Hospitals trying to get a handle on their retiree healthcare costs are trimming benefits and reducing the number of retirees eligible for them.
Tom McNulty, chief financial officer at Detroit-based Henry Ford Health System, said the company's equity could have been "nearly wiped out" if it didn't curtail benefits. The company scaled back, "trying to be fair to employees while trying to stay solvent," he said.
Henry Ford and some local hospitals are taking huge one-time hits on their income statements to meet rules set by the Financial Accounting Standards Board, a national group that considers changes in accounting procedures.
Detroit hospitals, like others nationwide, are modifying benefits packages to emphasize expense control, said Dennis Farrell, vice president and assistant director of Moody's Investors Service, New York.
The accounting adjustment may dampen the bottom line but won't affect credit ratings, the biggest concern that hospital executives said they had with the FASB rules.
"Investment bankers weren't overly excited or concerned" about the impact on hospitals, said Cheryl Lippert, a partner in the healthcare-services group in the Detroit office of Coopers & Lybrand. "Many hospitals do not provide retiree benefits.... (Benefits) are more pervasive in the auto industry."
The auto companies "give their retirees generally just about everything ...starting at age 55," said Larry Gelman, a principal in the health- and welfare-consulting division of the Detroit office of New York-based Coopers & Lybrand.
Some hospitals pay part or all of retirees' healthcare coverage when a retiree reaches age 65.
Like Henry Ford, some hospitals or systems-such as Catherine McAuley Health System, Ann Arbor, Mich.; Detroit Medical Center; and Crittenton Hospital, Rochester Hills, Mich.-have scaled back or restructured benefits. Others, such as William Beaumont Hospital, Royal Oak, Mich., maintained benefits.
Beaumont also amortized its total benefit obligation-slightly less than $17 million-over 20 years, said Dennis Herrick, Beaumont's CFO. "There was no real advantage to it either way. It was just the emotional impact of booking it all at once," he said.
The hospital will continue to pay half of non-Medicare coverage for its 9,000 retirees, Mr. Herrick said.
Holy Cross Hospital in Detroit had no financial obligation, took no write-off and did not change retiree-benefit offerings, said Laury Weiner, the hospital's CFO. Holy Cross provides a group policy to retirees, who must pay their own premiums but receive a less expensive group rate.
Henry Ford Health System will deduct $48 million from calendar-year 1993 expenses, Mr. McNulty said. Retiree healthcare costs the company $3 million a year, affecting as many as 800 employees.
"Our benefits would have cost us $220 million for a one-time hit...it would have nearly wiped out our equity. So we reduced benefits (first) to reduce the loss to almost $50 million," he said.
To protect employees, Henry Ford Health System is providing future retirees with supplemental Medicare benefits through its own insurance company, Health Alliance Plan of Michigan. Some costs will be shared, depending on the length of employment, Mr. McNulty said. The retiree contribution will continue to be based on worker longevity.
St. Joseph Mercy Hospital in Ann Arbor, Mich., wrote off $21.6 million, scaled back its Medicare supplemental benefits for about 1,000 retirees, and ended the hope of supplemental Medicare benefits for its current 2,500 full-time-equivalent employees, said Duane Newland, the hospital's CFO.
The hospital implemented financial incentives to ensure that retirees get their care at hospital clinics, he said. For example, deductibles are waived if people get their care at St. Joseph.
Crittenton Hospital took its FASB write-off over four years at a cost of $785,000, said CFO Kenneth Belke.
"We didn't change the benefit, but we said the over-65 group would pay the real (and entire) cost (of the policy), rather than the cost of all existing employees. That was more expensive," he said.
But Crittenton tried to ease the pain for the affected 60 retirees by letting them buy less expensive coverage with higher deductibles to lower the initial cost of the premium, Mr. Belke said.
Detroit Medical Center wrote off the cost of retiree healthcare benefits for the only two of its seven hospitals that offered benefits-Hutzel and the Rehabilitation Institute-and then eliminated the benefits of future retirees, said Shari Cohen, director of public relations for the medical center. Current employees who have worked more than 20 years and were vested maintained their benefits.