Not-for-profit healthcare systems continued to struggle with underfunded pension liabilities last year, and the situation has become even more challenging since 2011.
A report from Standard & Poor's found that the median funded status of hospital pension plans dropped to just 69.4% in fiscal 2012, compared with 72.6% the previous fiscal year.
The Government Accountability Office and others typically define a “healthy” pension plan as one that is at least 80% funded.
S&P blamed historically low interest rates for the mounting liabilities, even though asset values have increased. Companies calculate their future pension liabilities using what's known as a discount rate, which is based on the rate of return on their investments.
When investments yield lower returns, pension obligations rise.
The median discount rate in fiscal 2012 was 4.3%, compared with 5.2% in fiscal 2011, according to the S&P report.
Underfunded pension plans begin to impact credit ratings when they compete for cash that providers would otherwise use for facility and equipment upgrades or paying down debt, S&P said.
The credit ratings agency found that the median cash contribution as a percentage of earnings before interest, depreciation and amortization increased to 14.7% in fiscal 2012 from 13% the previous fiscal year.
Some health systems have started to move away from defined-benefit plans to defined-contribution plans, such as 403(b) plans, S&P said.
The report pointed to systems such as Daughters of Charity Health System, Los Altos Hills, Calif., which froze its defined-benefit plan for nonunion employees in February 2011, and closed plans for three of its four union groups in January 2012 and January 2013.
The system's funded status fell to 45.1% in fiscal 2012 from 51.7% in fiscal 2011, when it already had one of the 10 lowest funded pension plans.
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