U.S. health care mergers and acquisitions are on a tear. Those deals may be great for shareholders, but they can bring investment and other challenges for plan sponsors and employees at the companies involved.
The third quarter of this year marked the eighth straight with more than 200 transactions, according to Irving Levin Associates, a specialist in health care M&A research. Despite the number of announced deals falling 12 percent year-over-year, to 363, July through September ranked as the second-busiest third quarter since Levin started keeping track in 1948.
Even if volume is down, the deals keep getting bigger. Earlier this month Ardent Health Services announced plans to buy LHP Hospital Group in a tie-up that would create the second-largest private hospital chain in the country.
As a result of this merger fever, health care plan sponsors have fallen behind on governance and plan management, which means added administrative headaches that distract pension committees from investment decisions. Theres no clear escape from that trap, but the corporate pension world offers some potential solutions.
What weve seen in health care as a result of the strong trend toward consolidation over the past five years is a sweeping change in plan sponsorship, and that has significantly changed the relationship between health care employees and their employers, says Lynn Cornwall, a senior partner at global human resources consulting firm Aon Hewitt.
Cornwall notes that health care is unique because the industry doesnt rely on any single retirement plan structure. Health care providers can be backed by nonprofits, religious organizations, for-profit companies, or physician partnerships, so after a merger sponsors may end up with a basket of plans and requirements, few of which can be consolidated.
Part of the problem is that HR issues arent part of the merger process, explains Douglas Johnson, a partner at Mercer, the worlds largest human resources consulting firm. Retirement plan liabilities are counted on the balance sheet, but there isnt a strong discussion about how to integrate them postmerger.
According to Johnson, handling retirement plan issues after a deal closes can leave health care providers with limited options for integration. As a result, the merged companies start looking at ways to derisk, including freezing plans, making lump sum payments to staff to get them off employer-backed programs, and moving as many employees as possible onto defined contribution platforms.
However, closing plans or consolidating them can create a whole new set of headaches unique to health care. Aon Hewitts Cornwall points out that because health care providers must have certain levels of operating cash on hand, freezing a retirement plan doesnt solve the balance sheet problems. A frozen defined benefit plan can negatively impact the audit rating of a provider if it is underfunded, she says. This is often the case in an acquisition if the target was a weaker organization.
Moving over to defined contribution plans can also be difficult, thanks to the cash-on-hand requirement. With a traditional defined benefit pension plan, health care providers can take funding holidays to reduce their immediate cash need; defined contribution schemes have no such option. Even if they do make the move, plan sponsors may find themselves managing a variety of defined contribution plans that they cant integrate.
The realities of juggling multiple plans have left health care plan sponsors lagging other private pension groups when it comes to governance and investment rigor. In a recent survey of health care organizations by pension plan consulting firm NEPC, governance issues dominated the top eight concerns listed by the 31 respondents.
NEPC partner Ross Bremen, who wrote the report, says consolidation issues and regulatory woes are holding sponsors back from focusing on investment. Investors have been unclear on the protections offered by different types of retirement plans, and in some cases that has prompted lawsuits. Weve seen a lot of concern around recent litigation from church plan employees, for example, Bremen observes. That makes plan sponsors more cautious about making moves to change things or consolidate.
Providence Health & Services, a not-for-profit Catholic health care group operating in five western states, recently agreed to pay almost $325 million to settle an employee class action lawsuit that accused it of underfunding its pension plan. Other suits citing improper funding levels and governance issues have been brought against church plan sponsors this year.
The NEPC survey also shows that the relatively large size of health care retirement committees can hurt plan quality by impeding decision making. Such committees often have more than seven members, versus four to six for their typical corporate counterpart.
But there may be a silver lining. Health care providers have started to borrow ideas on postmerger integration and program choice from corporate pension plans. Although corporate pensions are often much simpler in structure, some of their practices lend themselves to health care.
For example, integration gives sponsors the option to review all plan providers and see which are delivering the biggest bang for the buck. Asking for fresh proposals can shed new light on pricing, commissions, and benefits.
Making retirement part of due diligence for a potential merger can also cut down on integration troubles. If you move retirement into the due diligence process, you can derisk and come up with solutions at the beginning rather than trying to undo a whole slew of problems after the deal is already done, says Jeff Black, a partner in Mercers M&A group. Considering plans with a smaller menu of investments something the corporate world is already doing can help too, Black adds.
Aons Cornwall agrees, pointing out that taking a closer look at 403(b) annuity plans or limiting the number of investments available to participants can reduce the pressure on sponsors and employees. People hear streamlining and think lack of choice, but it is often better for everyone involved if there are fewer, higher-quality options for investment, she says. Employers can limit risk, and employees can spend less time trying to understand products.
If health care plan sponsors want to get back to concentrating on investments, nailing down process is essential. Plan sponsors need to be clear about what they offer so they can make timely and informed decisions.
Its unlikely that we will see a clear playbook emerge in health care because of the nature of these mergers, Black says. But there are ideas to borrow from that can help retirement committees get up to speed. Fortunately, thats beginning to happen.