Health Care Reform and the Corporate Bottom Line

Just days after health care reform was signed into law, big corporations started writing billions of dollars off their bottom lines.

AT&T warned last week that it would be forced to write down $1 billion this quarter as a direct result of the law. Caterpillar said it would take a $100 million hit from what it called a "tax hike."

John Deere ($150 million), 3M Corp. (up to $90 million), Prudential Insurance ($100 million) and dozens of others said they would be affected. A group of 300 corporations has begun lobbying to change the law.

The actions of these corporations seem to confirm what health care reform opponents had warned about for months — as Republican congressional leaders reminded anyone who would listen.

The Wall Street Journal trumpeted the news in an editorial that decried "this wholesale destruction of wealth and capital."

How can a law that hasn't taken effect hit corporate bottom lines so hard? It hasn't.

The only change since health care reform became law is a bit of accounting fiction involving a remarkably sweet double bonus that big corporations would like to continue exploiting.

For decades, many large companies provided health care coverage to their retirees. It often was designed to supplement Medicare, covering things that Medicare didn't, such as prescription medication.

The number of companies providing benefits to retirees had been shrinking for years. Then came 2003, when a Republican-controlled Congress began debating a Medicare prescription drug benefit.

Sponsors had a difficult time attracting enough votes, especially from fiscal conservatives who worried that the new benefit would be too expensive.

Driving those worries was the realistic concern that corporations would drop coverage for their retirees, forcing those retirees into Medicare and sending the price of drug benefits soaring.

So Republican congressional leaders cut a special deal that gave corporations a double bonus if they continued providing coverage.

As Princeton University health care economist Uwe Reinhardt explains, the cost of that coverage counts as a business expense, which means it can be deducted from earnings for tax purposes.

Future costs of retiree health care benefits are carried on the books as a liability.

Under that special deal, corporations got a direct taxpayer subsidy. For every $1 spent on retiree drug coverage, the corporation receives 28 cents from the federal government.

But corporations could continue to deduct the full $1 as a business expense, even though they really paid only 72 cents.

Best of all, they could reduce the liability they carried on their books for drug coverage in future years, since 28 percent presumably would be paid by taxpayers.

Like health care reform, the Medicare drug benefit bill was back loaded; most of it didn't go into effect for years.

One part that did take effect immediately was the taxpayer subsidy. As a result, the "book" value of companies like AT&T, Caterpillar, John Deere and Prudential Insurance jumped by billions of dollars overnight. It rose before most Medicare patients got help with drug expenses.

The increase in value wasn't real. Rather, it represented a redistribution of wealth from taxpayers to corporate bottom lines.

Under health care reform, corporations still will get their 28 percent subsidy for providing retiree drug benefits. But instead of deducting $1 for every 72 cents they spend, they'll be able to deduct only 72 cents.

So that's the big "tax hike" those Caterpillar executives were moaning about — they have to balance their books based on real numbers, not accounting gimmicks and special deals.

Just like the rest of us.

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