Health Care Reform May Squeeze Some Companies, Retirees

March 31, 2010
Companies are concerned that the drug subsidy could be taxed, which could lead to 'significant' reductions in employer-sponsored retiree prescription drug coverage

The sweeping reform of the health-care system could exact a high price on some businesses and deprive two million Americans of health insurance, industry and union leaders say.

Some companies have already announced charges they will take based on the new law. AT&T said it would take a one-billion-dollar charge in the first quarter of 201., Caterpillar said it had set aside a charge of $100 million and 3M estimated a provision of up to $90 million.

Economist Joel Naroff, president of Naroff Economic Advisors, however, appeared skeptical about the swift corporate announcements. "It's hard to see immediately, two seconds after the bill, that they have to take these charges," he said. "How much is this an issue of trying to establish a base for which they can raise prices in the future?"

For Brian Bethune, chief U.S. financial economist at IHS Global Insight, the elimination of the tax break is "just one piece of the jigsaw puzzle" of reform and noted that "other corporate taxes are buried in this bill."

David Wyss, a Standard & Poor's economist, acknowledged that health-care reform "will raise cost for employers" but stressed the increase would not be "that big."

The reform "applies only to heavily unionized companies," Wyss said, where employees enjoy contract-protected benefits. "It's not going to affect most companies" which "don't provide such generous plans" for retirement and whose retired workers use the federal government's Medicare plan for drug coverage.

Still, 10 major companies, including Boeing, Xerox and Metlife, have expressed concern that the drug subsidy could be taxed, warning that would likely result in "significant" reductions in employer-sponsored retiree prescription drug coverage.

Some retirees could turn to Medicare for drug coverage if they are at least 65 years old, but if not they would have to bear the high cost of coverage alone or drop it entirely.

Gerry Shea, assistant to the president of the AFL-CIO union, said that "between 1.5 and 2.0 million retirees will likely lose their coverage."

A congressional committee announced last week it would hold a hearing in April on that issue.

S&P's Wyss said that businesses generally would be contractually obliged to continue to pay for drug insurance for their retired employees, and the elimination of the tax break would affect mainly the newly hired.

Shea said that even if some Americans lose their drug coverage, the argument that the new health-care law will cost companies money does not stand up.

"The biggest study was done by the Business Roundtable," an association of company CEOs, the union official noted. The study determined that the legislation "would save $3,000 a year on family coverage per employee" for companies, he said.

"If we don't try to change, it's going to be worse," he said. "We'll go from 38 to 50 million uninsured within five years."

Copyright Agence France-Presse, 2010

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