Shortly after Congress enacted the Health Care Reform Act, Caterpillar announced a $100 million tax charge (write-off) for 40,000 retirees receiving drug benefits, unleashing a flood of similar charges to the chagrin of Congress and the White House.
The two telecommunications giants, AT&T and Verizon chimed in with charges of $1 billion and $970 million respectively, followed by Deere & Co ($150 million), Boeing ($150 million), Lockheed ($96 million), 3M ($85-90 million), Ingersoll-Rand ($41 million), AK Steel $31 million), Xcel Energy ($17 million), Valero Energy ($15-20million), and Goodrich ($10 million).
The bill eliminates a subsidy for employers providing drug benefits to retirees.
Let’s examine the details of these developments. About 1,400 employers currently cover the drug benefits of about 6.3 million retirees, often pursuant to labor agreements.
President Bush’s Medicare Part D Program was enacted in 2003. Many employers considered eliminating their drug plans and moving the retirees to Medicare, which was a less generous plan than their existing benefits packages.
President Bush and Congress, a bi-partisan Congress, agreed to encourage employers to continue these plans by providing a subsidy, actually a double subsidy. First, the government would cover 28% of these drug benefits, which are more generous than Medicare’s. Second, the employer could exclude the 28% from income, in reality simply creating a wash with a subsidy.
The double subsidy comes in the form of the employer then being allowed to deduct the full 28%, up to $1330 per retiree, from taxes as an expense. In other words, after already broken even through the government subsidy, an employer now deducts the subsidy, certainly creating one of the most unusual tax subsidies provided by Congress.
While unusual, the belief of the Bush Administration and Congress was that he subsidies were less costly to the government than having the retirees dumped directly into Medicare.
As subsidies go, this one is petty cash compared to the new, large subsidies in the Bill.
So why eliminate it? To some, the idea of a double subsidy is hard to justify.
The real reason though was the need of the Democrats to doctor the books to make the new program appear self-sustaining, if not deficit neutral or favorable. Thus, they had to create 10 years of fictitious revenues to cover 6 years of underestimated expenditures. Revenues mean tax increases, large tax increases. A billion here and a billion there add up, and soon on a zero budget scale the plan is self-supporting, even if some of these taxes will not net revenue gains and the expenditures will inevitably exceed forecasts. That is the nature of the legislative beast.
The elimination is estimated to raise $4.5-5 billion in tax revenue over 10 years. Of course, it won’t as employers start eliminating these benefits, and throw the retirees into 100% government funded Medicare.
Remember President Obama’s promise: “If you like the plan you’re in now, you will get to keep it.”
These subsidies are treated as ”deferred tax assets” under current accounting principles. One of the responses to the Enron debacle is that companies must now write these assets off in the quarter the tax law change is enacted. Once the bill was signed, the companies were legally required to take these charges.
A spokesman for Caterpillar remarked: “From our point of view, a tax increase like this cannot come at a worse time.’ Note that many of these companies are among the last of our great industrial giants
Major lessons from this shoe:
No future Congress is bound by promises and programs of an earlier Congress. What Congress giveth, Congress can taketh away.
Pharma entered into a Faustian Bargain. It supported the President’s proposal in exchange for a ban on the importation of foreign drugs (from Canada) into the United States. These are mostly drugs manufactured in the U.S., and then shipped to Canada for sale in Canada substantially lower than their sales price in the U.S. Congress will inevitably allow the importation as a means to lower drug costs.
The budget figures are phony. If published by a public corporation, criminal charges for securities fraud could be filed, but this is Congress which makes the laws, albeit not the laws of economics.
We will have in theory a tax in 2018 on Cadillac Health Insurance plans (won’t happen), a 2.3% tax in 2013 on medical instruments (which will, of course, drive up the cost of medical care and export manufacturing jobs offshore), and elimination of the employer subsidy for drug benefits for retirees.
Similarly, the nationalization of the federal student loan program was thrown into health reform bill to reduce the costs of health reform. Go figure!
Health insurers now exist as a privately funded welfare system
No matter how economically bankrupt the plan may be, no matter how much it defies basic economics (think the California electricity debacle a few years back), Congress will not be to blame. Others, such as insurers, Pharma, providers will be demagogued.
Congressman Henry Waxman, Chair of the House Energy and Commerce Committee, and the Chair of the Oversight and Investigations Committee wrote a letter to the execs commanding their appearance before the Committee to explain their inexplicable actions. The Subcommittee Chair who co-signed the letter is the paragon of Congressional probity, Bart Stupak.
They are shocked, just shocked by these corporate actions since, as we all know, the Bill will substantially lower health costs.
Does anyone want to buy a bridge in Brooklyn?
Congress was on notice of these issues before enactment of the act. Many of these benefits are bestowed through collective bargaining agreements. Bill Samuel, Legislator Director of the AFL-CIO, in December asked Congress not to enact the provision.
The corporate execs will probably play their role in the Congressional Kabuki before Congress’ Grand Inquisitor, Henry Waxman, but wouldn’t it be great if they simply pointed out the legal and accounting requirements and asked if members of Congress actually knew what they were voting for?
If Congress were Enron, they’ll be in jail for the financial legerdemain.
The second shoe will drop in January, or in November when health insurance rates are announced for next year, recognizing substantial cost increases imposed by the bill.
Supporters trumpet many of the immediate benefits:
Elimination of life time caps and annual limits on benefits
Coverage of preexisting conditions, including those of children
Non-cancellation of a policy when an insured becomes ill
Coverage of “children” on their parents’ policies until age 27
New plans must cover preventative services without a co-pay
These changes will be very advantageous to many Americans, but they are not cost free. Someone has to pay, and that someone will be the other policy holders. In short, premiums will rise to cover the costs.
Insurers will be hammered by politicians as they seek to impose these rate increases. The battles are already playing out in Maine and Massachusetts.
The Governor has ordered his insurance regulators to reject 235 of the 274 proposed increases. The Governor wants the legislature to restructure the way doctors and hospitals are paid.
Contrary to expectations, as with the new federal statute, the Romney Universal Health Insurance Bill in Massachusetts has driven up costs. For example, hospital costs per Massachusetts resident are about 55% above the national average. The state blames it on the power of the academic health centers rather than the basic laws of supply and demand.
Three of the four largest health insurers in Massachusetts had operating losses last year. They spend 88% of their premium incomes on the underlying costs of medical care. All are non-profits in more ways than one. Some insurers may risk insolvency.
Six insurers and a trade association have filed suit.
We lived in Massachusetts when the state squeezed (and demonized) auto insurers so tightly that all the major insurers bailed out of the state. A similar development was unfolding in New Jersey. We were rolled into a new company, Trust Insurance Company, for our auto insurance. We left Massachusetts in 1996, and Trust Insurance closed its doors by 2002. The problem was with the accident rate and stolen vehicles in Massachusetts, not the insurance companies.
So too with health insurance; the ”problem” is that an aging population needs more health care.
The unpopular governor is up for reelection this year. The Harvard educated governor has not learnt the lesson of the auto insurers in Massachusetts.
He’s trying to ride anti-health insurance animus to reelection.
Several insurers have also responded by refusing to write new policies. He just ordered the insurers to write policies at last year’s rates. Dictat, not competition, is the wave of the future in health care.
Maine is even more illustrative. The state has provided for universal coverage since 1993. Insurers must provide individual policies to all applicants. 1% of the insureds receive 50% of the claims benefits. As rates rose, the healthy, especially the young, dropped out, recognizing that they could always get coverage if they needed it. They became classic free-riders. But as they dropped out, premium receipts trailed escalating costs, resulting in ever steeper premium increases, and more free riders.
The insurers are meeting resistance on their proposed rate increases. Anthem sought an 18.5% rate increase on individual lines, including a 3% profit margin. The Maine Attorney General argued against any profit because of the “extreme financial hardship” of the insureds in this tough economic time.
The insurance commissioner approved a 10.9% increase which is now in litigation.
One of the legal problems faced by Anthem is that under insurance law states will often allow insurers to lose money on individual lines, such as personal health insurance, if they earn an overall profit in other lines, such as group coverage. For example, if auto insurers wished to quit the state, they also had to give up their homeowners insurance and all other business in the state. Anthem is making money in Maine.
Health insurers now exist, at least for awhile, as a privately funded welfare system in Maine and Massachusetts.
The third shoe just dropped. Congressman Bart Stupak announced he is not seeking reelection.