Not-for-profit hospitals are feeling the pinch as their pension plans take a bigger bite out of their budget. The culprit, according to a recent Standard and Poor’s report, is low discount rates, which have eroded the funding status of defined benefit (DB) plans in 2012.
S&P’s latest RatingsDirect analysis says the median funded status of DB plans for not-for-profit hospitals and health systems decreased to 69.4 percent in 2012 from 72.6 percent in 2011. That erosion occurred despite the fact that these organizations have been seeing high asset values in their plans.
[See also: U.S. not-for-profit healthcare sector pension funding improves, gap still wide]
In comparison, in 2011, funding status, which refers to the ratio of plan assets to projected benefit obligations, looked more positive. The April 2011 S&P analysis reported that it climbed to 78.6 percent based on a sample that did not include most Dec 31, 2011 audits. When the latter were included, that figure dropped to 72.6 percent, which was still a modest improvement over 2010’s 71.7 percent.
Unlike most U.S. corporations, not-for-profit hospitals continue to offer DB pension plans while defined contribution plans, like 401(k)s, make up only a minority. Liz Sweeney, a primary credit analyst with S&P and co-author of the RatingsDirect Report, said that two-thirds of the approximately 500 hospitals and health systems S&P has data on still have DB pension plans, which are defined as employer sponsored with payouts based on formulas tied to an employee’s salary and length of service.
The drop in average discount rates from 5.2 percent in fiscal 2011 to 4.3 percent in 2012 fueled the drop in funding status. To cope with the growing financial liability, Kenneth T. Gacka, another S&P credit analyst, said some hospitals and health systems are looking to change their plan design, including freezes to the defined benefit plans. “That provides some small relief in the near term but the [full] benefits of that are expected to be over the longer term as the plans wind down,” he said.
The S&P report pointed to Ascension Health Alliance’s redesign of some of its DB plans as an example of what some health systems are doing. Ascension’s redesign, Gacka said, caused the organization to book “a substantial curtailment gain that helped offset the rise in PBO [projected benefit obligation] from a lower discount rate. Consequently Ascension’s funded status was stable at 93.1 percent in fiscal 2012 compared with 94.1 percent in 2011.”
The combination of operational uncertainty created by healthcare reform along with the impact of falling interest rates have made not-for-profit hospitals look more closely at not only the benefit structure, but how they finance pension deficits said Al Pierce, CPA, managing director of the Advice Team in SEI’s Institutional Group, a fiduciary management investment service. “Not-for-profit hospitals need to project the impact that these pension plans are going to have on their key credit metrics, like days cash on hand and cash to comprehensive debt, in order to assess the appropriate strategy, like any other capital project,” he said. “A comprehensive analysis will dramatically influence the ways that not-for-profits invest and fund these pension plans in the future.”