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For powerful health system, growing pains with new health plan

One of the nation's largest health systems is struggling with its new health insurance business, leading to the first loss in 15 years.

Partners HealthCare lost $22 million in its last fiscal year, after a $110 million loss at its Neighborhood Health Plan, an insurance subsidiary acquired in 2012 focused on Medicaid beneficiaries.

Excluding the health plan, Partners had a financially sound 2014 across the Brigham and Women's, Massachusetts General and seven other hospitals, various clinics, rehabilitation facilities and home health services.

The fiscal year 2014, through September 30, brought an operational surplus of $180 million (down from $600 million in 2013) and revenue $10.9 billion, an increase of five percent, according to a financial statement audited by PricewaterhouseCoopers.

Partners total current assets increased between 2013 and 2014, from $13.9 billion to to $14.7 billion, although cash and equivalents declined a bit from $471 million to $457 million and net assets declined from $7 billion to $6.9 billion. The organization also said it absorbed a shortfall of $1.1 billion in government reimbursements that didn't cover the full cost of care, and invested $120 million in community benefits.

"Our hospitals and physicians, which deliver world-class care to our patients, experienced reasonable financial performance and generated a margin of about 2 percent, which allows us to invest in new quality and safety initiatives and ways to improve the patient experience," said Peter Markell, Partners CFO and treasurer in a media release.

"However, like other Massachusetts Medicaid managed care organizations," he continued, Neighborhood Health Plan "continues to experience serious financial challenges resulting from state policy and operational issues related to ACA implementation."

Markell said that a surge of medical claims, the uber-high costs of the hepatitis C treatment Sovaldi and a dysfunctional state insurance exchange all contributed to the $110 million loss and the decision to set aside another $92 million in premium deficiency reserves for the 2015 fiscal year -- as well as a sense of urgency shared with other Medicaid plans about changes in state policies.

Neighborhood Health Plan was founded in 1986 by a group of community hospitals to serve the state's growing Medicaid population. Partners acquired the nonprofit health plan in 2012 for an undisclosed sum, and with a vision of using it as part of an integrated healthcare system.

Since then, NHP's membership has grown by almost 100,000 to 330,000 today, and last year it turned a $5.4 million surplus.

This past year, though, brought challenges for all of Massachusetts six Medicaid plans: the breakthrough hepatitis C drug Sovaldi, selling for upwards of $80,000 per patient course, and what the Massachusetts Association of Health Plans describes as continuously low rates from the state government that aren't enough to cover the health needs members with low incomes and a high prevalence of chronic conditions.

For Neighborhood Health Plan, the state's third largest Medicaid managed care plan, Sovaldi cost $20 million, without any adjustment from the state's fee-schedule. The membership's medical cost ratio increased from a high but sustainable 91 percent in 2013 to 105 percent in 2014 -- and even higher for new Medicaid members, 120 percent.

While there have been rumors that Partners might sell Neighborhood Health Plan, the organization said it is looking for ways to improve the business. "We are currently in conversations with state officials about potential solutions as we evaluate options and strategies that can restore NHP to a solid financial footing," said Markell.

Neighborhood Health Plan is going to see new leadership. Next year, Deborah Enos, an 18-year leader of NHP and CEO since 2005, is leaving and being replaced by COO David Segal, a veteran of Harvard Pilgrim who joined in 2008.

Aside from its insurance business, Partners also faces uncertainties in its plans for suburban expansion and acquisition of two small hospital systems. Partners recently signed an agreement with Attorney General Martha Coakley to cap its prices a inflation for the next seven years in exchange for acquiring South Shore Hospital in Weymouth and Hallmark Health System in Melrose.

That deal is still under review by a state judge, and Coakley, Democrat, lost her bid for Governor to Republican Charlie Baker, a former Harvard Pilgrim CEO whose stance on expansion of the state's largest hospital system is somewhat murky

As Health and Human Services secretary in 1994 signed off on Partners' creation, but has recently expressed signs of regret, comparing the merger of Massachusetts General and Brigham and Women's to "having the grenade that you throw on one end of the boat roll back down and blow up on you when the boat shifts."