NorthShore freezes pension plan, offers retirement package

NorthShore University HealthSystem is offering voluntary retirement to about 300 employees, a move to trim expenses as the implementation of key parts of the federal healthcare law looms.

If all eligible employees take the offer, the retirements would reduce the Evanston, Ill.-based system's 10,000-person workforce by about 3 percent, says a spokesman for NorthShore.

The offer, which was described yesterday in a letter to workers, comes on the heels of a June 17 announcement that NorthShore will freeze its employee pension plan as of Dec. 31 and shift all employees to a defined-contribution savings plan, another cost-cutting maneuver.

“The state of healthcare finance is changing at an unprecedented pace and NorthShore must adapt and change to meet these fiscal challenges,” Chief Human Resources Officer William Luehrs wrote in the letter. The pension change and workforce reductions are needed “to get ahead of the sizeable upcoming payment reductions associated with the Affordable Care Act before the start of the new fiscal year.”

Amid shrinking payments from government and private payers and rising costs of providing care, hospital margins are shrinking. They already have an idea of how much President Barack Obama's healthcare law and other changes in Washington will reduce Medicare and Medicaid reimbursements. In Illinois, the hit will be more than $11 billion over the next decade, the Illinois Hospital Association projects.

But it's harder to predict how the two most significant aspects of the overhaul set to take effect Jan. 1—the implementation of state-level benefits exchanges and the expansion of the Medicaid program—will affect hospitals' financial picture. To be sure, broader access to health coverage will increase the number of patients who can afford healthcare, but it's anyone's guess how much of a bump in volume hospitals will see.

Hospitals “know the downside, but they have no idea if there will be any upside to offset that,” said Doug Fenstermaker, a Chicago-based vice president of healthcare at Warbird Consulting Partners. “They're finally getting to the point that they're not acting like deer in the headlights and coming up with action plans on how they'll deal with this.”

In the letter, Mr. Luehrs acknowledges that the pension freeze and shift to defined contributions, announced Monday, “may lead some employees to think differently about their own retirement planning objectives.”

For this reason, he adds, NorthShore decided to offer an “enhanced retirement benefit package” to certain eligible employees. The program is open to employees 65 and older who have at least five years' service under the current pension, and to employees 60 and over who have at least 25 years' service under the current pension.

"They are longstanding, valued and respected employees who may be considering retirement and that is why we want to give them this opportunity," the spokesman said. "We are unclear as to how many eligible employees may voluntarily apply for (retirement) and be approved by NorthShore."

Though the hospital system will still contribute to employees' retirement accounts, the halt to benefit accruals in the pension plan will limit the growth of the system's projected liability, which stood at $456.3 million as of Sept. 30. The fair value of the plan's assets was just $341.5 million, meaning its funded status was 75 percent.

A spokesman for NorthShore did not comment additionally on the pension changes or the enhancements in the retirement offer.

Both moves are likely to reduce operating expenses for the four-hospital system, which generated $1.8 billion in revenue in 2012. NorthShore's salary and benefits expenses on the year were $912.1 million, just over half its revenue. Personnel costs typically are the highest category of costs for a hospital, usually eating up 45 to 50 percent of revenue.

Pension changes and voluntary retirements are two ways hospitals can reduce expenses without making more severe cuts, such as layoffs, said Mr. Fenstermaker, a former nonprofit hospital CFO.

“Hospitals are looking for the least negative impact from cuts that they can make,” he said. “It's a good strategic move.”

NorthShore freezes pension plan, offers retirement package originally appeared on Crain's Chicago Business.