Partners earnings edge up in the second quarter as state drops assessment on health insurance unit

Earnings edged up in the second quarter despite narrowing profit margins at Partners HealthCare System, aided partly by a state government decision to drop an assessment on Partners’ newly acquired health insurance division, Neighborhood Health Plan.

Net income totaled $133.2 million in the three months ending March 31 for Boston-based Partners, which runs Massachusetts General and Brigham and Women’s hospitals, an increase of 0.7 percent from the $132.2 million earned in the same period last year.

Operating income jumped nearly eight-fold to $40.8 million in the most recent quarter, from $5.3 million last year, when the hospital and doctors organization took a $110 million accounting charge to write off the value of computer and software systems it was replacing.

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At the same time, second-quarter income from investments slipped to $92.3 million from $126.8 million a year earlier as falling interest rates cut into the value of financial instruments known as “swaps” that Partners has been using as hedges in its investment portfolio.

Partners operating margin—the excess of revenues over expenses—narrowed to 1.6 percent in the quarter from about 4 percent last year. That was largely due to reimbursement cuts for Medicare and Medicaid, the government insurance programs for seniors and low-income patients that represent 45 percent of Partners patient revenues.

“We live on razor-thin margins,” said Peter K. Markell, chief financial officer and treasurer at Partners. “When you get squeezed in the rate of payment, that drops right to the bottom line.”

But the quarterly results received a boost from Neighborhood Health’s $15 million in operating income. That included $6 million returned to its coffers after the state’s new Health Policy Commission reversed a one-time assessment levied in the previous quarter under a new cost containment law.

Partners earned $26 million from its health care operations in the January-to-March period. Patient service revenue was flat, with growing inpatient volume offset by weaker outpatient activity. Research revenue, meanwhile, continued to grow even as Partners hospital labs braced for federal research cuts that haven’t yet taken effect.

Looking forward, Markell said, Partners would seek to boost revenue—partly by stepping up the commercialization of its medical research—in the face of falling margins. “We’re looking at how we can create new revenue sources,” he said, “and we’re putting a lot of attention on managing costs.”