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How Hospitals Should Handle Pension and Benefit Plans During Transactions

To say the healthcare merger and acquisition market is vibrant may be an understatement.

At the beginning of October, a multitude of hospital transactions and deals were finalized, in concert with a new quarter and the start of the federal government's new fiscal year. For example, Dallas-based Baylor Health Care System and Temple, Texas-based Scott & White Healthcare completed their merger, forming Baylor Scott & White Health — the largest nonprofit health system in Texas.

Often, months or even years of due diligence are reduced to a news release and a few official quotations, but the process involves many different moving parts to be successful. In healthcare, M&A is "truly a dance," says Tim Ruggles, vice president, managing director and healthcare practice leader at Fidelity Investments.

One of the elements finalized behind the scenes of a hospital's acquisition is pension and benefit plans. Usually, in definitive agreements, there is verbiage indicating what will happen to the benefit plans, but a lot of questions have to be answered.

Will the pension plan be terminated or frozen in an asset purchase or merger? Will the acquiring organization combine the new hospital's benefits into its own formula? If the target hospital's pension plan is underfunded, does the acquiring hospital want to take on that liability?

Here, Mr. Ruggles shares five best practices for hospital executives as they encounter pension and benefit plan issues during transactions.

1. Collaborate with senior leaders. When hospital CEOs and board members are first negotiating mergers or acquisitions, there must be a concerted effort among those leaders and the other members of the executive team to iron out the pros and cons. If the "integration could be reality," hospital leaders from both sides must lay out the basics of the benefit plans (e.g., type of plan offered, funded status) so they know what they are dealing with, Mr. Ruggles says.

2. Identify who integration leaders will be. Pensions and benefit plans dip into the responsibilities of many different parties, including CFO/finance, legal, human resources and, for hospitals with unions, labor relations. Mr. Ruggles recommends departments within each hospital identify leaders to analyze how a merger or acquisition will affect pensions and benefits from their department's point of view.

3. Create a repeatable model. For organizations that are "consuming rather than being consumed" — that is, the larger groups that are generally on the acquiring end — they should create a standardized template or general procedure so they can easily repeat pension and benefits decisions in the next transaction, Mr. Ruggles says. M&A activity is not likely to subside in the near future, and it would behoove hospitals and health systems to have a successful model to use again.

4. Ensure benefits are part of the overall M&A strategy. In any merger or acquisition, there is bound to be confusion, complexity and costs, especially for organizations that are entering the M&A conversation for the first time. When executives and board members decide to engage in these types of discussions, they have to outline how pensions and benefit plans fit into the larger picture. For example, what are the overarching goals of the merger — increase scale? create financial efficiencies? reduce costs? — and how do benefit plans work into those big-picture goals?

"You may have HR teams that have never been through a merger," Mr. Ruggles says. "You need to have good partners internally and externally, because developing that strategy is critical."

5. Communicate what is happening with benefits clearly and concisely. Pension and benefit plans are, understandably, of major concern during any transaction. Hospital employees rely on those plans for their retirement, and they want to know what will happen to their hard-earned money.

Mr. Ruggles says it is imperative for every member of the hospital C-suite to be able to articulate and describe what is happening to benefit plans to their employees. For example, if a hospital plans on merging with a system, and the pension plan will be frozen in the process. Possible reasons for freezing the plan include maintaining the hospital's financial viability, avoiding layoffs and ensuring the hospital can build new facilities in the community. Those reasons must be made clear to hospital employees, he says.  

"We've seen integrations fail from an employee-base perspective when there hasn't been clear and concise communication," Mr. Ruggles says. "You can't overcommunicate in these types of big changes."

More Articles on Hospitals, Transactions and Financial Issues:
5 Issues Forcing Standalone Hospitals to Consider the M&A Market
In the Height of Transactions: Q&A With Franciscan Health System CFO Mike Fitzgerald
Closing Pension Plan Could Cost Munroe Regional Medical Center $20M

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