Becker's Hospital Review

Finance 34 Top 7 Strategies for Non-Profit Hospitals to Mitigate Pension Plan Risk: Moody's By Bob Herman  A solid majority of non-profit hospitals in the United States offer defined benefit pension plans to their employees, and those pension liabilities are creating huge financial hurdles for hospital executive teams to manage, according to a new report from Moody's Investors Service. DB pensions, in which an organization is responsible for both contributing and investing funds, are a dying breed among many companies today. Many have switched to defined contribution plans, which put more of the investment and funding onus on the employee. However, Moody's said 72 percent of its 460 non-profit hospitals it rates offer DB pension plans. As pension obligations have mounted, hospitals have turned to several strategies to mitigate those pension risks. Moody's analysts outlined seven particular strategies that non-profit hospitals are engaging most right now. 1. Freeze the DB pension plan, and transition employees to a DC plan. Moving to a DC plan minimizes expenses and liabili- ties, and it also frees up hospital capital for other investments. However, Moody's analysts said this strategy may negatively impact employee satisfaction and result in higher turnover. 2. Increase voluntary employer cash contributions to the plan. Injecting more cash helps maintain a hospital's pension plan funding level and could be more feasible today, as many hospitals have higher-than-normal amounts of cash on hand. However, bigger pension cash contributions come at the expense of lower liquidity. 3. Offer a hybrid retirement plan. Cash balance plans, which have elements of both DB and DC plans, have been utilized in many hospitals and health systems and reduce the volatility associated with investments. 4. Introduce structural modifications to an active plan. Some hospitals have made changes to their DB plan formulas by increasing the number of years of pay, raising the age when employees are eligible to retire or reducing overtime and bonus pay. 5. Change investment allocation of pension assets. Some hospitals and health systems are hedging against interest rate risk by using alternative investment strategies, such as a liability-driven investment. 6. Issue pension funding bonds or private placement borrowing to fund the plan. States and local governments commonly issue debt to fund their pension liabilities, but when it comes to the healthcare sector, usually this option is reserved for larger health systems with positive credit ratings. Rochester, Minn.based Mayo Clinic and Boston-based Partners HealthCare, for example, have implemented this strategy in the past few years. 7. Terminate the DB plan. This strategy is usually a last resort, as closing a DB plan requires all benefits to be paid out. It can be costly, and according to the report, "terminating a plan can also create a contentious labor environment, particularly for unionized employees, making it a very difficult strategy to implement." n IRS Cuts Non-Profit Hospitals Slack, Adds Requirements on Community Needs Assessments By Jim McLaughlin T he IRS released a new proposed rule loosening penalties on the health law's requirement for non-profit hospitals to submit a community health needs assessment, granting some waivers for minor infractions and giving hospitals a window of time to repay taxes if they don't meet stiffer criteria to keep their tax exemptions. In the proposed rule, the tax collecting agency agreed it would not penalize small errors in community needs filings and would cap excise taxes at $50,000 for inadequate community needs reports. Factors the agency will consider in that determination include: the size, significance or repetition of the failure; existing and adjusted safeguards intended to ensure compliance; and correction and self-report of the failure. Multi-hospital non-profit systems and their member hospitals will be permitted to retain their tax-exempt 501(c)(3) status, but noncompliant hospitals' activities will become taxed as C Corporation. Such a penalty will not by itself affect tax-exempt bond status. Previously, hospitals were required to address all identified health needs, but the latest guidance from the agency requires hospitals to name and draft a course of action for prioritized health needs, including programs and resources allocated to need, the anticipated impact and the intended method to evaluate outcomes, as well as planned collaboration with other healthcare organizations. As in previous guidance, hospitals will need to justify why deprioritized ones will not be addressed in their plan. CHNA reports, in addition to implementation strategies required in earlier guidance, must be approved by an authorized body, including a hospital committee, governing body or an individual authorized by the governing body. The reports will also need to be made publicly available for six years after they are issued, twice as long as earlier guidance required. Adding increased specificity and clarity to its earlier proposed rule, the IRS defined medically underserved populations as those with health disparities or at risk of low use of healthcare services due to their language, income, geographic or other barriers. n

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