Partners HealthCare Center of Expertise in Academic Healthcare Management

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Partners HealthCareCenter of Expertise in
Academic Healthcare Management
May 14, 2009
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Partners Missions

• Clinical Care
• Research
• Teaching
• Community Support on Health Issues

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How do we generate cash for capital and operating
investment?

• We Earn it
• Operations
• Investment Income
• Philanthropy
• Debt

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What operating margin do we need to support
capital demand?
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Demand for Capital

• Since the healthcare industry is very capital
  intensive one of the biggest challenges we face
  at Partners is how to balance our capital
  appetite while ensuring financial stability

Capital Investment
Access to Debt
Financial Stability

• To manage this issue, we have developed the
  Financial Framework

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Financial Framework Key Principles

• What is the purpose of the Financial Framework?
• Partners uses the Financial Framework as a tool
  to manage investment and cash flow demands on a
  system-wide basis, both annually, and on a
  multi-year basis. The Framework has been reviewed
  and approved by the Partners Board.
• What are the key targets/drivers of the
  Framework?
• Maintain Minimum System-wide Uncommitted Days
  Cash on hand target of 105 days and a Total Cash
  target of 200 days .
• Uncommitted cash excludes all Board Designated
  and Sundry Funds and is made up of cash which
  appears on the Balance Sheet in two lines
  entitled Cash Equivalents and Investments
• Achieve System-wide 2 operating margin
• Meet required Debt Ratios (Debt Service Coverage
  3.3x and Debt to Cap lt40)

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Partners Operating Margins FY99-FY08
Operating Margin
in Millions
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The Framework

• By using the Financial Framework, we have
  provided a platform for internal decision making,
  which allows senior management to clearly
  understand what trade-offs must be made to stay
  within the envelope.
• From an external perspective, the Rating
  Agencies, have given Partners high marks for
  maintaining financial discipline. This
  structure, in addition to our strong operating
  performance, has resulted in higher bond ratings
  for Partners at the same time many of our
  competitors have seen downgrades. By improving
  our rating we have been able to borrow money for
  the benefit of the system at lower rates.

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Partners Financial Framework

• Operating Margin
• Investment Income / Unrealized Gains
• Depreciation
• Balance Sheet Changes
• Principal Payments
• Expense/Day Requirement
• Net Cash Available for Capital
• before Philanthropy and Incremental Debt
• Philanthropy
• Additional Borrowing Capacity
• Net Cash Available for Capital
• - Capital Demand
• GAP

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Financial Framework Key Elements

• Expense/Day Reserves Reserving for an increase
  in annual expenses is necessary to maintain the
  System-wide Uncommitted Days Cash on Hand target
  of 105 days.
• Debt Partners borrows on behalf of the system.
  We are currently rated a AA credit by SP and
  Moodys. The Financial Framework is one of the
  key factors that supports our rating, since it
  shows a strong management focus on balancing our
  investment needs, while maintaining our key
  financial ratios.
• Fundraising dollars accrue exclusively to the
  benefit of the entity/family receiving the gift
  they are not available to support System-wide
  investments.

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Partners and Rating Agency Medians
What are some of the key ratios that Moodys and
SP review and how do we compare to the Aa2/AA
medians?
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How does Partners use the Framework to make
decisions?

• Margin Achieving at least a 2 system-wide
  operating margin is necessary to support the
  capital needs of the system.
• What do we do to meet this objective?
• Annual and multi year margin targets are
  established for each of the Partners families
  e.g. BWF, MGH, NSMC, NW, PCC as well as all other
  entities
• The ability of each member of Partners HealthCare
  to maximize their margin is key to the success of
  this strategy.
• Key management actions that may be necessary to
  achieve these targets are identified. We
  currently have a major cost management initiative
  underway.

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FY09-FY13 Capital Spending totals 3.2B
( in Millions)

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AMC Total Patient Care Margin Dollars - FY07 vs.
FY08
Excludes BWH DFCI activity
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AMC Total Patient Care Cents on the Dollar FY07
vs FY08
Excludes BWH DFCI activity
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AMC IP Net Margin Trends by Service FY06 - FY08
Year End
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AMC OP Net Margin Trends by Service FY06 - FY08
Year End
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Public ? Private Payer Cost Shift

• We estimate that, if the public payers paid at
  cost, the premium to private employees would be
  reduced by 16. In other words, 84 of the
  premium paid by employers is to cover their own
  employees and 16 is a hidden tax because
  government programs do not pay the full cost of
  the services received.

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Financial Framework FY09 FY13 (2 Margin)
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MY Fundraising Capital Spending is offset by
approximately 200M in Philanthropy proceeds
during the FY09-FY13 timeframe
FY09-FY13 208.8M
Note MGH includes 5.3M of Nantucket funds for
Facility Renovation NSMC Fundraising includes
current projected fundraising for ACC