Kaiser's net worth boost riles advocates of health plan regulation

A boost to Kaiser Permanente's net worth from a drop in pension liabilities has provided fodder for state advocates of stricter health plan regulation.

The California Nurses Association rallied in protest last week over the Oakland, Calif.-based health plan and hospital operator's strong 2013 financial performance. The union blasted the system's growing net worth and endorsed a plan to empower the state's insurance commissioner to reject premium increases.

Pension accounting in recent years has strained the balance sheets of U.S. health systems, so some improvement to pension obligations of late has been a welcome change. Pension obligations swelled as the Federal Reserve reduced interest rates to boost the economy. The discount rate used in pension accounting is highly sensitive to interest rate fluctuations.

But rate adjustments and stronger investment performance last year provided some relief for a number of systems, as did the cash that systems poured into pensions. “We're seeing the deficits that had grown over the last few years reduce,” said Beth Wexler, vice president Moody's Investors Services. “They're making headway.”

That includes Kaiser Permanente.

“During the recession, changes in the discount rate and difficult investment markets caused a reduction in our net worth by almost $9 billion, though it was reasonable to expect that rates would recover and markets rebound,” said Kaiser spokesman Won Ha. “Over the past year and a half, as the discount rate adjusted and markets rebounded, and as we continued to advance prudent financial management and efficient operations, we were able to reverse much of that previous reduction.”

The improvement in Kaiser's pension and retirement liabilities was responsible for $5.62 billion of the $8.8 billion rise in its net worth in 2013, prompting the line of attack from the union and sponsors of the ballot initiative on insurance rate review.

The Patient Protection and Affordable Care Act requires insurers to justify rate increases of 10% or more but doesn't require those rates to be approved.

The ballot initiative's author, Jaime Court, criticized Kaiser for hiking rates last year up as much as 22% in its individual plans and 56% in small group plans.

Court said he didn't know about the role pension accounting played in Kaiser's fortunes. Upon hearing the explanation, he said it highlighted the need for greater oversight of health plan financial reporting by California regulators and the public.

“It may well be justified,” he said. “There's no power for either the public or the regulators to look at the books and force Kaiser to answer questions,” he said. “It's so complicated and on paper it's another big jump.”

The system reported net equity of $23 billion to state health regulators, which Court and other critics described as excessive in light of the state's required equity of $1.3 billion.

For Kaiser, though, that figure reflects the entire organization's net worth. “As both a health plan and hospital system, Kaiser Permanente maintains a net worth and financial reserve level that is different than what a health plan alone would maintain,” Ha said. “But this state regulation isn't meant to account for our hospital and care delivery infrastructure. CNA's suggestion that this is 'excess' fails to understand—or actually misrepresents—the purpose of the regulation.”

Kaiser's pension, meanwhile, remains underfunded. The pension fund has roughly 66% or 80% of what it needs, depending on the measure.

Follow Melanie Evans on Twitter: @MHmevans