan, a Medicaid insurer whose finances have deteriorated since Partners acquired it in 2012.

The state’s largest health network said Friday that it lost $108 million on operations in the year that ended Sept. 30, reversing a profit of $106 million a year earlier. Revenue at the parent company of Massachusetts General and Brigham and Women’s hospitals rose 7 percent to $12.5 billion, but expenses grew at a faster clip.

Partners said almost all of the losses — $104 million — came from Neighborhood Health, the largest insurer for low-income families and individuals on the state’s Medicaid program, called MassHealth. The insurer has increased its MassHealth membership by 80 percent in the past three years, but Partners said many of the people were sicker than expected, and that government payments don’t cover the full costs of care.

Partners acquired Neighborhood four years ago to gain a foothold in the insurance business and reach a broader population of patients. It argued that with a health plan in its portfolio, it could develop better ways of delivering care to patients with complex illnesses. But after $322 million in losses over the past three years, Partners is now under pressure to put the insurer on solid footing.

In October, Neighborhood Health stopped accepting new MassHealth members while it tries to negotiate new contracts with some hospitals. It is diversifying by bringing in a growing number of business customers. As Neighborhood’s losses mounted, Partners executives even considered selling off the insurance company, but they are now focused on fixing it.

“You can’t bleed red ink forever, but we’ve invested in the management there, brought some new people in,” Partners’ chief financial officer, Peter K. Markell, said in an interview. “We have reorganized to create a commercial division and MassHealth division. We’re pretty committed to trying to make it work.”

Partners’ hospital network also posted a $4 million loss during the year, a rare deficit that Markell attributed to growing competition for patients.

Although Partners has been criticized for using its market power to extract higher payments from insurers, Markell said the payments simply aren’t enough.

“At the end of the day, the biggest issue is the rate of payment we get from commercial payers and Medicare and Medicaid,” he said. “Those payments are not keeping up with wage increases and pharmaceutical costs.”

The financial challenges for the year also included continuing costs of implementing Partners’ new $1.2 billion electronic health record software .

Partners, like many health systems, has money invested in financial markets. When those investments are included, Partners lost $249 million in 2016, compared with a $92 million loss in 2015.

Neighborhood Health is one of six insurers that the state pays to manage care for people on MassHealth. All of those plans face similar challenges: Their members, often struggling with poverty, are more likely to have complex medical needs, and insurers say the state’s reimbursements through the MassHealth program don’t keep pace with their costs.

But Neighborhood Health’s losses have mounted as its MassHealth business has grown. MassHealth accounts for two-thirds of its 454,000 members, and the company is implementing a “corrective action plan.”

“Neighborhood Health Plan struggled financially for some time even prior to Partners’ acquisition of them,” said John Freedman, a health care consultant.

But Neighborhood faces an additional challenge, according to Partners officials and health experts. It is the only insurer available on the state Health Connector and the only MassHealth insurer that offers full access to Partners’ prestigious hospitals, so it tends to attract a mix of patients who are sicker than those who join other health plans.

Mark Shepard, an assistant professor at Harvard’s John F. Kennedy School of Government, has studied Neighborhood Health’s enrollment patterns. “The types of people that select into the only plan covering Partners would tend to be high cost, more likely to use Partners, which is an expensive health care provider, and therefore less profitable to the insurance company,” he said.

There is uncertainty ahead for Neighborhood as the state prepares to roll out a major restructuring of the MassHealth program, moving from the traditional fee-for-service payment model to one that gives providers a fixed amount to take care of patients. Partners also reported that its doctors and hospitals, which account for the bulk of its business, logged weaker financial performances this year. Two community hospitals, North Shore Medical Center and Newton-Wellesley Hospital, saw fewer patients than expected. Partners competes with Lahey Health, Steward Health Care System, Beth Israel Deaconess Medical Center, and other health systems.

“People are being lured away,” Markell said. “It’s just very competitive.”

Even while they advocate for higher payments from insurers, Partners executives have hired consultants to help them find efficiencies and reduce costs.

Partners’ financial challenges are being felt, to some degree, across the health care industry, said Robert S. Huckman, professor at Harvard Business School. “It is a tougher environment for providers and for insurers,” he said. “[There is] pressure to keep costs down, but health care requires labor and equipment and technology, all of which have costs that are increasing.”