Most of the new costs stem from a reduction in federal subsidies that many companies get in order to provide drug coverage to their retirees. The new law reduces those subsidies and makes them taxable, just like income. The charges are noncash, meaning that companies won't have to write a check but, ultimately, their tax bills will be higher.
The subsidies began in 2003, when a prescription drug benefit was added to Medicare. To prevent companies from moving their retirees - for whom they're providing private drug benefits - into the new Medicare program, the government began giving companies tax-free subsidies. These subsidies averaged about $665 per retiree covered under a company-sponsored prescription program. However, according to Roland McDevitt, with Towers Watson, the new act will decrease that by $233 per retiree. Because each company will have to make up the difference - up front - for the duration of each retiree's retirement, McDevitt says the law will cost companies about $2,800 per retiree in 2010 alone.
Defenders of the new tax note that before 2003, companies did not get a subsidy, so they are still coming out ahead if they get a taxed subsidy, even if it has been reduced.
"Taxing the subsidy means that more companies will eliminate or reduce the coverage," Caterpillar, John Deere, Con-Way, Navistar, Verizon, Xerox, Boeing, Exelon Corp., Public Service Enterprise Group, and Met Life warned in a letter to Congress, "and more retirees will shift to Medicare.which will create more cost for both the government and the retirees."
Many Companies Feeling the Hit
AT&T expects to take a $1 billion noncash charge against earnings - the most of any U.S. company so far. The company, which ended 2009 with 282,000 employees, says it will have to re-evaluate the healthcare benefits that it offers its employees and retirees. Verizon Communications also will take a big hit - about $970 million. Verizon says that this new law could result in reduced benefits for its employees and retirees. Verizon currently offers access to healthcare coverage to almost 900,000 employees, retirees, and their families at a cost of nearly $4 billion a year.
Peoria, Ill.-based Caterpillar expects a $100 million loss in the first quarter as a result of losing the subsidy. Caterpillar says that it also faces higher insurance costs from a requirement in the new law that would extend coverage for employees' dependent children up to age 26. The company says that this provision, along with eliminating the tax exemption on drug subsidies, will raise its healthcare costs by at least 20 percent in the first year alone.
"In our fragile economy, we can ill afford cost increases that place us at a disadvantage versus global competitors that are not similarly burdened," Gregory Folley, vice president and chief human resources officer of Caterpillar, wrote to Congress.
What does this mean for the average consumer? These companies will likely have to pass on some of these costs by charging more for their goods and services. And companies also will have less money to spend on retaining workers, which means that additional jobs might be cut.