Partners HealthCare

Center of Expertise in Academic Healthcare Management

May 14, 2009

2

Partners Missions

• Clinical Care

• Research

• Teaching

• Community Support on Health Issues

3

How do we generate cash for capital and operating investment?

• We Earn it• Operations• Investment Income

• Philanthropy

• Debt

4

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%

5

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)

14

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

16

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$