Health law will make it more costly for companies to cover retiree prescription drug benefits

Companies say health care costs hard to swallow

The health care overhaul will cost U.S. companies billions and make them more likely to drop prescription drug coverage for retirees because of a change in how the government subsidizes those benefits.

In the first two days after the law was signed, three major companies — Deere & Co., Caterpillar Inc. and Valero Energy — said they expect to take a total hit of $265 million to account for smaller tax deductions in the future.

With more than 3,500 companies now getting the tax break as an incentive to keep providing coverage, others are almost certain to announce similar cost increases in the weeks ahead as they sort out the impact of the change.

Figuring out what it will mean for retirees will take longer, but analysts said as many as 2 million could lose the prescription drug coverage provided by their former employers, leaving them to enroll in Medicare’s program.

White House spokesman Robert Gibbs defended the tax law change Thursday, saying the original provision allowing companies to deduct the federal subsidies from their taxable income was a “loophole” that will be closed by the health care overhaul.

For the government, the tax changes are expected to raise roughly $4.5 billion over the next decade to help pay for the health overhaul. Some of the savings would be negated by retirees enrolling in the Medicare plans.

“You’re increasing the incentive for companies to say ‘We don’t want to be in the health care business any more,’” said James Gelfand, senior manager of health policy for the U.S. Chamber of Commerce, which fought the overhaul.

American industrial companies that are struggling to compete globally against companies with much lower labor costs are particularly likely to eventually drop retiree coverage, said Gene Imhoff, an accounting professor at the University of Michigan.

“Anything that they can use to justify pushing something away from the employees, pushing it back on the employees or the government, they’re going to do it,” Imhoff said. “I’m not sure you can really blame them for trying to do this.”

Caterpillar spokesman Jim Dugan said the company is still studying the health care law and doesn’t yet know what the full impact will be. But he acknowledged that benefit changes are possible.

“Obviously, there’s greater cost pressures on us that could drive changes to plans, but we haven’t made any decisions on that,” Dugan said.

Spokesmen for Deere and Valero said it was to soon to say how the change would affect the benefits they offer retirees.

When Congress approved the Medicare prescription drug program in 2003, it included government incentives for employers to provide drug benefits to retirees so the public system wouldn’t be overwhelmed. Employers that provide prescription drug benefits for retirees can receive subsidies covering 28 percent of eligible costs; those subsidies totaled $3.7 billion in 2008.

Under the 2003 law, companies could deduct the entire amount they spent on the drug benefits from their taxable income — including the government subsidy, an average of $665 per retiree.

The health care law signed by President Barack Obama on Tuesday prohibits companies from writing off the subsidies starting in 2011, meaning they will no longer be able to deduct them from their taxable income.

For example, if a company spent $100 on benefits, including a $28 government subsidy, it could write off the full $100 on its taxes under the old rules. The new rules would allow the same company to write off only $72.

The follow-up health care bill to reshape parts of the overhaul would delay the changes until 2013.

As many as 1.5 million to 2 million retirees could lose the drug benefits provided by their former employer because of the tax changes, according to a study by the Moran Company, a health care consulting firm.

James Klein, president of the American Benefits Council, said between 6 million and 7 million retirees currently get the benefits. But the number of companies offering them has been dwindling for years.

Generally, retirees would prefer to stay with prescription drug coverage provided by their companies as opposed to enrolling in a Medicare Part D plan, said Marilyn Moon, a health care economist with the nonpartisan American Institutes for Research.

She said most of the company-sponsored plans are more generous and almost none have the coverage gap that comes with Part D plans.

“That’s particularly painful and problematic for people who have substantial expenses at any one point in time,” she said.

Industry groups say they lobbied hard against the change in the tax rules before it was added to the health care law over the winter.

“It was in all of our letters and communications that went up to the Hill, and the companies were heavily involved in that,” said Dena Battle, a tax specialist with the National Association of Manufacturers.

Nationwide, companies would take a $14 billion hit on their financial statements if all of the roughly 3,500 companies receiving the subsidies continued to do so, according to a study by Towers Watson, a human resources consulting firm.

That financial hit will be a one-time cost as companies report a new cost estimate for the benefits over the life spans of all retirees.

Deere and Caterpillar were among a group of 10 companies that sent a letter to congressional leaders in December warning of the cost increases. The others were Boeing Co., Con-Way Inc., Exelon Corp., Navistar Inc., Verizon, Xerox Corp., Public Service Enterprise Group Inc. and MetLife Inc.

Most of the other companies that signed the letter said Thursday that it was too soon to estimate their costs. A number of other major U.S. companies also said they did not know how much the tax change would cost them. Some companies might wait until they release their earnings reports next quarter to address the costs so they have time to review the entire law.

The companies that signed the December letter warned that changing the way retiree drug benefits are subsidized would have a broad impact on the economy, and there are already indications that the effects will trickle down to individuals.

Consumers Energy, a Michigan gas and electric company with 2.9 million customers, said it will not take a big first-quarter charge because, like most utility companies, it can try to recover the added costs from its customers through rate hikes.

AP Business Writers Daniel Wagner in Washington, Tom Murphy in Indianapolis and Tom Krisher in Detroit and Associated Press Writers Stephen Ohlemacher and Ricardo Alonso-Zaldivar in Washington contributed to this report.