Partners HealthCare
Center 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?
Margin Requirements% of
Revenue
Principal Payments 0.5%Capital Spending (in excess of depreciation) 3.9%
4.4%
Working Capital 1.6%
Net Requirement 6.0%
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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
Financial Stability
Access to Debt
Capital Investment
• 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: <40%)
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Partners Operating Margins: FY99-FY08$
in M
illi
ons
$120
$(132)
$(72)
$106
$133
$76
$36
$(30)
$13
$(31)
$(150)
$(100)
$(50)
$-
$50
$100
$150 Operating Margin
FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
Ops Margin -4.4% -2.2% -1.0% 0.3% -0.7% 0.7% 1.4% 2.2% 1.6% 1.7%
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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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+ 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
Rationing Process
Partners Financial Framework
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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 S&P and Moody’s. 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 Moody’s and S&P review and how do we compare to the Aa2/AA medians? Moody's S&P 2
FY04 FY05 FY06 FY07 FY08 FY09 Budget Aa2 AA+/ AA
Debt/ Cap 32.0% 33.5% 28.9% 30.8% 31.6% 33.8%
Debt + Leases/ Cap 39.8% 43.0% 37.5% 37.0% 37.4% 38.3% 26.1% 26.9%
Debt Service Coverage (MADS) 1 4.7 4.6 6.3 4.5 3.5 4.5
2.8 3.1 4.0 3.2 2.6 3.2 7.0 7.2 w/ NPV Leases
Cash/ Debt 204% 188% 219% 192% 192% 175%
Cash/ Debt + NPV Leases 141% 128% 151% 146% 148% 144% 235% 198%
1 Net revenue available for debt service divided by estimated future peak principal payments and interest expense. Excludes change in net unrealized
gains on equity method investments and nonrecurring nonoperating gains of $186M and $206M in FY06 and FY07, respectively, related to Enbrel.2 Moody's and S&P Medians were published in FY08 but are based on FY07 results
Debt Service Coverage (MADS)
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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
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
$1,100
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Unfunded Capital Requests
Funded Capital
Capital Capacity @ 2% Margin
($ in
Million
s)
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AMC Total Patient Care Margin Dollars - FY07 vs. FY08
* Excludes BWH DFCI activity
($180,000)
($120,000)
($60,000)
$0
$60,000
$120,000
$180,000
$240,000
$300,000
$360,000
$420,000
$480,000
$540,000
Commercial OtherGovernment
Free Care Mcare Mgd.Care
Medicaid Medicare Total
Ma
rgin
(in
$0
00
s)
FY 07 Margin$
FY 08 Margin$
15
$0.00
$0.25
$0.50
$0.75
$1.00
$1.25
$1.50
Commercial Other
Government
Mcare Mgd.
Care
Medicaid Medicare Free Care Total
Cen
ts o
n t
he
Do
llar
FY 2007 FY 2008
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
($20,000)
($10,000)
$0
$10,000
$20,000
$30,000
$40,000
$50,000
Cance
r
Cardi
acO
rthop
edic
s
GI
Infe
ctiou
s Dise
ase
Obs
tetric
sN
euro
surg
ery
NIC
U
Respi
rato
ryO
ther
Med
icine
Men
tal H
ealth
Trach
eosto
my
Net
Mar
gin
in 0
00s
FY06YE FY07YE FY08YE
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AMC OP Net Margin Trends by Service FY06 - FY08 Year End
($100,000)
($75,000)
($50,000)
($25,000)
$0
$25,000
$50,000
$75,000
$100,000
$125,000
Net
Ma
rg
in i
n 0
00
s
FY06YE FY07YE FY08YE
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Public → Private Payer Cost Shift
We estimate that, if the public payers paid at cost, the premium to private employees would be reduced by 16%. In other words, 84% of the premium paid by employers is to cover their own employees and 16% is a hidden tax because government programs do not pay the full cost of the services received.
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FY09 FY10 FY11 FY12 FY13 FY09-FY13
Sources from Ops/Non-Ops 78.09 82.73 88.16 93.71Margin 142.1 160.2 173.7 184.7 195.5 856.2$ Depreciation & Amortization 327.9 352.9 362.3 385.1 387.3 1,815.5$ Cash generated/ used by balance sheet (24.6)$ (24.5)$ (19.1)$ (25.2)$ (29.6)$ (123.0)$ Gifts & Others (unrestricted) (19.7) (26.2) (27.3) (28.4) (29.6) (131.2)$ Non Op Investment Income/ Unrealized Gains 25.4$ 30.7$ 176.5$ 187.9$ 201.6$ 622.1$ External Sources (Research) 13.2$ 13.2$ 13.2$ 13.2$ 13.2$ 65.8$ FY08 Uncommitted Cash Shortfall (205.0)$ (205.0)$ Total Release of Prior Year Tail & Other Reserves 109.9$ (11.8)$ (51.0)$ (12.0)$ (12.3)$ 22.9$
Net Cash Generated from Ops/Non-Ops 369.2$ 494.5$ 628.2$ 705.4$ 726.0$ 2,923.3$
Required CommitmentsPrincipal Payments Long Term Debt (39.2) (51.4) (53.3) (62.3) (59.1) (265.5)$ Expense/ Day Reserve (120.6) (155.3) (123.1) (137.4) (151.2) (687.5)$
Total-Required Commitments (159.8)$ (206.7)$ (176.4)$ (199.7)$ (210.3)$ (953.0)$
Net Cash Available Before Debt & Fundraising 209.4$ 287.7$ 451.8$ 505.7$ 515.7$ 1,970.3$ Total Incremental Fundraising 71.9$ 58.8$ 52.1$ 16.0$ 10.0$ 208.8$ Framework Debt 400.0 0.0 400.0 0.0 400.0 1,200.0$ Deferred Use of Proceeds (200.0) 200.0 (200.0) 200.0 (200.0) (200.0)$
Total Debt & Fundraising 271.9$ 258.8$ 252.1$ 216.0$ 210.0$ 1,208.8$
Net Cash Available for Capital 481.3$ 546.5$ 703.9$ 721.7$ 725.7$ 3,179.1$
Baseline Spending (151.5)$ (176.7)$ (183.3)$ (194.5)$ (195.8)$ (901.8)$ Known Commitments (incl Cap I and inflation) (384.2)$ (325.3)$ (290.6)$ (87.6)$ (49.6)$ (1,137.3)$ Other Capital (e.g. Ext Sources, PY Tail) (77.2)$ (19.4)$ (13.2)$ (13.2)$ (13.2)$ (136.1)$
Capital Spending Before New Inits (612.9)$ (521.5)$ (487.1)$ (295.2)$ (258.5)$ (2,175.1)$
Net Cash Available for New Inits (131.6)$ 25.1$ 216.8$ 426.5$ 467.2$ 1,004.0$
SRH New Facility (7.0)$ (87.0)$ (104.6)$ (23.4)$ (8.8)$ (230.8)$ LTAC Investment (32.5)$ (13.6)$ (46.1)$ NWH ASC (includes local capital) (13.7)$ (15.8)$ (29.5)$
Selected New Initiative Spending (53.2)$ (116.4)$ (104.6)$ (23.4)$ (8.8)$ (306.4)$
Net Cash Available After Selected New Inits (184.8)$ (91.3)$ 112.2$ 403.1$ 458.4$ 697.6$
Available Spending for additional New Inits (239.2)$ (458.4)$ (697.6)$
GAP (184.8)$ (91.3)$ 112.2$ 163.9$ -$ -$
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
Note:
MGH includes $5.3M of Nantucket funds for Facility Renovation; NSMC Fundraising includes current projected fundraising for ACC
FY09-FY13:
$208.8M
MGH BW/F NSMC NWH SRH McLean Total
FY08FC & Prior 63.0$ 55.0$ -$ 3.8$ -$ -$ 121.8$
FY09B 36.3$ 20.0$ 8.6$ 3.0$ -$ 4.0$ 71.8$
FY10 35.0$ 5.0$ 7.8$ 1.0$ 10.0$ -$ 58.8$
FY11 36.0$ 5.0$ -$ 1.1$ 10.0$ -$ 52.1$
FY12 -$ 5.0$ -$ 1.0$ 10.0$ -$ 16.0$
FY13 -$ 10.0$ -$ -$ -$ -$ 10.0$
Total Fundraising Proceeds 170.3$ 100.0$ 16.4$ 10.0$ 30.0$ 4.0$ 330.6$