Already caught between flattening revenues and rising costs, many hospital CEOs are confronting a looming pension fund gap.
The University of Chicago, which includes the university and the medical center, and Resurrection Health Care Corp. were among the most underfunded pension funds for hospitals in the country, according to a study of 550 health systems by Standard & Poor's Ratings Services, based on 2010 financials.
While U of C's and Resurrection's retirement funding has improved, they are part of a group of five Chicago-area hospitals and health care networks whose pensions are less than 80 percent funded and are considered at risk of default, according to federal regulations. NorthShore University HealthSystem and Provena Health, which merged with Resurrection in 2011 to form Presence Health, also are below the threshold. The others are Northwest Community Hospital and Elmhurst Memorial Healthcare.
The five most underfunded hospital pension funds are among 10 major hospitals and health care networks in the Chicago area that owe a total of $1.12 billion to their pension funds, according to a Crain's analysis of the most recent financial statements.
Take a closer look at ten local hospitals and health care networks' pension funds
The huge deficit is due to investment portfolios that haven't returned to their pre-recession levels while interest rates remain stuck in a prolonged trough. The economic tumult of recent years has left the majority of nonprofit hospital pensions underfunded, though not as severely as the pension systems of the state of Illinois, which have only 40 percent of the funds needed to pay retirees.
Many hospitals are following for-profit employers, moving to defined-contribution plans, such as 401(k) accounts, that shift the risk of investment returns to workers.
Nevertheless, oversized contributions are likely to catch up with some hospitals, pushing up their costs at a time when operating margins are shrinking because of heightened pressure on reimbursement rates.
Determining whether a pension fund is adequately funded involves estimating the long-term benefits to be paid compared to the fund's existing assets and expected future returns on investments, called the discount rate. When interest rates are low, as they are now, the discount rate is lowered, forcing employers to cover the gap.
The U of C Medical Center paid $52.7 million into the pension fund in the fiscal year ended June 30, the largest contribution in its history, a spokesman says in a statement. The payment helped boost the funding level to 64 percent, from 48 percent in 2010.
"The medical center plans to continue to contribute more than the minimum requirement, with a goal to have the plan fully funded by the end of the decade," the spokesman says.
Resurrection's pension is 50 percent funded, an improvement over 2010's 30 percent. The pension plan is separate from Provena's fund, which was 71 percent funded in 2011. Provena froze its defined-benefit program in 2004.
"Presence Health is making a concerted effort to increase the level of plan funding," a spokesman for the Chicago-based system says.
Evanston-based NorthShore declines to comment on its pension fund, which was 67 percent funded in 2011.
Northwest Community Hospital's pension plan was 76 percent funded on Sept. 30, 2011. The Arlington Heights-based hospital raised that to 87 percent by Nov. 30, a spokeswoman notes.
Pension fund accounting often paints a bleaker picture than the reality because it understates investment returns, says James Doyle, chief financial officer of Elmhurst Memorial Healthcare, whose fund is 73 percent funded.
In 2009, Northwestern Memorial HealthCare stopped enrolling new employees in its pension fund. Even though its plan is overfunded, on Jan. 1 it froze the accrual of benefits for participants but upped payments to its defined-contribution plans.
"Our opinion was that the defined contribution was the better plan for our employees," Chief Financial Officer Peter McCanna says. "It is true that the defined contribution has less volatility."
Some Chicago-area health care systems, such as Advocate Health, say their defined-benefit pensions help recruit and retain employees. The pension fund of the Oak Brook-based network of 11 hospitals was 86 percent funded in 2011.
"A defined-benefit plan continues to be one of the vehicles we use to assist our associates," says Kevin Brady, chief human resources officer for Advocate, in a statement.