Tuesday, January 14, 2014

Note:  I am not offering investment advice.  I am not qualified or registered to do so.

The Boston Globe's Robert Weisman offers a summary of a presentation made by Partners Healthcare System at the annual J.P. Morgan Healthcare Conference.  This is an audience of investment people who are trying to keep up with trends in the health care industry and who advise clients on whether or not they should buy bonds. Weisman notes, "The Partners presentation in San Francisco came days after the massive hospital and doctors system disclosed it will sell $425 million worth of bonds to finance new construction and other expansion initiatives."

As you would expect, the PHS made optimistic projections about its future, and I have to agree:  There is little on the horizon that would interfere with Partners' ability to service its debt.

First of all, the company was able to persuade the governor and legislature that it should not be subject to rate regulation and that it should be allowed to keep all the excess revenues it has received over the years. Indeed, the revenue advantage that PHS has in its current contracts, relative to other provider organizations, is guaranteed by the new legislation.

Secondly, even though the Health Policy Commission has raised doubts about the wisdom of PHS acquiring new provider organizations, like South Shore Hospital and Harbor Medical Associates, it does not really matter if the formal merger takes place.

As I have noted:

We need to understand that South Shore has been a vassal of Partners for years, with extremely close clinical relationships and referral patterns. The Patriot Ledger reported

"Sarah Darcy, spokeswoman for South Shore Hospital, said the two hospitals have worked together since 2004 on providing a wide range of medical and surgical care. Among them are the Dana-Farber/Brigham and Women’s Cancer Center, the Breast Care Center, and a Harvard Medical School-affiliated surgical residency program at South Shore Hospital."

Merger or not, those relationships will persist.  The doctors trust one another.  Patients and families are used to the referral patterns that have been established. Such relationships are not torn asunder by a failure to create a larger corporation with a common bottom line.

Thirdly, the likelihood that a competing force will arise in the region is small, in that there are a multitude of obstacles standing in the way.  Even if mergers occur that create a "book-end" to Partners, it will be years before that entity will be an effective competitor, given the many cultural and logistical challenges.  And, if it becomes an effective competitor, the state is highly likely to move into a duopoly situation, protecting the revenue streams of both entities.

Finally, for those who think and hope that transparency and tiered markets and consumer-driven health care will dramatically change market share, look at this insightful comment I received on my blog yesterday:

My impression is that health care leaders in the state government are afraid of hurting the golden goose called Partners (as was said by others an important part of the local economy), so they have deliberately limited how big a price incentive that insurers could give to lower priced hospitals in tiered and limited networks to prevent to large a loss of market share too quickly.

But the reverse has happened.

Over the last few years state healthcare leaders have gradually allowed the financial incentives to increase with little noticeable effect on market share - in fact the market share of the highest cost hospitals like those of Partners and Childrens has increased at the same time as tiered and limited networks were introduced. 

Whom do I call to get some of those bonds?


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