Congress Seeks More Information on Health Care Charges

AT&T (T) announced last week that it would charge $1 billion against its earnings as a result of the recently passed health care bill. Other companies also announcing charges include Caterpillar (CAT) ($100 M), John Deere (DE) ($150 M), and MMM ($85-90 M). Analyst David Zion of Credit Suisse estimated that S&P 500 companies will rack up a combined $4.5 B charge.

In response, Congressman Henry Waxman (D-CA), Chairman of the House of Representatives Committee on Energy and Commerce, and Bart Stupak (D-MI), Chairman of the Subcommittee on Oversight and Investigation, sent letters to the chief executive officers of AT&T, Caterpillar, Deere & Co, and Verizon. Here is an excerpt from the letter for AT&T:

After the President signed the health care reform bill into law, your company announced that provisions in the law could adversely affect your ability to provide health insurance….

The new law is designed to expand coverage and bring down costs, so your assertions are a matter of concern. They also appear to conflict with independent analyses. The Congressional Budget Office has reported that companies that insure more than 50 employees would see a decrease of up to 3% in average premium costs per person by 2016. The Business Roundtable, an association of chief executive officers from leading U.S. companies, asserted in November 2009 that health care reform could reduce predicted health insurance cost trends for businesses by more than $3,000 per employee over the next ten years.

That much seems entirely reasonable. The drafters of the legislation had expectations that were apparently inconsistent with the companies’ announcements, so they’d like to obtain more information. But further details of the letter troubled some observers:

We request your personal testimony at this hearing. To assist the Committee with its preparation for the hearing, we request that you provide the following documents from January 1, 2009, through the present: (1) any analyses related to the projected impact of health care reform on AT&T; and any documents, including e-mail messages, sent to or prepared or reviewed by senior company officials related to the projected impact of health care reform on AT&T. We also request an explanation of the accounting methods used by AT&T since 2003 to estimate the financial impact on your company of the 28% subsidy for the retiree drug coverage and its deductibility or nondeductibility, including the accounting methods used in preparing the cost impact statement released by AT&T this week.

Representative Michael Burgess (R-TX) expressed concern that this “looks an awful lot like an attempt to intimidate and silence opponents of the Democrats’ flawed health care reform”.

You don’t need to pour through email to understand why the companies were forced to take immediate charges against their profits. The Wall Street Journal explains:

The charges are related to a 2003 law providing a prescription-drug benefit under Medicare. 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. Congress voted them a 28% tax-free subsidy for continuing to provide coverage to retirees eligible for Medicare.

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.

The cost of providing retiree prescription-drug coverage was already tax-deductible before the 2003 law. After that law was signed, companies remained able to deduct the cost of providing the benefit, including the portion paid for by the subsidy.

The current health-care overhaul doesn’t eliminate the subsidy, nor make it taxable. What it 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 say they need to take a charge reflecting the fall in the asset’s value.

Accounting rules say the charges, which affect what are called “deferred tax assets,” must be taken in the quarter in which a tax-law change is enacted. The first quarter ends Wednesday. Companies wouldn’t have to announce the charges before they actually report their first-quarter earnings over the next several weeks. However, if they viewed the charges as material, they might feel they needed to inform shareholders immediately.

My position is that eliminating the tax-deductibility of the subsidy, as the recent legislation did, was perfectly reasonable, and that the companies’ responses to the legislation were perfectly reasonable. But the Congressional “request” for a personal appearance of the CEOs and the right to peruse all the company email on the topic are not reasonable.

Congress seeks more information on health care charges

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About James D. Hamilton 244 Articles

James D. Hamilton is Professor of Economics at the University of California, San Diego.

Visit: Econbrowser

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