Pension Plans Spell Trouble for Nonprofit Hospitals
"The average discount rate of some of these plans 10 years ago was probably close to 7% or 8%. Today it is more like 4%, so think about the impact of that on cash flows going out 30 or 40 years. It's going to be massive. It's an increase in excess of 40% to 45% in the amount of money they owe."
Even though interest rates are apt to rebound, Pierce says, this likelihood provides no relief to hospitals.
"The assumption is that rates will go back up, but here is how the rules work: If you are an accountant, you have to give an accurate representation of what you [would] owe today if you had to service all of your debts. You have to determine what it would cost to terminate the plan today based on prevailing rates," he says.
Meeting the financial obligations of a DB pension plan is not a challenge that is specific to the healthcare industry, but it adds an extra layer of complexity for hospitals and health systems already dealing with several financial challenges.
"To put it into context for hospitals, they are already dealing with what we consider to be a pretty difficult operating environment because of soft patient volumes, increasing integration with physicians, and low reimbursement increases. There are a number of operating challenges, and growing pension funding needs add to that struggle," Sweeney says.
Although recent federal legislation called the Moving Ahead for Progress in the 21st Century Act (MAP-21) will help reduce the amount hospitals have to contribute to their DB pension plans in 2013 and 2014, this reprieve will be temporary, says the report.
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