Healthcare organizations are feeling the effects of the national shortfall of $645 billion in pension liabilities and are pursuing the ‘least bad option’ for handling the problem.
The nationwide pension crisis has organizations scrambling to properly fund employee’ retirement packages and represents a self-inflicted dilemma that will have a dramatic impact on the healthcare industry without a clear solution.
Given that healthcare organizations typically operate in low-interest environments on thin margins, hospitals are slated to struggle as much as any organization under new federal accounting rules.
This year is a turning point for pension plans, as reduced corporate deduction rates from the tax reform bill passed late last year come into effect, as well as new rules set by the Governmental Accounting Standards Board, which establish reporting requirements for governments regarding healthcare liabilities.
As aging baby boomers get closer to receiving pension benefits, healthcare liabilities are projected to rise, culminating in an estimated shortfall of $645 billion, according to Pew Charitable Trusts.
Yuri Nisenzon, ASA, EA, MAAA, FCA, assistant vice president at Lewis & Ellis, based in Allen, Texas, told HealthLeaders Media that the federal government and health systems must work to align pension contributions to post-retirement income.
“A lot of people realize that the retirement situation in our country is not great,” Nisenzon said. “The main vehicle for retirement are defined contribution plans, 401(k) plans, and there’s some easy math to show that people are not going to have enough income at retirement based on the average 401(k) balance and people living longer.”
What can be done?
As hospital CFOs consider redesigning pension packages for the future, healthcare organizations are relatively hamstrung. The new GAAP rules have discontinued the practice of delaying how healthcare liabilities are recorded, instead requiring them to be listed on an organization’s balance sheet.
Brian Argo, chief financial officer at Conway Medical Center(CMC) in Conway, South Carolina, told HealthLeaders Media that health systems with active pension plans are “by far in the minority,” adding that they are “all but extinct” in the southeast. This realization among hospital CFOs has forced them to look for solutions, even if they are imperfect approaches.
“I think if you look at the auto industry and look at all industries, it’s what is the least bad option,” Argo said. “[Active pension plans] are unsustainable, and the least bad option, in many cases, is freezing the plan and making sure that when you do that you have a funding scenario in place where you can get it funded to 100% so you can meet that liability.”
One idea floated within the industry as a potential solution is encouraging older employees to retire while recruiting a younger workforce and enrolling them in a defined contribution plan. However, Argo said hospital executives can’t fully mitigate liabilities by shifting to a younger workforce because of the sizable, immediate cash costs for retiring employees.
Argo said the few hospitals remaining with defined benefits plans have started to reduce benefits as a cost-cutting measure, a move that often significantly impacts employees when hospital leadership reduces cost of living expenses and limits spousal benefits.
Another reason health systems have struggled to adequately address the crisis is the tax reform law passed late last year, which reduced the corporate deduction rate from 39% to 21%. Usually hospitals properly fund pension plans in a strong economy, according to Nisenzon, but since the Great Recession pensions have been critically underfunded.
Now, funding is still difficult because hospital CFOs have other priorities to address with limited funds, according to Argo, such as complying with new regulations promoting value-based care, investments in facility infrastructure, and equipment upgrades.
Why do pensions matter?
Pension plans are critical to talent recruitment for hospitals since physicians need assurance that when they switch systems their benefits will follow them, according to Nisenzon. Another incentive for hospitals to maintain pension plans is to retain their best talent after a merger with another organization.
Defined benefit plans, where organizations calculate employee compensation for retirement based on salary and years of employment, also allow organizations to increase their tax deductions, which has made the plan popular with smaller physician groups, according to Nisenzon.
Competitive compensation packages have a place in hospital recruitment efforts, though clinical personnel are “not favorable” for employers, according to Nisenzon, since they consist of older, highly paid doctors who must be salaried appropriately.
This has created another unintended problem for health systems that employ workers who have paid into defined benefits plans for decades.
Argo said that for employees who have worked at the same system for 30 years, they can essentially “double dip” on their salary and defined benefits pensions, creating a fiscal challenge for the hospital.
Pensions in deep freeze
In conversations with fellow hospital CFOs, Argo said most other health systems have continued to focus on material changes to pension plans, addressing growing liabilities by freezing plans, and moving toward defined contribution plans.
Argo said CMC has begun offering defined contribution plans to new hires, such as 401(k) and 403(b) plans. These allocate 5% of an employee’s annual salary into a money market account, which the hospital is not liable for since it is a private, individual account.
Nisenzon said hospital leadership has increasingly embraced defined contribution plans because they minimize market-based investment risks for the organization and provide participants with transparency regarding the balance of their benefits.
While most systems have frozen defined benefits plans to stem fiscal losses and mitigate further risk, Nisenzon said this move has likely agitated hospital employees who work in highly unionized environments and are opposed to a reduced level of expected income after retirement.