Faced with flat patient volume, higher expenses, and a shortfall from government payments, Partners HealthCare System Inc. today reported a 35 percent drop in its income for the second quarter.
The income decline to $22.5 million for the three months ending March 31, compared with $34.5 million during the same period a year ago, comes as Boston-based Partners finds itself at the center of a growing debate over how to contain rising medical costs in Massachusetts.
Last month, the US Justice Department opened a civil investigation into possible anti-competitive behavior by Partners, the region's most powerful hospital and physician network. Earlier this year, Attorney General Martha Coakley issued a report pointing to the market cloud of some health care providers, including Partners, as a principal driver of increasing medical costs in the state.
Partners, which owns Massachusetts General Hospital and Brigham and Women's Hospital, both teaching affiliates of Harvard Medical School, finished the second quarter with total assets of $10.4 billion, up from $10.1 billion last Sept. 30. Those assets -- among them $5.3 billion in investments, including a $1 billion endowment -- underscore the deep financial resources from which the hospital system can draw.
But the recent focus on reining in costs -- including through state government caps on some health insurance rates and proposed legislation to control growth in spending on medical care -- has created a more uncertain environment for health care providers, said Peter K. Markell, the company's vice president of finance.
"The organization is relatively healthy right now," Markell said. "That can change pretty quickly. It's a very challenging environment, very fluid. Rates of payment are under attack and we're just going to have to see what other pressures come to bear. It's become more difficult to plan, but we're working our way through it."
Partners, a nonprofit health care provider, has been on the sidelines in the current dispute between state regulators and insurers over rates for plans covering individuals and small businesses because its contracts with insurers run through 2012, said Markell. But executives at Partners don't expect that will insulate them for long as the clamor for cost control rises.
"I think the state will put pressure on the insurance companies and they will put pressure on us," Markell said. "But there are no free lunches. If costs are getting cut, there has to be cuts in programs." Partners executives have concluded that "we're going to just have to squeeze expenses more and get more efficient," he said.
For the second quarter, Partners said its operating income fell to $13.1 million from $36 million a year ago. That was partly offset by nonoperating income of $9 million, mostly from investments, compared with an investment loss of $1.6 million last year when the stock market tumbled.
The decline in operating income stemmed from several factors. One was a flattening of patient volume and a decline in some elective procedures such as imaging tests and cosmetic surgery. "With the economy and people paying more out of their own dollars, I think people are paying attention and being more careful," Markell said. Overall operating revenue in the quarter rose slightly to $1.9 billion from $1.8 billion a year ago.
Another factor in the income drop was an increase in labor costs, employee health benefits, and the Partners pension liability, which climbed 30 percent due to a change in the discount rate used to compute liability.
Partners, like other health care providers, also saw its shortfall from government payments widen as higher costs outstripped increases in payments from Medicare and Medicaid, the federal programs that insure senior citizens and low-income people.