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January 13, 2015 12:00 AM

Moody's downgrades Partners HealthCare bonds

Rachel Landen
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    Partners HealthCare System in Boston saw its ratings downgraded last week by Moody's Investors Service when the agency rated new bond issues expected next week.

    The system is expected to raise $580 million from new bond issues next week. Moody's rated both the new and existing debt of as Aa3 but with a stable outlook, pointing to an operating loss in Partners' insurance division, anticipated weaker performance and plans for increased capital spending as drivers behind the ratings.

    Neighborhood Health Plan, the insurance arm that Partners acquired in 2012, suffered a $110 million loss in 2014 that helped drag the system's fiscal year operating margin into the red. The loss was also one of the reasons highlighted by Fitch Ratings in its assignment of AA ratings to Partners' upcoming bond issues. Fitch also noted a $92 million premium deficiency reserve—booked as a requirement under generally accepted accounting principles—that further grew Partners' operating loss. Fitch's outlook for Partners, like Moody's, is also listed as stable.

    But Standard & Poor's wasn't as optimistic about the system's outlook, despite also assigning an AA rating to the system's $580 million in debt.

    “The negative outlook reflects our view of Partners' weakened operating performance in fiscal 2014 and uncertainty about recovery through the two year outlook period,” the S&P analysts said in a release. But S&P did mention “Partners' excellent enterprise profile and balance sheet strengths” as mitigating factors, which Moody's and Fitch alluded to as well in their reports.

    Partners, the parent of Massachusetts General Hospital and Brigham and Women's Hospital, holds nearly 22% of the market in eastern Massachusetts. And the system has been in the process of attempting to acquire several other facilities in the region. But both of those new deals have come under scrutiny from critics who charge that Partners is looking to add hospitals in order to jack up prices.

    This week at the 2015 J.P. Morgan Healthcare Conference in San Francisco, Partners HealthCare Chief Financial Officer Peter Markell shot down critics' accusations, explaining that the system's motivation for expanding its patient population is in order to implement value-based care strategies.

    Whether or not Partners will be able to acquire South Shore Hospital, along with two hospitals owned by Hallmark Health, now depends on a judge approving an agreement reached with the state's attorney general.

    But those aren't the only pieces that Partners is looking to add. The $10.9 billion system's CEO, Dr. Gary Gottlieb, announced in October that he will be stepping down this year. A search by the board of directors for Gottlieb's successor is currently underway.

    Follow Rachel Landen on Twitter: @MHrlanden

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