Added Retiree Drug Benefit Costs to Business of ObamaCare

The 2003 Medicare prescription drug benefit threatened to induce companies who provided prescription drug benefits to retirees to substantially end that benefit.  The result would be that these retirees would wind up on the Medicare D prescription drug program and cost the taxpayers more than if the private companies continued their drug benefit programs for their retirees.  In order to give such companies an incentive to keep their retiree drug programs, the money the companies spent on the retiree drug benefit was entirely tax deductible, beginning in 2006.  Given a 35% corporate tax rate, this meant that for each dollar spent on the drug benefit, the company saved $0.35 of taxes.  In addition to this, the company was given a 28% subsidy, or $0.28 per dollar spent.  Thus, the company was effectively reimbursed $0.63 of every dollar spent to continue the retiree drug benefit plan.  But, one of the really odd things about this was that if the retiree paid a part of the cost himself, the company got to treat that money as though it was spent by the company for the sake of these tax benefits!  So, it is not necessarily the case that the company was paying $0.37 per drug cost dollar to keep the retiree from being switched over to Medicare D.

ObamaCare now has changed the rules on this subsidy/tax deduction.  The company still gets a 28% subsidy, but it cannot expense the 28% of the cost covered by the subsidy or any amounts paid by the retiree himself.  They now get to expense the remaining 72% of the cost minus the amount spent by the retiree himself.  For each dollar spent, including by the retiree personally, the company now gets $0.28 + 0.35 ($0.72 - x) = $0.532 -0.35x /dollar spent on the retiree drug benefit program, where x is the amount spent by the retiree himself.  The company has lost at least $0.098 per dollar of drug costs for each present and future retiree on the program.  This expense has to be written off, just as the future income expected from this source was added to the books of many companies in 2004.

The Democrats did not think the expensing of money not spent by the company was right, so they changed that.  Of course they were on a desperate quest to find ways to reduce the horrible costs of ObamaCare.  It was odd that the companies could deduct the variable amounts which were actually spent by the retirees out of their own pockets.  This means that it is possible that some companies were directly getting a windfall profit on the program, while others were providing a net benefit to the taxpayer by keeping people off of Medicare D at some expense to the company.

Since Medicare D offers many plans, but all require the retiree to pay part of the cost, there is no simple way to figure out if the old company subsidy/tax deduction actually saved the taxpayer any money or it cost the taxpayer money, except to look at the average cost figures.  Mark Steyn says that the old corporate retiree drug benefit subsidy plan was costing taxpayers about $665 per person covered, while the equivalent Medicare coverage cost is about $1,200 per person.  So the way that subsidy system worked was strange, but on balance, it was effective.

In any case, companies with retiree prescription drug plans now have a decrease in their expected tax asset and they must, under federal law, declare that decrease in the quarter they become aware of it.  Obama may not like the timing of the losses declared by many companies, but they have no choice but to do as they have done.  AT&T declared a loss of $1 billion, John Deere a loss of $150 million, Caterpillar a loss of $100 million, 3M $85 - 90 million, AK Steel $31 million, Valero Energy $15 million.  Verizon has announced that its health care benefits costs are going up, but not how much.  The Wall Street Journal on 26 March 2010 said 1400 companies are thought to still offer retiree prescription drug benefit plans.  But, Mark Steyn thinks about 3,500 businesses are and that they cover about 5 million retirees.  David Zion of Credit Suisse, is quoted in the 26 March 2010 Wall Street Journal as estimating that the S&P 500 will take a first quarter hit of $4.5 billion to earnings due to this ObamaCare change.

In many cases companies have dropped such plans for retirees, but it can be hard for those companies with many union retirees whose benefits are subject to union agreements to do so in any case.  Some of them will just have to suffer the higher expenses for some time.  These costs will be passed on to consumers and to those who own the companies' stocks.  American corporations already pay much higher corporate taxes than most other countries corporations do.  In fact, only Japanese corporations have it as bad as American corporations in the OECD.  These higher health care costs, and this is just the tip of the ice berg, will make American companies less competitive in the international markets.  John Deere, Caterpillar, 3M, AK Steel, and Valero Energy are certainly greatly affected by higher costs due to their substantial exports.

Another company which has announced that it is affected adversely by ObamaCare is Medtronic.  Medtronic makes medical devices, which are now to be hit with new taxes.  Medtronic says it may have to layoff 1,000 employees as a result.  In the interest of disclosure, Medtronic is a customer of my materials analysis laboratory.

The announcements by these companies of the adverse effects of ObamaCare on them, has made Representative Henry Waxman, D - CA and chairman of the House Committee on Energy and Commerce, furious.  He is claiming that these companies are exaggerating the effects on them.  He is also livid that their announcements are tarnishing the celebration of the socialist enthusiasts.  He is attempting to intimidate them with an order that they must explain their claims at a 12 April hearing before his investigative subcommittee.  They are to supply the subcommittee with masses of paperwork and all internal communications on their health care costs and their estimates of the effect of ObamaCare on them.  Note that Waxman is an accomplished extortionist of private sector companies and his committee chairmanship gives him great power to do selective harm to any company that does not bow low enough before him.