The corporation completed its study of 1,037 healthcare defined-benefit pension plans, including 802 hospital plans, in March 2008—when the Dow Jones industrial average was in the range of 12,000 vs. about 8,500 today—and found two elements that were problematic, Kelly says.
One is familiar to hospital executives: The hospital industry has a much different profile than most of the industries that the PBGC deals with, Kelly says. It is largely not-for-profit, runs on thin margins and has to provide at least some level of service to all who walk through its doors—something the corporation doesn't see with any other industry, Kelly says. Its fragmented nature also leaves hospitals more exposed to the fortunes of their local economies than most businesses that the PBGC monitors, she adds.
“We haven't seen one like this with a tremendous number of plans concentrated in one industry,” Kelly says. “It caught our attention.”
The other concern is also related to that fragmentation: the hospital plans are much more numerous and much smaller individually than any industry that the corporation deals with, Kelly says. That means there are simply a lot of plans, an internal challenge that the PBGC faces in monitoring these plans and the additional burden it would face in taking control of a significant percentage of hospital pension plans, Kelly says. Defined-benefit pensions not an issue at most for-profits
Small pension plans covering 10,000 participants take nearly as much staff time to handle as plans with a million or more participants, Kelly says, so any changes in the industry's economics that unsettled hospitals' already precarious finances could unleash a wave of small plans on the PBGC. Moreover, smaller organizations have less management resources and fewer specialized personnel that they can devote to oversight of their pension plans than large corporations, Kelly says.
The study relied heavily on the annual filings that defined-benefit plans must make with the Internal Revenue Service on Form 5500. At the time of the study, the Form 5500s that were available covered 2004 and 2005, and then the PBGC adjusted those figures to estimate where the pension plans stood as of Dec. 31, 2006, according to the study (See chart).
Hospital pension plans don't differ materially from other pension plans in one respect—their asset mix, Kelly says. Typical pension plans hold about 60% of their assets as equities, so those have suffered from the drop in the stock market. The Dow closed 2006 at 12,463 and has dropped by nearly a third since then.
To make matters worse from an actuarial standpoint, interest rates have fallen sharply from the level used in the study, Kelly says. While good for borrowers, lower interest rates increase the total liabilities in their defined-benefit pension plans to meet their future liabilities, she says. “Funding ratios are going down across the board,” Kelly says.
The study also revealed that there was a geographic element to the problem, Kelly says. Hospital plans in three states—Michigan, New Jersey and New York—had more than $750 million in unfunded benefit liabilities and a funding ratio below 80%, according to the study. The PBGC spoke with health department officials in New Jersey and New York to make them more aware of the problem and encourage them to discuss it with hospital officials in their states, Kelly says.
Matthew D'Oria, deputy commissioner of the New Jersey Health and Senior Services Department, says his agency's meeting with the PBGC last fall opened a new source of information for its efforts to stay on top of hospital finance in New Jersey. The department gained new oversight powers under a law that was enacted last year (Aug. 18, 2008, p. 12).
“As much data as we get, there's not a lot of specific information about the pensions,” D'Oria says. “On the balance sheet, it shows up as a liability, but just one of many. They were able to shed a lot of light on some of our hospitals. We know better now which ones are closer to safe levels for pension funding.”