Seeking a ‘Path Toward Stability’ for Health Care, TRS Switches Administrators

Struggling to fund its medical benefits programs, trustees of the largest public pension system in Texas voted Friday to switch administrators, which is expected to save its health care plans $754 million over the next five years.

The Teacher Retirement System of Texas (TRS), which is ending contracts with Aetna and Humana, selected Blue Cross and Blue Shield of Texas (BCBSTX) and UnitedHealthcare (UHC) for roughly 705,000 public employees and retirees. The plan for workers starts in September, while the plan for retirees will begin in January.

“Our members’ health care is now and will always be a top priority,” TRS Board Chairman Jarvis Hollingsworth said in a statement. “And these new contracts support TRS’ health plans on the path toward stability.”

TRS is hoping the savings from the switch will put its health care programs back in shape. TRS, which is the second-largest purchaser of health care in Texas after the Medicaid program, pays nearly $4 billion a year in health care claims.

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In fact, TRS Chief Health Officer Katrina Daniel told the board prior to voting on Friday that the system has more participants in its medical benefits programs than it does current annuitants. The benefits contracts cover more than 700,000 participants, versus roughly 435,000 retirement annuity recipients.

“The size of these plans is huge and that sometimes can be eclipsed a little bit because our pension program is so large and so strong,” Daniel said. “But I wanted to make those points just to emphasize the magnitude of the decisions that you’re about to make.”

As of August, the TRS public pension system reported it was 76.4% funded, but its medical benefits program for retirees is just 2.7% funded.

A TRS spokeswoman said the fund is developing new rates and benefits for active employees that it will present to the board in April. The Texas legislature budgeted $231 million, which, in addition to the $754 million in savings, will help keep premiums and benefits for retirees the same through next year.

The spokeswoman said savings from the switch come from greater network discounts for medical services, as well as lower administrative fees and Medicare Advantage cost reductions.

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Tags: Employee Benefits, health, Health Care, Retirement, school, teacher, Texas, Texas Teacher Retirement System (TRS)

Hoo boy, Goldman Sachs thinks stocks are vulnerable to a correction, owing to the new coronavirus, which threatens to crimp earnings.

“Equity markets are looking increasingly exposed to near-term downward surprises to earnings growth,” wrote Peter Oppenheimer, Goldman’s chief equity strategist, in a research note. “While a sustained bear market does not look likely, a near-term correction is looking much more probable.”

News of the contagion’s spread helped pull down the S&P 500 by 1.05% on Friday. In early trading Monday, the index slid another 3%. For 2020 as of Friday, the benchmark index was up 3.3%. The Monday drop could erase that.

A correction marks a 10% decline in the S&P 500 from its high point. There have been six of them over the past decade, Yardeni Research indicates. The most recent came in late 2018, when the broad market dropped 19.8%, just short of the 20% line, which constitutes a bear market. Back then, the slowing of global gross domestic product (GDP) growth and the start of the Chinese-American trade war were the main culprits.

For the fourth quarter of 2019, whose earnings announcement season is almost over, the outlook is for a 0.9% increase, estimates FactSet Research. Thanks to still-tepid economic expansions worldwide, FactSet projects 2% earnings growth in the current quarter and 4.9% in 2020’s second period. That is considerably down from the double-digit increases logged until lately.

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On the plus side, earnings surprises have been robust for 2019’s final quarter: 71% of S&P 500 companies have reported positive surprises. Should Goldman’s Oppenheimer be right, that figure would dive, and earnings going forward may even end up lower than their year-ago periods. Even high-flying tech companies, which have mostly enjoyed sturdy earnings advances and rising share prices, could suffer, he added.

Already, Apple has said that it expects it won’t meet its revenue projection for the current quarter because of virus-linked disruptions in its supply chain. Chinese factories make iPhones, the key product for the planet’s most valuable company by market cap. Airlines and auto makers have similar fears. Even Procter & Gamble, the consumer products behemoth, announced last week that disruption of its China-based suppliers would harm its upcoming quarterly results.

What Goldman’s strategist called “spillovers” from reduced Chinese demand are “dramatically more important” to the world economy than they were 10 or 20 years ago. Oppenheimer pointed to Chinese tourism outside the country, now halted because of Beijing’s travel ban, as a particular loss—China’s overseas tourists constitute 0.4% of global gross domestic product.

Outside of Asia, the virus hit would be worst in Europe. According to Oppenheimer, a 1% dip in global sales-weighted GDP would pare European earnings by some 10%. The Euro Stoxx 50 Index has almost double the portion of its holdings in China, compared with the S&P 500.

At the moment, the S&P’s 12-month forward price/earnings ratio is 19, above the 10-year average of 15. Such lofty valuations could dip. “In the context of relatively weak earnings growth, there’s probably too much complacency and we could see some negative earnings,” Oppenheimer said in a Bloomberg TV interview. “And valuations are vulnerable to a setback.”