Data and Research July 18, 2019

S&P Finds Most Not-for-Profit Hospitals Manage Pensions Well

However, the ratings agency doesn’t expect funded status improvements to continue, and it notes that many not-for-profit hospitals are focusing on de-risking strategies.

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The U.S. not-for-profit health care sector has benefited from an increase in the median funded status of its pension plans in fiscal 2018—increasing from 80.6% to 85%, according to S&P Global Ratings.

S&P says this boost is primarily due to an increase in the discount rate used to measure pension liabilities, which reduced those liabilities. The discount rate is based on a conservative municipal bond rate, and S&P views the 2018 increase as being within reasonable volatility expectations, so it says it doesn’t consider it to be a fundamental change in the funded status of the plans.

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In the near term, S&P Global Ratings believes a higher funded status should mean lower statutory minimum contributions to defined benefit (DB) pension plans, which could help overall financial profiles because operating performance in the health care sector remains under stress. However, the bond rate may be volatile from year to year, the projected benefit obligation for many plans remains large, and many plans have updated assumptions such as mortality to more accurately recognize longer lifespans and higher benefits to be paid out. Therefore, the advantages to organizations’ financial profiles from lower statutory minimum contributions may not fully materialize.

S&P notes that many not-for-profit issuers continue to focus on de-risking strategies that lower pension funding risks, including increasing annual contributions to improve the funded status with less dependence on volatile markets, closing current plans to new participants, freezing plans, and in some cases, terminating plans altogether.

According to S&P’s analysis, most hospitals and health systems have managed their pension burdens well, with no credit implications. However, it believes that even without a direct negative credit impact, in some circumstances, a high funding burden has inhibited improvement in credit quality. Furthermore, not all hospitals’ pension funding improved in 2018, and for providers already struggling with thin income statements and balance sheets, underfunded pension plans could contribute to credit stress.

In general, S&P says, it considers fully funded plans (plans funded at 100% or more) or the absence of a DB plan as positive factors in its assessment of an organization’s financial profile. Conversely, it views DB plans that are considerably underfunded, or expected to be underfunded in the near- to mid-term, as risks to the financial profile.

Whether the average funded status will remain at the current level or improve depends on a number of factors, including market returns, discount and bond rate trends, other actuarial assumptions, and benefit design changes, according to the S&P Global Ratings report. S&P notes that many hospitals and health systems are moving to mitigate risks through more conservative asset allocation strategies, while others are focusing on reducing liabilities by making benefit design changes. Still, some are reluctant to change or curtail DB plans that have long been a part of their benefits packages and that they see as a powerful recruitment and retention tool.
Compliance July 18, 2019

Yale Sued Over Wellness Program ‘Penalty’

The lawsuit says the so-called “incentive” Yale offers for participating in the wellness program are in fact a “penalty” that violates non-participants’ rights, and it notes that the Equal Employment Opportunity Commission (EEOC) withdrew the incentive portions of its wellness program rules.

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Employees of Yale University have filed a class action lawsuit on behalf of all current and former employees of Yale who are or were required to participate in Yale’s Health Expectation Program (HEP) or pay a fine adding up to $1,300 annually between January 1, 2017 and present.

 

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While incentives to participate in wellness programs may encourage participation by employees who want to participate, these incentives are also a “penalty” for those who do not. According to the complaint, the penalty for non-participation in the program is among the highest in the country among large employers, coming in at $25 per week, or $1,300 per year. The lawsuit contends that in New Haven, Connecticut, where Yale is located, $1,300 is equivalent to nearly five and half weeks’ worth of food, four months of utility costs, nearly a months’ worth of housing, or a month’s worth of childcare.

 

The lawsuit accuses Yale of not only slashing employees’ expected income, but violating their civil rights. It notes that the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) prohibit employers from extracting medical or genetic information from employees unless that information is provided voluntarily.

 

The lawsuit goes on to say the $1,300 penalty makes the HEP anything but voluntary. It cites one employee who is a member of one of the unions at Yale that is subject to the HEP, as saying Yale is “forcing” union members to do “something they don’t want to do” and “financially penalizing them if [they] don’t do it.” Another union member explains that he would prefer not to participate but “can’t throw away $25 [per week] to keep [his] information private.”

 

“The weekly penalty imposed by Yale has a coercive effect on its employees, forcing them to either pay a fine to protect their civil rights or participate in a wellness program against their will. That is a violation of the ADA and GINA,” the complaint says.

 

In 2016, the Equal Employment Opportunity Commission (EEOC) issued final regulations governing employee wellness programs’ compliance with the ADA and GINA. The final ADA rule stated that wellness programs that are part of a group health plan and that ask questions about employees’ health or include medical examinations may offer incentives of up to 30% of the total cost of self-only coverage. The final GINA rule said the value of the maximum incentive attributable to a spouse’s participation may not exceed 30% of the total cost of self-only coverage, the same incentive allowed for the employee.

 

The AARP, in 2017, filed a lawsuit alleging that the EEOC’s final wellness program rules are arbitrary, capricious, an abuse of discretion, and not in accordance with law. The AARP asked that the rules be invalidated. In 2018, the U.S. District Court for the District of Columbia vacated the incentive portions of the wellness program rules. However, the judge issued a stay on his decision until January 1, 2019. According to his opinion, the court “will also hold EEOC to its intended deadline of August 2018 for the issuance of a notice of proposed rulemaking.”

 

On December 20, 2018, consistent with the court’s order, the EEOC withdrew the “incentive” portions of the 2016 rules.

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