Untitled

U.S.
Not-for-Profit Health Care

Sector's 2013 Pension Plan Medians:
Time To Exhale?
Primary Credit Analysts:
Liz Sweeney, New York (1) 212-438-2102; liz.sweeney@standardandpoors.com
Kenneth T Gacka, San Francisco (1) 415-371-5036; kenneth.gacka@standardandpoors.com
Research Contributors:
Sinto Inasu, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Prasad Patil, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Table Of Contents
A Slow Recovery
The Funding Gap Narrows, But Will It Continue?
Regulatory Change Provides Temporary Relief
Ratios Provide Insights, But Each Plan is Unique
Pension-Related Issues Add Risk To Financial Profiles
A Low Correlation Between Funded Status And Ratings
Plan Sizes Vary Significantly
Court Challenges Affect Religiously-Sponsored Health Systems
Defined-Contribution Plans Are Still A Minority
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MAY 15, 2014 1
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U.S. Not-for-Profit Health Care Sector's 2013
Pension Plan Medians: Time To Exhale?
The U.S. not-for-profit health care sector finally saw an improvement in the funded status of its pension plans in 2013
due to higher discount rates and stronger asset values. The increase is good news for an industry grappling with credit
stress brought on by health care reform and other factors. A higher funded status should mean lower statutory
minimum contributions to defined-benefit (DB) pension plans over time, although perhaps not immediately.
Due to the way required contributions are calculated, changes in funded status, up or down, do not necessarily
translate into immediate increases or decreases in required contributions, but if the current trend holds for a longer
period, it should spell relief for hospitals' cash flow over time.
Overview
The median funded status of defined-benefit pension plans increased to 80% in 2013 after four years at
approximately 70%, but remains well below the 90% achieved in 2007.
The improvement in funded status was mainly due to a modest increase in discount rates and higher asset
values.
Defined-benefit plans are still vulnerable to stock-market swings, although plan sponsors are seeking ways to
mitigate volatility through asset allocation changes, pension freezes, and even plan terminations.
The increase in funded status brings the median up to 80%, a level last seen in 2008, but still well below 2007's 90%.
Key drivers of the improvement were an uptick in the discount rate, which has the effect of reducing pension liabilities,
and healthy asset appreciation due to strong investment markets and hospitals' contributions to the plans. Another
factor for some hospitals and health systems was amendments, such as pension freezes that shut out new employees
from the plan or permanently locked in existing members' benefits. Freezes often result in an actuarial gain, which
increases the funded status of the plan.
Despite the rebound in funding levels and the longer-term implications for lower cash contributions to the plans, many
hospitals are not ready to exhale yet. Pension plan valuations remain volatile and subject to numerous actuarial
assumptions and market fluctuations that sponsors have limited control over. Plan asset values are currently buoyed
by investment markets that are near historic highs, so a market downturn could quickly wipe out the recent
improvement. Many hospitals are taking advantage of the recent improvement in funded status to lock in asset gains
through more-conservative investment allocations, and some are even planning to terminate the plans through the
distribution of assets to beneficiaries as a lump sum or the purchase of annuities for beneficiaries. Unlike pension
freezes, pension terminations mean a plan will cease to exist. Terminations have been rare in recent years because
when a plan is underfunded, the plan sponsor would have to first contribute enough to the plan to fully fund it before
distributing assets to beneficiaries. Furthermore, low interest rates make it very expensive to purchase annuities for
beneficiaries. The recent uptick in funded status and slightly higher interest rates bring plan terminations into a more
realistic price range for some sponsors.
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Religious organizations also face a new challenge. They have long assumed their DB plans, often called "church plans",
were exempt from regulatory requirements under the Employee Retirement and Income Security Act of 1974 (ERISA),
including the statutory minimum contribution calculations. However, church plan sponsors are now seeing their status
challenged in legal actions, which could result in formal funding requirements, potentially higher than planned.
A Slow Recovery
Standard & Poor's Ratings Services has tracked the funding levels of the DB plans of not-for-profit hospitals and health
systems since 2007, when funded status was at its highest level of 90%. Funded status declined sharply in 2008 and
2009, by a total of 20 percentage points following the big downturn in global investment markets. Despite hospitals'
healthy contributions to the plans and a recovery in asset values since 2009, funded status was essentially flat at 70%
through 2012 (see chart 1). The stagnant values were due to declining discount rates - the interest rates used to
determine the present value of the pension obligation which resulted in growing benefit obligations (see chart 2).
The trend finally reversed in fiscal 2013, when the discount rate, which is benchmarked on fixed-income securities
yields, rose while asset values soared. The improvement brought funded status back to the 2008 level of 80%, which is
an encouraging development given that the discount rate is still very low in historic terms. The implication is that
funded status is poised to go higher if the discount rate continues to rise and asset values remain steady. Funded status
is the ratio of plan assets to the projected benefit obligation (PBO).
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U.S. Not-for-Profit Health Care Sector's 2013 Pension Plan Medians: Time To Exhale?
Chart 1
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Chart 2
A look at rating actions over the last few years indicates that pension funding has contributed to credit pressure.
However, the issue isn't often a primary reason for rating actions partly because pensions are long-term obligations
whose values move up and down with investment markets and actuarial changes. Because we expect changes in
valuation over long periods, our ratings accommodate a certain amount of volatility in the valuation of pension
liabilities. Defined-benefit pension plans are a common component of overall benefit packages at hospitals and health
systems and are present at the majority of our rated not-for-profit hospitals and health systems, while
defined-contribution (DC) plans make up a significant minority. Defined-benefit plans are employer-sponsored, and
payouts are based on formulas tied to an employee's salary and length of service.
In our view, most hospitals and health systems have managed their pension burdens well without a credit impact,
although we believe in certain circumstances a high funding burden has inhibited improvement in credit quality.
Furthermore, not all hospitals saw their pension funding improve last year, and for providers already struggling with
thin income statements and balance sheets, underfunded pension plans could cause credit stress.
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The Funding Gap Narrows, But Will It Continue?
The median funded status for DB plans in our sample rose to 80.0% in fiscal 2013, from 69.2% in fiscal 2012. In our
view, the improvement primarily reflected higher asset values due to favorable investment market performance and a
decrease in the valuation of pension liabilities as discount rates edged up. The discount rate that plan sponsors use to
measure their pension liability is a key assumption. Since plan sponsors discount future benefits to the present value,
higher discount rates cause the pension benefit obligation to fall, while lower rates cause it to rise, if all other
assumptions remain the same.
The median discount rate rose to 4.9% in fiscal 2013, from 4.2% in fiscal 2012 (see chart 2), the first meaningful
increase since we started tracking this data for hospitals. Another factor that helped improve funded status was
curtailment gains for plan sponsors who made significant benefit design changes. A good example is CareGroup,
Mass., which froze benefits under its Beth Israel Deaconess Medical Center Plan as of Jan. 1, 2013, and replaced it
with an enhancement to its DC plan. CareGroup recorded a reduction in PBO of $67 million in fiscal 2013 for plan
amendments. In conjunction with strong asset valuations and a rise of 25 basis points in the discount rate, CareGroup's
DB plans saw a dramatic increase in funded status to 93% as of Sept. 30, 2013, from 70% at Sept. 30, 2012.
Other pension-related medians were mixed and moved only incrementally in fiscal 2013, including net periodic benefit
cost, which worsened slightly to 1.4% of operating expenses from 1.2%. In 2013, employer contribution as a
percentage of cash flow (measured by EBIDA) declined to 13.6% from 15% in 2012, meaning that hospitals spent less
of their cash flow on pension contributions, freeing up cash for other uses like debt repayment, capital expenses, and
building reserves. However, this remains well above the low points of near 10% that we observed in 2007 and 2008
when we began this study (see table 1). This measure is influenced by changes in pension contributions as well as
changes in cash flow from year to year. An increase in this measure doesn't always indicate higher pension
contributions, as it can be skewed during times of depressed cash flow, similar to what we saw in fiscal 2009, when
cash flow was soft for many hospitals.
Whether funded status will remain at this level or improve depends on a number of factors, including actuarial
assumptions, investment market levels, discount rate trends, and benefit design changes. Many hospitals and health
systems are moving to mitigate these risks through asset allocation strategies while others are making benefit design
changes. At the same time, others are reluctant to change or curtail DB plans that have long been a part of their
benefits packages, and which they see as a powerful recruitment and retention tool.
Table 1
Not-For-Profit Hospitals And Health Systems Median Pension Data
2013 2012 2011 2010 2009 2008 2007
Sample Size 172* 319 328 327 308 311 273
Funded status
(%)
80.0 69.2 72.6 71.7 70.2 80.7 90.0
Discount rate
(%)
4.9 4.2 5.2 5.5 6.3 6.5 6.3
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Table 1
Not-For-Profit Hospitals And Health Systems Median Pension Data (cont.)
Projected
benefit
obligation/total
assets (%)
23.3 24.0 21.9 22.6 20.1 18.4 19.4
Net periodic
benefit
cost/total
operating
expense (%)
1.4 1.2 1.3 1.3 1.1 1.0 1.2
Employer
Contribution/EBIDA
(%)
13.6 15.0 13.0 13.0 14.3 10.4 10.0
Return on plan
assets (%)
7.5 7.5 8.0 N.A. N.A. N.A. N.A.
*Sample size for fiscal 2013 is smaller than prior years because not all 2013 audited information was available at time of publication. The full 2013
sample size will be available in next year's report. N.A.--Not available.
Each year, we publish the pension medians with the most recent year of data based on the audited financial reports
available by March, which are primarily audits with fiscal years ending June 30 and Sept. 30. Consequently, the sample
size for the most current year is always smaller than that of the prior year, which contains financial information for all
fiscal year-ends. In our April 2013 pension study, the data for 2012 included 142 hospitals and health systems. Based
on that sample, funded status was 69.4%. We now have full information for 2012, with a sample size of 319. Based on
the complete 2012 sample, the funded status was revised slightly, to 69.2%. Similar adjustments are made each year.
Our 2013 median data includes audits available through March 2014, with a sample size of 172. Audits for hospitals
with Dec. 31, 2013, fiscal year-ends were largely not available as of the publication date. Based on a preliminary view
of Dec. 31, 2013, results, we believe that the full sample data for 2013 will be similar to the data presented here.
Regulatory Change Provides Temporary Relief
Recent federal legislation ("Moving Ahead for Progress in the 21st Century Act", or MAP-21) provided some cash flow
relief to DB plan sponsors in the form of lower statutory minimum contributions in 2013. The act requires plan
sponsors to use a different formula for determining the discount rate used in calculating statutory minimum
contributions. Based on the current rate environment, that results in a much higher discount rate in the short term and
lower statutory funding minimums. Some hospitals even had no contribution requirements in 2013. However, the
funding relief in MAP-21 is designed to be temporary and doesn't change the overall economics of pensions. The act
also won't have much impact on the pension disclosure reported in audited financial statements, including the discount
rate used for accounting purposes.
MAP-21 applies to plans subject to ERISA, which governs required contributions for most DB pension plans. We often
observe that plans with falling funded status, based on audited financial statements, do not experience an immediate
increase in required contributions to make up the shortfall. Conversely, plans with rising funded status may
simultaneously have growing contribution requirements. Over a long period, there is a high and inverse correlation
between funded status and required contributions. However, in the shorter term, there are numerous smoothing
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mechanisms and multiyear amortization periods that can result in timing differences between a decline in funded
status and an increase in required contributions. In addition, plan assets as reported in audited financial statements are
valued as of the fiscal year-end, whereas asset values for required contribution calculations may be subject to
smoothing over time. Finally, we use the plan assets as a percentage of PBO to measure funded status, whereas ERISA
uses a somewhat different calculation that will generally show pensions with a higher funded status than the
accounting statements.
Ratios Provide Insights, But Each Plan is Unique
This is our sixth annual study of the not-for-profit health care sector's pension plans. We use aggregated data from a
broad sample of our rated universe, including more than 300 rated providers with fiscal 2007-2012 data and more than
170 with fiscal 2013 data. The sample size is smaller for the 2013 data because most of the audits for the fiscal year
ended Dec. 31, 2013, are not yet available. Tracking the broad sample allows us to monitor pension funding trends
using our considerable sample size to smooth any unusual effects from individual organizations. However, each plan
has unique characteristics, including actuarial assumptions, workforce characteristics, payout amounts and timing,
asset allocation, and whether there have been changes such as a freeze in benefit accruals. These unique
characteristics can have a substantial impact on a plan's funded status, and in any given year some plans' asset and
liability valuations could change in a direction contrary to the broad sample. In our rating analysis, we recognize the
unique characteristics of each plan, while also applying our understanding of the broader trends gleaned from the
median ratios.
This year, we added a new ratio to our study the return on plan assets. It represents sponsors' long-term projection
of the total return on assets in a plan. Generally, higher assumed rates of return result in lower annual pension benefit
expenses, if all other factors remain constant, while lower return assumptions will raise the expense. The median
return on plan assets was flat in 2013 at 7.5%.
Pension-Related Issues Add Risk To Financial Profiles
Standard & Poor's includes pension funding as part of its rating analysis and regularly discusses current and projected
pension contribution levels with management. In fiscal 2013, the demand that pension contributions had on total cash
flow declined, with median contributions as a percentage of EBIDA reduced to 13.6% from 15% in 2012 (see chart 3),
which was the highest since we started tracking this measure. Pension funding is a use of cash flow that competes with
other cash needs such as capital spending, debt repayment, and working capital.
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Chart 3
For many organizations, rising pension cost and underfunded pensions are simply issues, among others, that
management teams are successfully juggling, with no immediate credit implications. However, we do consider DB
plans and their funded status as a component of our assessment of an organization's financial profile. Employer
pension contributions can often directly affect unrestricted reserve ratios and crowd out other cash needs.
Furthermore, the effect of swings in funded status is evident in several key ratios that we analyze, including debt to
capitalization and pension-adjusted debt to capitalization. For instance, we noted in our April 4, 2014, report on
Dignity Health, Calif., that the organization's pension liability was reduced as of the fiscal 2013 audit due to growth in
plan assets, certain plan adjustments, and a higher discount rate. These changes collectively contributed to nearly a
$450 million improvement in unrestricted net assets, which helped drive an improvement in debt to capitalization for
Dignity Health despite an increase in debt during the year.
Overall, management teams are quite aware of the demand on funds and risks associated with DB pension plans, and
many organizations are evaluating amendments to their plans. Over the past year, several organizations announced
amendments to their plans. One example is Presbyterian Healthcare Services (PHS), N.M. PHS has a DB plan that has
been closed to new entrants since January 2006; however, the organization also ceased future benefit accruals to the
plan effective Jan. 1, 2013. The effect was a favorable curtailment adjustment recognized in PHS' audit for the year
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ended Dec. 31, 2012.
In general, we consider fully funded plans or the absence of a DB pension plan as positive factors in our assessment of
an organization's financial profile. For example, we considered Sutter Health, Calif.'s fully funded DB pension plan as a
positive factor in our rating on its debt. Also, we cited Scripps Health, Calif.'s lack of such a plan as a conservative
aspect of its balance sheet and an additional strength of the overall financial profile in our 'AA' rating. Conversely, we
view DB plans that are considerably underfunded as risks to an organization's financial profile.
When a sponsor freezes its DB plan, employees hired after the date of the freeze may not be eligible for the DB plan,
often called a "soft freeze". In addition, existing participants may stop accruing new benefits but are still entitled to all
vested benefits at retirement, also called a "hard freeze". After the freeze, in most cases the employees earn all future
benefits in a DC plan, which is a far more predictable expense for management, because the investment risk in DC
plans is with the employee, who determines the asset allocation. However, since employees hired before the date of
the freeze are still vested in the DB plan, the plan continues to pay benefits for many years, in most cases for decades,
generally for the life of all vested beneficiaries. Since the frozen plan no longer accepts new employees and existing
employees no longer earn benefits, certain actuarial assumptions used to calculate required contributions become less
volatile, while others continue to have uncertainty. In general, contributions will become less volatile and ultimately
shrink as the plan winds down over the years. Our credit analysis recognizes the benefits of reduced volatility in plan
contributions, and eventually reduced contributions in absolute terms.
Pension Bonds: A Free Lunch?
Some health systems have pursued or recently indicated that they are considering issuing bonds for the purpose
of making lump-sum contributions to their underfunded DB plans. The circumstances that have piqued hospital
executives' interest in pension bonds include generally low discount rates in the past few years, the low cost of
issuing debt (including taxable debt), and the gap between the cost of borrowing and the expected return on plan
assets. Low discount rates have led to underfunding of DB plans, often resulting in increased funding
requirements. In general, hospitals take the following approach: issue taxable debt at a low rate, contribute the
bond proceeds to the pension plan to increase funded status or even fully fund the plan, earn higher investment
returns on the plan assets than the cost of borrowing, and also reap cash flow savings through reduced annual
contributions because the plan's funding level is high.
Standard & Poor's already incorporates a variety of metrics into its analysis related to pension funding, including
pension-adjusted debt to capital and all the medians in table 1. For borrowers who intend to issue pension bonds,
we will review the projections related to DB funding with and without the pension bond issue, including projected
contributions, projected net periodic benefit cost, and projected return on plan assets. We expect that borrowers
will review a variety of stress scenarios to determine their risk exposures with a pension bond strategy.
While this strategy may be viewed as swapping one liability (a pension funding gap) for another (debt), we view
debt instruments as less flexible than pension liabilities, especially for the religiously-sponsored organizations that
are exempt from ERISA requirements. Unlike debt, hospitals often have some flexibility in determining, within
regulatory guidelines, how much and when to fund their pension plans. In addition, incremental debt, unlike
pension liabilities, weakens debt covenant calculations, which affect all bondholders. In addition, the strategy of
issuing low-rate debt and earning higher returns on the asset side of the pension carries risk due to potential
fluctuations in asset values, and there is no guarantee that a plan that is fully funded today from proceeds of a
bond issue won't be underfunded tomorrow. Still, we do recognize the benefits of such a strategy and view it as
less risky than additional debt issued for a new facility, for example.
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A Low Correlation Between Funded Status And Ratings
The 10 highest and 10 lowest funded plans from fiscal 2012 reflect representation at all rating levels, by all sizes, and
from all geographic regions (see table 2). We do not present the same data for fiscal 2013 because its sample size is
much less than the 2012 sample. The 10 highest funded plans have remained fairly consistent from year to year eight
have been on the list in each of the past two years, including Pomona Valley Hospital Medical Center, Calif., which
remains the highest in terms of funded status at 130.6%.
Pension funding is just one of the many factors in credit analysis. In our view, the median data demonstrate that
funding levels are not highly correlated with ratings, and organizations across the rating spectrum have varying
pension funding strengths and weaknesses. The low correlation between ratings on hospitals and the funded status of
their DB plans is demonstrated by Nevada Regional Medical Center (NRMC), Mo. and Northern Inyo County Local
Hospital District (NIHD), Calif., both of which are speculative-grade credits and have funded statuses higher than
100%. NRMC and NIHD were both downgraded since December 2013 due to stress on other aspects of their
respective financial profiles. Conversely, Kaiser Permanente, whose pension plan is funded at 39.4% based on audited
fiscal 2012's PBO, is the second lowest in terms of funded status on our list. However, Kaiser is rated 'A+' in part due
to our view of the strength of its integrated delivery system, sound cash flow, and robust unrestricted reserves.
Table 2
Highest And Lowest Funded Plans In Fiscal 2012
State Rating Outlook Funded Status (%)
10 Highest Funded Pension Plans
Pomona Valley Hospital
Medical Center
CA BBB- Stable 130.6
Nash Health Care Systems NC A Negative 123.4
The Health Care Authority
for Baptist Health
AL BBB+ Negative 117.2
Jackson County Schneck
Memorial Hospital
IN A Stable 113.1
Norton Healthcare KY A- Stable 110.3
Nevada Regional Medical
Center
MO B- Negative 109.1
Grand View Hospital PA A- Stable 107.7
Northwestern Memorial
HealthCare
IL AA+ Stable 104.8
CaroMont Health NC AA- Stable 104.5
Northern Inyo County
Local Hospital District
CA BB+ Stable 103.2
10 Lowest Funded Pension Plans
Baylor Scott & White
Health
TX A+ Positive 34.8
Kaiser Permanente CA A+ Stable 39.4
Scottsdale Healthcare AZ A- Positive 43.6
Catholic Health System NY BBB+ Stable 43.6
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Table 2
Highest And Lowest Funded Plans In Fiscal 2012 (cont.)
Hawaii Pacific Health HI A- Stable 44.8
Daughters of Charity
Health System
CA B- Negative 45.1
Health Quest System Inc. NY A- Stable 46.4
Integris Baptist Medical
Center Obligated Group
OK AA- Stable 46.8
North Colorado Medical
Center
CO A+ Stable 49.6
Saint Joseph Health
Services
RI CCC Watch Neg 50.2
Table 3 shows the funded status by rating category, using funded ranges to group providers. For fiscal 2012, we
observed that the tails of the distribution were comparable to 2011. Specifically, there were 15 providers with plans
funded above 100% in 2012 compared with 16 plans in 2011 (roughly 5% of the sample in each year). Similarly, there
were 10 plans that were funded at 50% or lower in 2012, which is only slightly higher than the eight plans that fit this
range in 2011. Most of the shifting occurred in the middle of the distribution, with plans migrating downward to the
51%-75% band in 2012 compared with a year earlier. The percentage of providers in the 51%-75% funded status group
increased to 63% in 2012, from 56.1% in 2011. In contrast, 29.2% of the sample had funded status ranging from 76% to
100% in 2012, a decrease from 2011's 36.6%. This overall weakening is in line with the slight dip in the median funded
status for the overall sample in fiscal 2012. While the change is fairly nominal between the last two years, if we look
over the longer term, we see that funded status is drastically lower than the peaks in 2007. By comparison in 2007,
23.2% of plans were funded above 100%, and 66.5% had funded statuses of 76%-100%. We did not present the top 10,
bottom 10, or the funded ranges by rating category for fiscal 2013 because the sample size is relatively small, as many
audited financial statements are not yet available.
Table 3
Funded Status Ranges By Rating Category (Number Of Issuers)
Fiscal 2012 Total (Fiscal year)
'AA' 'A' 'BBB' 'SG' 2012 2011 2010 2009 2008 2007
Funded status (%)
Above 100 4 7 2 2 15 16 10 10 28 63
76-100 24 48 18 3 93 120 113 94 148 181
51-75 42 98 45 16 201 184 197 188 101 28
26-50 1 6 2 0 9 8 7 3 12 0
0-25 0 0 0 1 1 0 0 0 0 0
Total 71 159 67 22 319 328 327 295 289 272
SG--Speculative grade
Plan Sizes Vary Significantly
When analyzing DB plans, we believe it is important to look at the relative size of the plan, not just the funding level.
Some plans that are underfunded as a percentage of PBO are relatively small plans. This can be the case when plans
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have been closed for a long period of time or if only certain employee groups or certain hospitals within a multihospital
system are covered in DB plans.
As a proxy for relative size, we use a balance sheet measure and a revenue measure. The balance sheet measure is the
PBO as a percentage of the health system's total assets. We use this measure to gauge a plan's size relative to an
organization's total asset base. For this measure, a lower value indicates a lesser risk, all other things being equal. For
example, Memorial Health Services (MemorialCare), Calif. currently maintains a DC plan for its employees, but its
balance sheet includes a DB plan related to former employees of Anaheim Memorial Medical Center (AMMC was sold
off by MemorialCare on July 1, 2009), but this plan has been closed to new entrants since 1998 and benefit accruals
have been frozen since 2005. As such, the PBO is very small at about 2% of MemorialCare's total assets and we don't
consider the 76% funded status of this plan to be material to MemorialCare's financial profile. The largest is St. Joseph
Health Services in Rhode Island, whose pension benefit obligation of $164 million is more than double the
organization's total assets, and is a component of the organization's overall weak financial profile. For the entire
sample, PBO as a percentage of total assets declined slightly to 23.3% in fiscal 2013, from 24.0% in fiscal 2012.
However, the ratio is higher than the 19.4% in fiscal 2007.
The revenue measure is the net periodic benefit cost as a percentage of total operating expenses. This measure shows
the relative burden of pension expense on the hospital's expense base. This measure is relatively small and stable,
having ranged between 1% and 1.4% since 2007, including an increase to 1.4% in 2013 from 1.2%. The increase is a
good example of the lack of immediate correlation between benefit expenses and changes in funded status, as the
pension benefit expense rose in 2013 despite improving funded status.
Court Challenges Affect Religiously-Sponsored Health Systems
Historically, religiously-sponsored health systems like Dignity Health, Catholic Health Initiatives, and Trinity Health,
which have DB plans, have considered their plans exempt from the funding requirements of ERISA because the law
has a specific exemption for "church plans". While many health systems with church plans fund them similarly to the
nonexempt plans, they have retained the flexibility when necessary to reduce annual pension contributions and some
have occasionally taken advantage of that ability. Recently, the church plan exemption of a number of
religiously-sponsored health systems has been challenged in court, and two federal district courts recently ruled
against Dignity Health, Calif. and St. Peter's University Hospital, N.J., saying that the plans were not exempt from
ERISA because they were not established by the church itself. Both decisions are being appealed. If these rulings hold
up, and other court cases against religiously-sponsored health systems are successful, it could result in increased
funding requirements for some organizations at a time when they are facing other industry pressures and diminished
cash flow. We will monitor this issue for its impact on hospitals and health systems' pension funding requirements, and
how those requirements could affect credit quality.
Defined-Contribution Plans Are Still A Minority
We also identified 176 hospitals and health systems that have DC plans only. This represents more than 30% of our
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rated universe, indicating that DC plans are a significant minority in the not-for-profit health care world. We expect this
number to grow as more providers move away from traditional DB plans, although in most cases hospitals that freeze
their DB plans still have pension obligations and continue to contribute to them for many years. For those
organizations, we still include the DB plan in our medians, and they are not part of the "defined-contribution only"
group. In our credit analysis, we do recognize the benefits of reduced volatility in plan contributions, and eventually
reduced contributions in absolute terms, as a frozen DB plan winds down over time.
Table 4 shows the largest 25 hospitals and health systems with only DC plans. Under DC plans, including the popular
401(k), an employer and employee usually set aside a certain percentage of income each year in that employee's
retirement savings account. A few providers have small DB plans for key executives, but all other employees
participate in DC plans. In those cases, we consider the organizations to have DC plans. Like organizations with DB
plans, the DC organizations are diverse in size, geography, and credit quality.
Table 4
Largest 25 Hospitals And Health Systems Without Defined-Benefit Pension Plans
Hospital/Health System State Rating Outlook
Fiscal 2012 operating
revenue ($000s)
St. Joseph Health System CA AA- Positive 4,375,965
Texas Health Resources TX AA- Positive 3,724,758
Adventist Health
System-West
CA A Stable 2,897,888
Scripps Health CA AA Stable 2,563,834
Methodist Hospital of
Houston
TX AA Stable 2,331,041
Baptist Health South
Florida
FL AA Stable 2,037,131
Marshfield Clinic WI A- Stable 1,864,278
Orlando Health FL A Negative 1,827,015
Baptist Memorial
Healthcare Corp.
TN AA- Stable 1,824,216
University Medical Center
Corp.
AZ BBB+ Negative 1,160,468
Cook Children's Medical
Center Inc.
TX AA Stable 1,134,662
Children's Healthcare of
Atlanta
GA AA Stable 1,125,326
University of Iowa
Hospitals & Clinics
IA AA Stable 1,098,293
Covenant Health TN A- Stable 1,050,593
Mission Health Inc. NC AA- Stable 1,050,065
Children's Mercy Hospital MO A+ Stable 1,037,367
Saint Francis Health
System of Tulsa
OK AA+ Stable 1,009,179
Cadence Health & Affiliates IL AA Stable 1,006,867
Health First Inc. FL A- Stable 996,686
Methodist Health System TX AA- Stable 969,229
Gundersen Lutheran WI A+ Stable 881,335
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Table 4
Largest 25 Hospitals And Health Systems Without Defined-Benefit Pension Plans (cont.)
Mcleod Regional Medical
Center
SC AA- Stable 856,941
Southcoast Health System MA A Negative 779,446
Childrens Hospital of Los
Angeles
CA BBB+ Negative 770,744
Denver Health & Hospital
Authority
CO BBB Stable 743,871
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