Tags: Healthcare Reform | healthcare | costs | business | taxes | medicare | writeoff

Obamacare's Prescription for Disaster: $14 Billion Cost to Industry

By    |   Wednesday, 31 March 2010 07:53 PM

Major business groups want a provision of healthcare-reform repealed because it could cost American corporations up to $14 billion at a time when people desperately need jobs.

James A. Klein, president of the American Benefits Council, warns the same tax-law change that led AT&T to take a $1 billion charge last week represents "a serious mistake that is having negative and unintended consequences."

On Wednesday, Boeing became the latest company to announce a write down of value due to healthcare reform, deducting $150 million from its first quarter earnings.

Douglas Holtz-Eakin, a former director of the Congressional Budget Office, and the head of President George W. Bush's council of economic advisers, tells Newsmax that the higher taxes incurred by AT&T and other corporations reflect the deep flaws in the healthcare reform measure, which he calls "a dreadful bill, one this country really can't afford and shouldn't have pursued."

He adds that the tax changes will burden the American economy's ability to create jobs.

"That money's going to come out of the ability to invest in capital, the ability to hire new workers, the ability to do R & D -- all the things that are at the heart of making the economy grow faster," he says.

At the heart of the controversy are changes in subsidies first offered to businesses when the system to provide prescription drug benefits to seniors, known as Medicare Part D, was enacted in 2003.

Many major companies that already paid to provide prescription-drug benefits to their retirees would simply shift them onto Medicare Part D, disrupting seniors' healthcare plans while increasing the costs of Medicare Part D.

To encourage businesses to keep the retirees on the corporate plans, two incentives were offered: The corporations would receive a federal subsidy of $1,330 per retiree, and they would be able to deduct the value of the subsidy from their corporate tax bills.

Congressional Democrats and White House Press Secretary Robert Gibbs have referred to the double incentive as a "tax loophole." Not so, according to Holtz-Eakin, who says Congress "carefully calibrated" the precise, smallest subsidy necessary to keep companies from cancelling prescription-drug coverage from retirees' plans.

The healthcare plan signed by President Obama changes that structure, however, continuing the subsidy while ending the tax deductibility of the program costs. The change affects the profitability of a wide range of companies struggling to remain competitive in a tough economy.

In addition to AT&T's whopping $1 billion write-off in value and Boeing’s $150 million, the other companies taking charges read like a Who's Who of American industry:
  • Deere & Company - $150 million
  • Caterpillar - $100 million
  • 3 M - $90 million
  • Goodrich - $10 million
  • Valero - $15-$20 million
  • AK Steel - $31 million
In addition, telecommunications giant Verizon has sent a letter to employees warning that their healthcare plans may change as a result of healthcare reform.

No one knows exactly how deep the tax hike will bite, or how many jobs will evaporate from the U.S. economy as a result. More than 3,500 companies now receive the tax break. Credit Suisse has estimated the impact on U.S. business at $4.5 billion. But a U.S. consulting firm, Towers Watson, has estimated the true cost at $14 billion over several years.

"There is no question what's going to happen in terms of the direction," Holtz-Eakin tells Newsmax. "This is bad news. The question is how quickly does it happen, and whether it shows up as higher unemployment, or simply as more discouraged workers who don't show up in the measure of unemployment rate, but in the end represent a real economic loss."

Holtz-Eakin adds that the impact will be amplified by the bill's overall impact of the bill, which he says will increase the federal deficit despite the findings of the CBO that he used to direct.

"So it adds to the pressures for higher interest rates, higher taxes," he says.

"None of that is good economic news. There's nothing in this that would generally cause the economy to grow faster, create more jobs, or provide more income to individuals."

Holtz-Eakin predicts that some companies will simply drop prescription-drug coverage for retirees, thereby dumping them onto Medicare Part D. And the worst fallout from healthcare still lies ahead, he says.

"I think we're just starting to get the bad news," Holtz-Eakin tells Newsmax. "Think about what the bill does. It has terribly intrusive regulatory structure. A lot of insurance companies simply won't be able to survive. We know they'll be closing their doors, with direct job losses as the consequence.

"We also know that the states have been severely handicapped in their ability to go forward because of the new Medicaid obligations. They'll turn around to the business community and start raising taxes because their budgets are a mess. That will hurt the economy," he says.

That dour evaluation may help explain why The Wall Street Journal earlier this week editorialized that the new provisions amount to “a wholesale destruction of wealth and capital."

The announcements by the corporations -- who were complying with SEC-enforced accounting rules that require sharing of information on the objective value of their corporations -- has set off quick retaliation by Democrats.

House Energy and Commerce Chairman Henry Waxman declared the write-downs appear to "conflict with independent analyses."

He ordered the CEO's of major corporations to defend their write-offs during congressional hearings next month, asking them to provide "any analyses" that the companies had conducted on healthcare costs, "including e-mail messages, sent to or prepared or reviewed by senior company officials related to the projected impact of health care reform…"

House Minority Leader John Boehner shot back: "Instead of interrogating America's private-sector job creators, Congress should be listening to them, heeding their warnings about the effects of this deeply flawed new law, and replacing it with reforms that will help them get back to creating jobs."

Megan McArdle, business and economics editor for The Atlantic, wrote Tuesday that a failure to announce a reduction in company value would amount to misleading investors.

"Obviously, Waxman is incensed because this seems to put the lie to the promise that if you like your current plan, nothing will change," she wrote.

"But this was never true. Medicare Advantage beneficiaries are basically going to see their generous benefits slashed, retiree drug benefits suddenly cost more and may now be discontinued, and ultimately, more than a few employers will almost certainly find it cheaper to shut down their plans.

"If Congress didn't want those things to happen, it should have passed a different law," McArdle concluded.

Whether the charges have much impact on actual business operations is problematic. Many investors anticipated that reform could have an effect on short-term corporate results, and the only immediate impact appears to be a slight downward pressure on the firms' stock evaluations.

The American Benefits Council, an association representing 300 large corporations, is urging President Obama and Congress to repeal the tax increases on companies that provide prescription-drug benefits to their retirees.

U.S. Chamber of Commerce President Thomas J. Donahue blasted Waxman's decision to haul the companies before Congress simply because they've complied with legal requirements to inform investors of how the changes enacted by Congress impact their viability.

"They're searching for a way to blame these businesses for a mess that the lawmakers themselves have made," Donohue wrote.

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Major business groups want a provision of healthcare-reform repealed because it could cost American corporations up to $14 billion at a time when people desperately need jobs. James A. Klein, president of the American Benefits Council, warns the same tax-law change that...
Wednesday, 31 March 2010 07:53 PM
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