Pension Risk Matters : Pension Risk News & Analysis : Investment Governance, Inc. : Pension Risk & Investment

My client conversations are mainly with financial professionals and attorneys. However, as someone who wants to stay informed about the economy, I likewise enjoy getting different perspectives from market participants, especially those who are directly impacted by changing rules and regulations. So it was with interest that I read the following note on my doctor's pay window:

"Dear patients -

As of October 1, 2010, I no longer accept Medicare insurance due to the harassment and cuts in payments by the federal government. My fees are very reasonable. Please feel free to discuss them with me personally. I would love to continue to care for my Medicare patients, just without the federal government telling me how to do my job or how much to get paid. This is just the beginning of the healthcare reform. Please thank your politicians. Remember, elections have consequences."

Whether you agree with him or not, the reality is that, like any regulation, there are unintended consequences. When you deny someone the opportunity to earn a risk-adjusted return, don't be surprised that some individuals exit the market and seek gainful work elsewhere. If true that large numbers of physicians are no longer "supplied" at the same time that health care mandates force demand upward, it's obvious that prices are going to spiral. To the extent that regulations keep prices in check, even more doctors will get discouraged, leave the industry and put more pressure on the demand-supply gap.

According to "The Coming Doctor Shortage" by Herbert Pardes (Wall Street Journal, January 19, 2011), "Health-care reform will add an estimated 32 million people to the ranks of the insured, driving them to seek medical attention that in the past they may have avoided due to expense." In addition, an aging populace adds to demand even as nearly a third of doctors in the United States are older than 55 years with plans for retirement at some point.

The math is straightforward.

• 250,000 doctors will retire within the next decade.
• Increased needs require "an additional 130,000 doctors, both general-practice physicians and specialists, 15 years from now."
• About 16,000 doctors are trained each year.

Besides those doctors who are throwing in the towel, I've talked to quite a few who are discouraging their relatives, friends and family members from studying medicine.

If things don't correct soon, fewer rational individuals will be willing to incur large personal debts and study long hours to become doctors. If that happens, "do no harm" may be the reality of too much legislative interference.

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Are you ready to celebrate National Nothing Day on January 16 of each year? Created by late newspaperman Harold Pullman Coffin, 1973 marked the debut of this unusual event. The stated goal is for Americans to relax without worrying about missing an observance or celebration of something.

Perhaps not surprisingly, there is mounting evidence that relaxation and good health go hand in hand. According to the Mayo Clinic website, yoga (a type of relaxation activity) reduces stress, enhances fitness, helps with the management of chronic health problems and can keep weight gain in check. Writer Gloria Charlier cites an interview with Dr. Herbert Benson by veteran broadcaster Diane Rehm about his 2010 book entitled The Relaxation Revolution. The central premise is that a mind-body connection exists and must be nurtured. He's in good company since numerous prominent medical experts share his view. For businesses, the introduction of wellness programs can lower health care costs and encourage happier, and logically more productive, employees. Click to read "The relaxation response is healing" (Cincinnati Examiner, August 26, 2010).

If you get antsy sitting around this Sunday doing nothing, check out Meeting Wizard. A colleague tipped me off about this free site that finally (!) gets a handle on email and telephone tag when trying to set up multiple-person meetings.

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In the last few months, I've watched my mother bear her illness with grace and dignity. She recently passed away, after a struggle with much pain. It has been a terribly sad time but I thank the many friends and colleagues who kept my mother in their thoughts.

In particular, I remain amazed and grateful for the numerous health care workers who tirelessly tended to her needs and those of others in hospice. In conversations with those individuals, it was clear that their work was more than a way to earn a living. It is truly an honor to have met the nurses (male and female) who never complained and instead carried out their work with a smile.

To my dear mother, may you rest in peace and know that you are missed and loved. Like the rose shown here, your beauty endures. You will be remembered with a legacy of purpose and hope.

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 In 1905, poet George Santayana wrote that “Those who cannot remember the past are condemned to repeat it.” Was he prescient or practical, acknowledging that human behavior sometimes tends towards inertia if the challenge is deemed too hard? Unfortunately for those who favor inaction, the tide is turning in favor of transparency and investment best practices (and arguably none too soon).

A recent survey conducted by the IBM Institute for Business Value augurs poorly for those who think the past holds the key to the future. To the contrary, nearly nine out of ten surveyed financial executives said they believe that high returns are no longer achievable and that “excessive risk taking, opacity and leverage” have gone the way of the dodo bird. If true, think about the difficulties that lie ahead for institutional investors.

One asset allocation mistake or sloppy due diligence step could cut short any meaningful chance of realizing even modest yields over time as it will be harder to make up for lost ground. More than a few pension, endowment and foundation leaders will simply have no chance but to button up their procedures in order to mitigate uncompensated risk. Their very financial survival will depend on the proper identification, assessment and management of qualitative and quantitative sources of uncertainty.

New rules will come and go, forcing what regulators will invariably characterize as best investment practices. They will be wrong. Staying in business will critically depend on going well beyond the letter of the law and instead committing to a robust and comprehensive focus on economic "compliance" where it counts, i.e. preserving or growing available cash. For example, suppose an institutional investor conducts background checks on key traders but ignores lock ups or undue concentration of said traders' positions. Absent Lady Luck, the pension, endowment and/or foundation will have taken one step forward and two steps backward by spending money to address one risk factor while ignoring others.

The good news is that opportunity presents itself in these turbulent times. Enlightened organizations can differentiate themselves as advocates of buy side governance, thereby potentially reducing their exposure to litigation, lowering the chance of economic losses and/or enhancing their respective reputations with plan participants, donors, taxpayers, shareholders and other relevant constituencies.

Reform won't be easy. Diminished budgets for risk management technology systems and skilled personnel will challenge even well-intentioned institutions. Unfortunately, excuses will fall on deaf ears if promises can't be kept. A retiree or grantee won't care why the checks don't arrive on time or arrive and then bounce.

The future is here. Everyone is a risk manager now. 

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Since the inception of www.pensionriskmatters.com in late March 2006, we have never received any negative comments. To the contrary, feedback from readers around the world has been very positive and insightful. However, there is a first time for everything and I am not one to avoid taking responsibility for my actions. In this case, a reader took me to task for the use of the word "tubby" in a June 25, 2008 post about employee benefits and weight. Out of respect for that reader and anyone else who might have been upset (despite no intent on my part to offend - I have used the word to describe my own efforts to keep excess pounds at bay), I have retitled that post. Let me also apologize sincerely and thank that reader for sending comments our way.

The topic of employee benefit mix is an important one for many reasons. As timely news events occur, we will cover them in subsequent blog posts.

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In response to my June 25, 2008 post ("Is There a Link Between Weights and Benefits?") about the fiduciary ramifications of asking employees to lose weight or otherwise change their lifestyle, law professor Paul Secunda writes the following:

<< I agree with Susan on this, of course, but wouldn't it be funny hearing someone say: "I am not going to eat that muffin because I might get fired or my health premiums may go up?" >>

Check out what else the creator of the popular "Workplace Prof Blog" has to say on this topic. 

• "Do Workplace Smoking Bans Have a Multiplier Effect?" (April 25,2008)
• "Higher Insurance Premiums On the Way for Obese Workers?" (July 9, 2007)
• "Obesity Regulation in the Workplace?" (November 24, 2005)

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Sacramento Bee investigative journalist Jon Ortiz reports that the giant California Public Employees' Retirement System ("CalPERS") has just announced an 8 percent rise in "its Kaiser basic premiums." According to "Rate outlook dismal for individual health plan subscribers" (June 24, 2008), roughly 2.5 million individuals will feel the pinch. Citing Dr. Michael Kraten, Connecticut-based industry expert, relatively healthier baby boomers and cheaper generic drugs have helped to stave off premium increases, but not for long. Even if large organizations like CalPERS are able to drive a hard bargain, "Whatever price breaks the big players get are passed down the line as providers haggle with doctors and hospitals over payment for services and raise or lower rates on other policy purchasers."

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A few weeks ago, en route to speak at a valuation conference about hedge fund issues, I sat next to a health-conscious surgeon. For nearly an hour, he spoke passionately about spiraling hospital and pharmaceutical costs, due in large part to what he described as an obesity epidemic. He offered several compelling examples of procedures that could have been done at a much lower cost, had patients been smaller in girth. Though I consider myself a healthy person (low-fat diet, regular exercise), I do admit to a few pounds of excess baggage. You can therefore imagine my discomfort as I munched on my Power Bar, wondering - Is he addressing non-skinny people like me or outright weight-challenged children and adults?

It was no surprise then that this Sunday's New York Times addressed this problem, said to be costing employers big-time. In her piece, reporter Kelley Holland links to an "aha moment" map, courtesy of the Centers for Disease Control and Prevention. Based on 2006 data, all but four of fifty states clearly struggle with obesity, with at least 20 percent of adults having a Body Mass Index ("BMI") in excess of 30. (According to the Department of Health and Human Services, BMI is a gauge of body fat. BMI numbers above 25 place an individual in the overweight category. Use the online calculator to get a rough estimate of your BMI.) Holland continues to grab attention with some sobering statistics.

• More than 25 cents of every dollar spent on medical services is due to excess weight complications (based on research conducted by Emory University Professor Kenneth Thorpe).
• The corporate tab for too many muffins is $45 billion per year (according to a Conference Board report). See Medical News Today, April 10, 2008.
• Obesity links to chronic health problems more than smoking or excess drinking (based on Rand Corporation research by economist Roland Sturm).

 "Waistlines Expand Into a Workplace Issue" is a scary read. Citing examples of employers that offer incentives to visit the gym and otherwise slim down, Holland writes that more needs to be done, despite the fact that it is a "sensitive" issue. While I'm the last to make a value judgement about weight, some disturbing thoughts come to mind.

• How are longevity patterns (and the related cost of offering healthcare benefits and a traditional pension) impacted when plan participants are officially deemed overweight?
• Do employers experience lower costs if their pension plan covers mostly unhealthy participants?
• For employers that offer both health insurance and a defined benefit plan, do they deem an "optimal" mix of healthy versus not so healthy plan participants? (This assumes that healthier individuals who live longer push pension costs up but keep a lid on healthcare benefit expenses.)
• Should employers figuratively serve "in loco parentis" or does this expose them to allegations of discrimination?

Ban the coffee cake. Carrots anyone? 

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In today's edition, New York Times reporter Robert Pear describes a recent action by the Equal Employment Opportunity Commission ("EEOC") that gives employers free rein to cut back benefits for persons 65 and older. (See "Many Retirees May Lose Benefits From Employers.") The rationale seems to be that, once eligible for Medicare, senior workers should transition fully or partially out of private benefit programs because they are otherwise covered. Quoting EEOC Chair, Naomi C. Earp, the goal is to encourage plan sponsors to continue voluntarily providing and maintaining health benefits. Premiums deemed "too high" and the fact that people are living so much longer than ever before is creating havoc with corporate bottom lines. As a result, "many employers refuse to provide retiree health benefits or even to negotiate the issue." In some cases, if they are unable to contain costs for benefits offered to older workers, companies may decide to cut back altogether. This means that younger workers would be exposed - no employer provided coverage, no Medicare.

According to the December 26,2007 Federal Register, the new policy protects plan sponsors from legal threats of age discrimination in the event that they create a two-class benefits program. The "Appendix to Sec. 1625.32--Questions and Answers Regarding Coordination of Retiree Health Benefits With Medicare and State Health Benefits" provides additional information. The upshot is that employers now enjoy flexibility to (a) provide retiree healthcare benefits “only to those retirees who are not yet eligible for Medicare" (b) modify, reduce or eliminate benefits upon an employee's 65th birthday and (c) decrease or eliminate health benefits for the spouse or children of a retiree of a certain age.  

How many companies rush to the door remains to be seen. As employers struggle to attract and retain good workers, including those with a bit of gray, providing or reinstating diminished benefits may come to pass. Only time will tell.

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In case you haven't heard, most people think any pension problems are a walk in the park compared to a looming health care crisis. Some think the answer is national health care. Others persist - "Let the market do its thing." This blogger tends to be in the second camp but I am pretty sure we'll end up with socialized medicine at some point . Some say we are already there. After all, who REALLY knows the true cost of a particular service or pharmaceutical? There is seldom a supply-demand dynamic at work.

In a recent Wall Street Journal article, journalist Chad Terhune describes the Tennessee response in the form of a mini-medical plan called CoverTN. Made available to businesses that meet certain criteria, it allows employers to offer health care coverage at a cost far below that of catastrophic insurance. The bad news is an annual per capita limit of $25,000. One hospital stay could wipe this out in short order. Nevertheless, even a few corporate biggies are looking at mini-medical as a way to contain costs.

To read more, go to www.wsj.com and search for "Guarded Health: Covering the Uninsured, But Only Up to $25,000 - Tennessee Experiment Goes Against the Grain As States Remake Care", April 18, 2007.

Pension Risk Matters Editor's Note: Hear what guest blogger, Dr. Michael Kraten, CPA, has to say about health care. His recommendation for more transparency in benefits administration is one we soundly support. Founder and President of Enterprise Management Corporation, a management consultancy based in Connecticut, Kraten is doing interesting research in the area of virtual reality negotiations, health savings accounts and non-profit governance. He is also an accounting professor at Suffolk University in Boston, Massachusetts. To learn more, visit his website at www.enterpriseman.net.

Text from Dr. Kraten:

What is the Aflac duck selling?

If you answered “general health insurance” ... surprise! You are not correct. The Aflac web site offers dental, hospital confinement indemnity, hospital confinement sickness indemnity, hospital intensive care, and specified health event policies ... but not general health insurance.

What's the difference? Well, general policies are designed to cover most medically necessary services, with perhaps a few carve-outs and a relatively high lifetime maximum coverage limit tossed in for good measure. Aflac's policies, though, are only designed to cover a few narrowly defined services, and often include a relatively low annual coverage limit as well.

In other words, these are not general insurance policies at all. They're really prepaid service plans, where the plan manager (i.e. Aflac) keeps the premium if the services are not used by the end of the coverage period. And because the services frequently reflect relatively rare catastrophic events, the premium often goes unused ... and are thus typically converted to profits.

This type of plan is certainly not new to the commercial markets. Delta Dental, for instance, has been offering narrowly defined service contracts with low annual reimbursement ceilings for many years. But now many states are considering the implementation of such programs as well. Tennessee, for instance, recently launched a government subsidized small business plan called Cover TN. Its Program Summary states that it simply covers “basic health needs” only, with an annual maximum coverage limit of $25,000 per year ... not nearly enough to cover many complicated hospital stays.

Other states, such as California and Massachusetts, have opted to pursue a different path, proposing universal coverage programs that would cover most medically necessary services. But the costs of such plans are far more significant, and critics complain that their resultant taxation financing mechanisms are both onerous and self-defeating.

Time will tell whether the universal coverage programs will prove to be cost-effective, or whether the prepaid service programs can provide more than “band aid” protection for bleeding state program budgets. The American public might benefit, though, by receiving honest and transparent explanations from their health plan funding organizations regarding what they can expect ... and what they cannot expect ... for their premium dollars.

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According to "Bush Bids to Increase Focus on Health Care with Plan on Tax-Based Aid for Consumers" (Wall Street Journal, January 22, 2007), the White House intends to curb skyrocketing health care costs by seeking tax relief for some. Journalists John D. McKinnon and John Harwood write that independent buyers of health insurance would get a tax deduction, arguably a boon for the millions of persons who are self-employed or work for companies that do not provide insurance. In contrast, employer-provided health insurance benefits would constitute taxable income. Likely winners include an estimated 80% of employees for whom the average premium (for a family policy) is a reported $11,500. Executives, professionals and some "rank-and-file" union workers may not be so lucky.

In a related article, "UAW May Run Some Retiree Benefits" (Wall Street Journal, January 23, 2007), reporter Jeffrey McCracken describes a "potentially revolutionary plan" whereby the United Auto Workers could assume responsibility for a ten billion dollar plus liability. A critical question is whether big U.S. auto manufacturers can find the money to finance "a handover of future retiree health-care obligations to a union-managed fund." Beyond costs, McCracken posits that union leaders face a real dilemma. Accustomed to negotiating hard on behalf of their members, can or will they want to police members' health care activity as a way to control costs?

As stated here and elsewhere, health care has the potential to dwarf the pension issue in a serious way. (Click here to read our most recent post about health care economics.)

If employers decide they can't afford to offer insurance coverage in its current form, pensions may be curtailed even further as part of a serious look at employee benefits overall. This is not necessarily a good thing if companies and municipalities then find it difficult to attract and retain productive workers.

Add the questionable state of Medicare to the mix and the current situation looks bad. With the 2008 election frenzy already underway, we're sure to hear more about health care solutions. Generating a meaningful dialogue (no sound bites please) is good. Without radical surgery soon, we're in for a long recovery.

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Courtesy of law professor Paul Secunda, click here for a legal take on trying to get staff in shape. (In the interest of full disclosure, I could lose ten or fifteen pounds myself, and yes, I'm trying).

Related to today's post about healthcare costs, Professor Secunda raises an interesting question. What can an employer do to improve healthfulness in the workplace without getting in trouble?

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New York Times reporter Nicholas Wade describes research by the Harvard Medical School and the National Institute of Aging that could be a boon for vintners worldwide. Using experimental mice, scientists allege possible benefits of a "natural substance found in red wine, known as resveratrol". One group of furry creatures, fed a high-fat diet, accompanied with daily doses of resveratrol, gained weight but did not experience signs of medical problems and, "even more striking, the substance sharply extended the mice's lifetimes."

Wade describes a second gateway to expanded years - put the cupcakes away. Research done since 1935 shows that "mice fed a calorically restricted diet - one with all necessary vitamins and nutrients but 40 percent fewer calories - live up to 50 percent longer than mice on ordinary diets."

Elsewhere, Medicinenet.com quotes Mark Mattson, Ph.D and chief of the Laboratory of Neurosciences at the National Institute on Aging as likewise extolling the benefits of this approach.

"First, it reduces free radical production, or the production of highly damaging forms of oxygen, and the second is that calorie restriction increases the resistance of cells to stress. We think that both of these are important in protecting against a number of different diseases that have a negative impact on life span, such as cardiovascular diseases and cancer."

If you're panting to try cold kale soup and other goodies (similar to what my husband eats), click here to visit the site of the Calorie Restricted Society for more information.

Lest you are asking what this has to do with benefits, many experts now describe pension "problems" as tiny compared to a looming health care crisis - one that could wreak financial havoc across companies, big and small. So while the prospect of living longer is an amazing gift for many, there is a real cost of providing medical services to retirees. In some cases, post-employment exceeds work span by a significant amount.

At my request, Mr. Robert James Cimasi, president of Health Capital Consultants and author of The U.S. Healthcare Certificate of Need Sourcebook and countless articles and speeches, describes the situation this way.

"The US Healthcare Delivery System is facing what is perhaps its greatest challenge in the expected demand for increased health services from the aging of the baby-boom generation, the fastest-growing segment of the population. With the over 65 years old portion of the US population expected to increase from 20 million in 1970 to 69.4 million in 2030, the entire system by which healthcare services are dispensed in the U.S. is subject to radical change in the next two decades. As healthcare costs continue to rise faster than inflation in the overall economy, driven by advances in technology and treatment (as well as the growing baby-boomer population), pressures to reduce costs will result in a changed paradigm for healthcare delivery, most likely leading to some form of healthcare rationing. The potential result is that the quality of care received will depend increasingly on the individual's ability to pay.

One example of this trend is the accelerating movement from the traditional U.S. health coverage system of 'defined benefits' (where employers provide a package of defined benefits to their employees) to a system of 'defined contributions' (where employers contribute a set amount and then require employees to decide how much of their health benefit dollars to spend by selecting from a range of benefit plans), which is being driven by employers seeking to limit their exposure to what has become double-digit health insurance premium rate increases. These arrangements represent a fundamental shifting of the financial risk of health coverage from the employer to employees, whereby employers can limit their contributions, while employees must contribute increasing amounts of their own money to pay for health insurance cost increases in attempting to maintain the same level and quality of health care for themselves and their families.

This 'sea-change' in the U.S. Healthcare Delivery System presents both challenges and opportunities for the investment community, based to a great degree on the scope of their understanding of the risks related to these fundamental underlying factors."

For additional information, visit the HCC website library.

Other online resources that may be of interest are listed below.

1. National Center for Policy Analysis Health Care Economics

2. About.com Health Care Economics

3. Council on Health Care Economics and Policy

4. U.S. National Library of Medicine Health Care Economics

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