In the past several days, several major corporations have announced substantial writedowns in response to the new health care law. These include Deere & Co. ($150 million), Caterpillar ($100 million), AK Steel Holding ($31 million), and 3M ($85–90 million). Yesterday, AT&T joined the list, announcing it would take a $1 billion charge against future earnings. A CreditSuisse analyst cited in both stories estimated the total first-quarter hit to S&P 500 firms will be $4.5 billion.
The writedowns are in response to the loss of a tax-free subsidy for providing prescription drug coverage to retirees. Several years ago, Congress decided it was better to induce corporations to provide prescription drug coverage for retirees than to have the costs paid by Medicare, so it enacted a tax-free subsidy, while still allowing companies to take a tax deduction for the coverage . Under the health care reforms Congress just enacted, however, the deduction will be eliminated in 2013.
Why are the companies announcing these changes? And why now if the tax change does not take effect until 2013? Because failure to do so could get the companies in trouble with the SEC. Under standard accounting rules, companies are supposed to take the charge in the quarter in which the tax law change is enacted, not when it takes effect. Because the first quarter ends Wednesday, more writedown announcements may be forthcoming.
Rep. Henry "The Pig Man" Waxman "has summoned some of the nation's top executives to Capitol Hill to defend their assessment that the new national health care reform law will cost their companies hundreds of millions of dollars in health insurance expenses. Waxman is also demanding that the executives give lawmakers internal company documents related to health care finances -- a move one committee Republican describes as "an attempt to intimidate and silence opponents of the Democrats' flawed health care reform legislation."
Waxman, a powerful Congressman who many describe as "a F*&^%$g idiot," is dismayed that so many corporations have responded so negatively to the new health care reform bill.
The new law is designed to expand coverage and bring down costs, so your assertions [that the bill will increase costs and will likely result in these companies terminating their employee health care plans]are a matter of concern.
Congressman "Extra Chromosome" Waxman is apparently wholly unfamiliar with a concept known as "math." In the interest of helping him understand, here is a handy example from the New Yorker:
Take a medium-sized firm that employs a hundred people earning $40,000 each—a private security firm based in Atlanta, say—and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500). In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)
In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.
Reached for comment, Congressman Waxman replied: "I was told there would be no math."
For those consumed with this issue (and I support health care reform in general, but not this piece of crap that cannot possibly work), here is what the celebrated CBO analysis tells us:
By 2019, it says, the bills passed by the House and Senate will have cut the number of uninsured Americans by thirty-two million, raised the percentage of people with some form of health-care coverage from eighty-three per cent to ninety-four per cent, and reduced the federal deficit by a cumulative $143 billion. If all of these predictions turn out to be accurate, ObamaCare will go down as one of the most successful and least costly government initiatives in history. At no net cost to the taxpayer, it will have filled a gaping hole in the social safety net and solved a problem that has frustrated policymakers for decades.
According to the C.B.O., between now and 2019 the net cost of insuring new enrollees in Medicaid and private insurance plans will be $788 billion, but other provisions in the legislation will generate revenues and cost savings of $933 billion. Subtract the first figure from the second and—voila!—you get $143 billion in deficit reduction.
Hurray!
That is totally AWESOME. Kuumbaya, everyone. Kuumbaya.
But wait a second! The bulk of the cost savings—more than $450 billion—comes from cuts in Medicare payments to doctors and other health-care providers. Will these really happen?
Survey says: AARP!
Then there is the whole David Copperfield "accounting gimmickry." These are the accounting practices that are not generally accepted.
The C.B.O. counts as revenues more than $50 million in Social Security taxes and $70 billion in payments towards a new home-care program, which will eventually prove very costly, and it doesn’t count some $50 billion in discretionary spending. After excluding these pieces of trickery and the questionable Medicare cuts, Douglas Holtz-Eakin, a former head of the C.B.O., has calculated that the reform will actually raise the deficit by $562 billion in the first ten years. “The budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed,” he wrote in the Times. “So fantasy in, fantasy out.”
So you see, sports fans, all of this is leading us nowhere and is more likely than not going to make things much, much worse.
Which is kind of too bad, because there really was a simple solution.
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