Defined benefit plans at health systems all over the country are floundering under the combined weight of rising premiums, low interest rates, and an updated lifespan forecast from the Society of Actuaries.
The pension plan troubles that are plaguing so many hospital systems are not likely to go away any time soon, says a CFO who is struggling to keep his operation profitable as its pension plan costs grow.
Rather than being a temporary problem, the financial challenges might mean the end of pension plans, he says.
The pension plan has been problematic for a good while at Springfield, MA-based Baystate Health, a non-profit health system comprising five hospitals, a multispecialty medical group, and an HMO. Chief Financial Officer Dennis Chalke says rising premiums from the Pension Benefit Guaranty Corporation (PBGC) are only part of the problem.
"Defined benefit plans are becoming a thing of the past, unfortunately," Chalke says. "Especially with fewer and fewer plans surviving, the ones that remain have to pick up a bigger burden with the rising PBGC premiums. It's just becoming unaffordable."
Baystate Health closed its defined benefits plan to new employees in 2005, an effort to keep the plan viable for existing participants, Chalke explains. In the following years, Baystate Health revised some provisions of the plans to make it more affordable and less volatile, but Chalke says the organization was always trying to play catch up and came to realize that the plan couldn't survive in its current makeup.
"The low interest rates certainly hurt the plan's performance because the present value of your future obligations is determined by the interest rate, so the lower the rate the bigger the present value of your future obligations," Chalke says.
Baystate Health narrowly avoided an operating loss in 2015 by indefinitely freezing its pension benefits, a move that Chalke says was the only option for keeping the health system profitable. Baystate Health reported $69.7 million revenue in the year ended Sept. 30, 2015.
Employees were notified of the action in September and the organization subsequently held about 140 informational meetings about the plan. About 40% of Baystate Health staff are affected.
A Threat to Solvency
Pensions have loomed over health systems as a potential threat to solvency for years, but the threat became dire in 2015 when the Society of Actuaries forecast that current retirees will live well into their 80s. That announcement forced health systems to recalculate their pension plan numbers and in most cases the results were disconcerting, especially with interest rates as they are.
"There were all these things that were working against these defined benefit plans, for all companies, not just us. The mortality table changes were the final event that really caused everyone to take a hard look at whether these plans were affordable," Chalke says.
The bottom line for the system was clear: Baystate Health's pension plan was going to run out of money unless it added $6 million, and that would have put the health system in the red. Keeping the pension plan in its present state would have meant a 30% increase in expenses year over year, he says.
"With the healthcare environment seeing flat or declining payment rates, and volumes that are pretty flat as well, it's hard to cover a 30% increase in your pension costs with additional revenue," Chalke says.
Tallying the Losses
To make matters worse, Baystate was experiencing an operating loss from expenses related to its health plan, which it has owned since 1985. With a 45% increase in health plan expenses, the plan lost $28 million in 2015 after earning $4 million in 2014, the losses attributed mostly to the fast growth of pharmaceutical, physician, and outpatient specialties.
The numbers weren't adding up; Baystate's operating expenses increased 21% to $2.15 million while revenue increased 17% to $2.14 million. The pension revenue was the only way to save the year, says the organization's CFO.
"Many other health systems have frozen their plans or closed them to new employees, so we're not early in the steps we've taken, but I think you're going to see a continuation of this," Chalke says.
For health systems that still have a defined benefits plan, Chalke urges CFOs to look for ways to reduce the volatility of expenses. With plans that have a cash option allowing retirees to take either an annuity or the cash, for instance, CFOs may want to revisit the minimum interest rate and look at how to best invest the dollars in the plan, he says.
"There are many things you can do to try to keep the plan as viable as possible, but in the end we had done most of those things and in the end the plan was still not affordable," Chalke says. "I think that's an eventuality that most health systems will face going forward. That is a fact that most other industries have come to realize about defined benefit plans, and I'm afraid the hospital industry is catching up."