Partners’ financial health turns on complex plans

Investments, debt key to results

When Partners HealthCare, the big Boston hospital group, announces its financial results each quarter, what often stands out are not the gains and losses for providing medical services. It’s the investment and debt portfolios.

With $7.5 billion in assets under its watch — more than at most community banks — Partners feels the swerves of the stock market in a big way. And there’s another significant factor in the quarterly swings: a complex hedging strategy on Partners’ debt. Together, these are often the tail that wags the dog.

“We know we’re going to get these ups and downs,” said Peter K. Markell, chief financial officer and treasurer at Partners. His goal is to not let the volatility affect the business of delivering medical care. “The main focus of everyone is the mission — patient care, research, teaching, and service to the community.”


Partners reported non-operating results ranging from a $244 million loss in the last three months of 2008 to a $146 million gain in the same period in 2010. Indeed, in 10 of the last 17 quarters, the company reported a change in the value of investments and hedges that dwarfed its operating ­income. Income from operations over the past four years has ranged from $5 million to $116 million.

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Officials at Partners say the investment and hedging swings don’t reflect permanent changes in Partners’ wealth; rather, they offer a snapshot in time. But these levels are important for the nonprofit, as evidenced in late 2008, when Partners halted expansion plans due to declines in its investments during the financial crisis.

Partners manages its $7.5 billion portfolio for the long term, using a portion of the gains to help finance building projects. Far from the patients and doctors at Partners hospitals like Massachusetts General and Brigham and Women’s, the funds that drive the institution’s future are managed on the 11th floor of the Prudential Tower, at the company’s headquarters.

The results have hurt as well as helped, at least on paper.

For instance, in the heat of the financial crisis, $244 million in losses more than wiped out the $59 million Partners had reported in earnings for providing medical care for the quarter ended December 2008. More recently, in the first three months of 2012, a $127 million gain on financial instruments helped offset a big write-off for old computer systems that nearly wiped out all the operating earnings.


There are two components of Partners’ large quarterly swings: the investments and a separate category called swaps. These are like insurance on the hospital group’s $3 billion in long-term debt, to guard against rising interest rates. Partners uses swaps to hedge about one-quarter of its debt — bonds it sells to borrow money for new facilities and to renovate medical buildings.

Swaps became hugely popular among hospitals, universities, and other big borrowers in the mid-2000s. They offered a way for institutions to take advantage of historically low variable-rate debt, without taking on too much risk. In one instance, Partners says, it locked in a low variable rate, and even with the cost of the hedge is paying 4.6 percent on the debt, versus the 5.5 percent it would have paid on fixed-rate bonds.

“This was a very popular strategy,’’ said Moody’s hospital analyst Daniel Steingart. But it has dropped off significantly since the financial crisis, when swaps backfired and proved costly for the likes of Harvard University. They were costly mainly for those who sold, much like selling a stock at the bottom of the market. For those who have held on, like Partners, there have been paper losses but not permanent ones.

But with interest rates falling in a struggling economy, there has been a cost to owning these instruments. Partners has had to post collateral on the swaps from time to time, essentially handing to the bank, for safekeeping, the sum it would owe if it did have to terminate the swaps early. Partners had $116 million in collateral posted on Sept. 30, and it has at times been higher than that since 2008.

But even with $1 billion in swaps, Steingart said, Partners is within the norm for hospital groups of its size. “In Partners’ case it’s something we look closely at,’’ he said. “They provide good disclosure and good management of the risks associated with it.”


Markell said the company has adequate resources to handle the collateral calls, and these outlays place no stress on health care operations.

Partners manages its $7.5b portfolio for the long term, including for its building projects.

“If you intend to hold the swap to maturity, you never realize a loss or a gain,” Markell said.

In the meantime, the building projects the company had put on hold during the financial crisis have resumed, executives said. The 12-story Brigham Building for the Future, which will house clinical and research groups devoted to neuroscience, immunology, genomics, and regenerative medicine, is scheduled for a 2014 groundbreaking. And Spaulding Rehabilitation Hospital, which is moving to a new $200 million facility in the Charlestown Navy Yard, is expected to open in April.

Beth Healy can be reached at