PBGC Premiums Plague the Hospital Industry

At a time when no industry can afford them less, October Three’s 2020 edition of our report on the PBGC Premium Burden shows that the premiums being paid on account of underfunded pension plans are hitting hospitals harder than any other sector.

Our analysis showed that it was not uncommon for hospitals to be paying these premiums in excess of ½ of 1% of plan assets and that for many hospitals, those annual premiums exceeded 1% of plan assets. 

How much does that matter?

Consider a plan whose assets are invested in a mix of investments where the assets, without regard to PBGC premiums would be expected to return 7% per year. After factoring in PBGC premiums of 1% of assets, that 7% decreases to 6%. Depending on the nature of the plan’s liabilities (largely based on the ages of plan participants), we would expect that such levels of premiums would increase the long-term costs of the plan by 10-15%.

October Three’s 2020 PBGC Premium Burden analysis shows that aggregate premiums since 2008 have totaled a staggering $46B –6B in 2019.  Of this total $600 million are paid by hospitals.

For many plan sponsors, sound pension management has become, in large part, management of PBGC premiums. But our research shows that hospitals, generally, are failing to manage those premiums. Many plan sponsors, including most hospitals with plans (including frozen plans), continue to pay far more in PBGC premiums than they needed to. In fact, our research shows that employers have paid $525 million more in premiums than they needed to since 2011. Missed savings in 2018 alone were $40 million. And these missed opportunities were completely avoidable.

While many employers have adopted strategies to manage escalating premiums, a significant number have not. With the financial challenges and desire to reduce their cost structures that we see in the hospital sector today, this would seem surprising. But at the same time, since most of these hospitals have frozen their pensions, finance departments appear to have focused on other areas of potential savings and put these pensions in set it and forget it mode. 

Let’s use the plight of one hospital to illustrate.

Hospital H is a large, traditional facility in an urban area. It boasts roughly 1,150 beds. For the calendar year, it had operating income of roughly $2.2 million (i.e., $1,900 per bed). Our analysis showed that they could have saved approximately $600 thousand in PBGC premiums using a few simple techniques that we have espoused since we first released our study in 2017. 

Rather than having operating income of $1900 per bed, this would have increased that figure by about 27% to almost $2450 per bed based on $2.8 million of operating profit.

A copy of our full report can be found here.