According to the Wall Street Journal, AT&T Inc. said it would take a $1 billion charge against earnings tied to the federal health-care overhaul, joining a number of other companies in reporting similar impacts.
On Friday, 3M Co. joined AT&T in saying it would take a first-quarter charge –$85-$90 million – based on a change in accounting treatment triggered by the new healthcare legislation. Deere &Co., Caterpillar Inc. and AK Steel Holding Corp. said they were also taking such charges – charges related to prescription-drug benefits for retirees, according to the report. Reuters reported that Deere & Co and Caterpillar Inc estimated a combined $250 million in one-time charges in SEC filings Thursday – charges that will cover added costs as those retiree prescription drug benefits become taxable under the new law.
Administration officials reportedly called the estimates “premature.”
Under the 2003 Medicare prescription drug program, companies that provide prescription drug benefits for retirees receive subsidies covering 28% of eligible costs, but are allowed to deduct the entire amount they spent on these drug benefits — including the subsidies — from their taxable income. The change – which White House spokesman Robert Gibbs characterized as closing a “loophole,” allows companies to only deduct the 72% they spent on those programs.
However, as the American Benefit Council noted Friday, “in fact, this provision of the Medicare Modernization Act was carefully crafted on bipartisan basis to save the government money by making it possible for employers to continue sponsoring retiree drug coverage, rather than move retirees into the Medicare Part D program”.
At the time it was adopted, some companies were threatening to drop drug coverage for their retirees, since this would now be available through Medicare. To forestall those moves, Congress voted them a 28% tax-free subsidy for continuing to provide coverage to retirees eligible for Medicare (see “D-Day”). The subsidies caused the cost of companies’ obligations for retiree benefits to decline. AT&T, for example, saw its obligation drop by $1.6 billion at the time, according to the WSJ.
That said, the current health-care overhaul doesn’t eliminate the subsidy, according to the WSJ. What changes is that companies will no longer be able to deduct the portion of the drug benefit paid for by the subsidy. Since companies had created an asset based on the expectation they would be getting these deductions over the lives of their current and future retirees, they now say they need to take a charge reflecting the fall in the asset’s value. How big might that be? Well, the WSJ cites a Credit Suisse report estimate that companies in the S&P 500 index will rack up a combined $4.5 billion charge due to the change in the value of the tax asset.
“Over the next several days, many companies will be compelled to either take a hit on their earnings or decide to move retirees into the Medicare Part D program.” American Benefits Council President James A. Klein said in a press release. “As our recent research report clearly shows, as more retirees are moved from employer plans to Medicare Part D, government outlays will increase, and the shift from employer retiree drug subsidy programs to Medicare Part D is likely to be significant. In the end, this so-called revenue raising provision may actually cost the government money.” A separate study, conducted by the Towers Watson consulting firm, reported that unless companies change their benefit plans, the aggregate accounting charge would be nearly $14 billion.
Note that while a Towers Watson update notes that although the change in tax law does not take effect until 2013, employers participating in the program “will be required to recognize the full accounting impact of the 2013 tax law change in the financial statements for the accounting period in which the President signs the legislation into law” (see http://www.towerswatson.com/united-states/research/1424).
“For months, the American Benefits Council, along with several employers and labor unions, warned that the retiree drug subsidy tax in the health care legislation would impose an enormous hit on company financial statements as soon as the bill was signed into law,” Klein said Friday. “The recent announcements by major U.S. companies have captured Wall Street’s attention, while the Obama Administration fails to acknowledge their significance”.
Congressional Hearing Slated
Democrats in Congress are jumping right on the claims. House Energy and Commerce Committee Chairman Henry Waxman (D-California) and Congressman Bart Stupak (D-Michigan), who chairs the Oversight and Investigations panel, announced plans to hold an April 21 hearing on “claims by Caterpillar, Verizon, and Deere that provisions in the new health care reform law could adversely affect their company’s ability to provide health insurance to their employees. These assertions appear to conflict with independent analyses, which show that the new law will expand coverage and bring down costs.”
The committee has issued an invitation to those companies’ CEOs – as well as AT&T’s – “requesting their testimony at the hearing as well as information and documentation from each company on the law’s projected impact.”