In late June, S&P Global Ratings released a report that indicated that overall nonprofit healthcare pension funded ratios are stable.
While hospitals and health systems have been challenged with several acute financial dilemmas related to the coronavirus disease 2019 (COVID-19) pandemic, there are long-term financial factors that must also be addressed going forward.
One key area is the pension plan, an oft-overlooked concern that, like so many other aspects of American life, has been affected by the COVID-19 outbreak.
In late June, S&P Global Ratings released a report that indicated that overall nonprofit healthcare pension funded ratios are stable, though the ratings agency expects "lower funded ratios" in fiscal year (FY) 2020.
The ratings agency found that the median funded status of defined benefit plans fell from 84% in FY 2019 to 83% in FY 2020 due to a lower bond rate. S&P stated that this slight dip does not represent "a fundamental deterioration to funding status levels."
Related: S&P Expects Lower Funded Ratios for Nonprofit Healthcare Pension Plans in FY 2020
S&P released a report last July that found the median funded status of defined benefit pension plans for nonprofit healthcare organizations in FY 2018 was 85%, increasing nearly 5% due to a higher bond rate.
Related: Nonprofit Provider Pensions Remain Solidly Funded
John Lowell, partner at October Three Consulting, LLC, a Chicago-based full service actuarial, consulting and technology firm, told HealthLeaders that most hospital leaders are more focused on pressing financial challenges related to the pandemic rather than the status of their pension offerings.
However, Lowell said that issues surrounding pension plan management existed before the pandemic and will likely continue even after a vaccine is discovered.
He offered three action items for hospital and health system finance leaders for handling their respective pension situations.
1. Listen to your consultants
Lowell said he encourages provider organizations with consultants assisting them with their addressing their pension plans to listen to the advice they're being given.
He added that leaders shouldn't just accept every recommendation but consider them as helpful to the organization.
"To a large extent, I think it's listening to the advice they might be getting and evaluating whether those things make sense for the hospital," Lowell said.
2. Have a person dedicated to saving money on pensions
Lowell said that hospitals and health systems should hire a worker to focus primarily on addressing their pension costs and removing financial waste.
"Let's say you have a person making $200,000 per year; if they spent half of their time doing everything they could to save money on the pension, and even if we add in $50,000 for costs, that's a $150,000 expenditure to save $500,000. That seems worth it to me," Lowell said.
He did add that some finance leaders may disagree with his suggestion, arguing that a specialist focused on saving costs on pensions may not fit into the "bigger picture of the hospital."
3. Considering whether to retire some pension debt
Hospitals have been accessing credit at a reasonable rate, according to Lowell, which is why finance executives should be considering whether it's a good expenditure to use that credit to retire some pension debt.
He noted that organizations have different existing liabilities, such as pension debt, loans, and mortgages on buildings, which should be considered for retirement if provider organizations have available credit.
"I think in a lot of cases retiring those pension liabilities or pension debt may actually get them a bigger and faster return on their investment than some of the others might," Lowell said.
Related: 'Why is There Nothing Left?' Pension Funds Failing at Catholic Hospitals
Jack O'Brien is the Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.