Baystate Health ended the year without an operating loss only after the Massachusetts health system froze its pension benefits, a move that generated enough revenue to offset losses from its health plan.
Baystate, a Springfield, Mass.-based system that includes five hospitals, a multispecialty medical group and an HMO, recorded $69.7 million revenue in the year ended Sept. 30, 2015, from freezing its pension plan this year.
Baystate replaced its pension with a contribution toward employees' retirement, a switch occurring across healthcare and other industries as pension costs drag on corporate finances. Pensions were an even greater issue last year after the Society of Actuaries released the first new estimate in 15 years for how long retirees will live. The estimates show retirees living longer and well into their 80s, which required health systems to set more aside for pensions. Interest rates used to calculate what employers owe pensions were unfavorable too, adding to financial strain.
Baystate's pension costs were projected to increase $6 million until the system decided to freeze the plan, Chief financial officer Dennis Chalke said.
Not only did the system avoid the additional expense, but revenue from Baystate's frozen pension was enough to erase the operating loss from rapidly escalating expenses from Baystate's health plan.
Baystate has owned an HMO since 1985. It grew rapidly last year after 60,000 Medicaid enrollees moved into its Medicaid managed-care plan after a contract dispute with a rival Medicaid managed-care plan, Chalke said.
The health plan lost $28 million last year after earning $4 million in 2014. Fast-growing pharmaceutical, physician and outpatient specialty services were the largest contributors to Baystate's 45% increase in health plan expenses.
The system moved quickly to stem future losses, Chalke said. It canceled an unprofitable Medicaid contract and raised premiums. It also renegotiated its pharmacy benefit management contract and sharpened its focus on medical management.
Pharmacy expenses increased 68% to $156 million, thanks to enrollment growth, higher-priced generic drugs and use of new high-cost specialty drugs, such as those to treat hepatitis C, Chalke said.
The health plan's physician and outpatient specialty services increased 45% to $294.2 million.
Baystate also paid $8 million into risk pools created under the Affordable Care Act to protect insurers with high numbers of costly patients from steep losses.
Overall, Baystate's operating expenses increased 21% to $2.15 billion. Operating revenue lagged, increasing 17% to $2.14 million.
That would have left the system with an operating loss were it not for the pension revenue. Baystate ended the year with an operating surplus of $59.8 million, or a margin of 2.8%, compared with 3.1% in its fiscal 2014.