March 26th, 2010
11:41 AM ET
8 years ago

Companies predict new cost from health plan

Washington (CNN) - It hasn't even been a week since President Barack Obama signed sweeping health care legislation, but several companies already have warned shareholders they expect to take a hit.

Manufacturer John Deere announced Thursday that it expected the company's expenses to be about $150 million higher than last year. That came a day after Caterpillar predicted a new cost of $100 million, and two days after AK Steel predicted a charge of $31 million.

"Having an additional cost like this is not great timing," said Caterpillar spokesman Jim Dugan.

As a deep recession spread last year, revenue for the world's largest manufacturer of construction equipment declined 37 percent over the previous year, and 19,000 workers were laid off worldwide. But in the last three months, the company has recalled 750 or so employees, and projected higher sales in 2010.

Caterpillar made a net profit in 2009 of $895 million out of $32.4 billion in sales, according to its Web site, while John Deere pocketed $873.5 million out of $23.1 billion in sales. AK Steel, however, suffered a $74.6 million loss on $4 billion in income.

Most of the new costs will come in a reduction in subsidies about 1,400 companies receive for providing drug coverage to their retirees. In an effort to raise several billion dollars for implementing the health care package, the law makes those subsidies taxable, just like income.

The subsidies began in 2003, when a prescription drug benefit was added to Medicare. To prevent companies that provided retirees with private drug benefits from dumping them into the new Medicare program, the government began providing an incentive. Giving companies a subsidy to continue their private coverage of retirees costs the government around half as much as covering those same retirees directly with Medicare's drug plan.

The subsidy averages $665 per retiree, according to Roland McDevitt, who has studied the issue for human resources consultants Towers Watson. The new tax would lower 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 estimates the change will cost companies $2,800 per retiree this year.

"That's a pretty big impact it will have on them," said McDevitt.

White House spokesman Robert Gibbs defended the provision Thursday, saying the change really amounted to the closing of a loophole, because companies were not paying taxes on either the subsidy or on whatever money they spent on the retiree drug plans.

Under the change, he said, "instead of there being a subsidy and what amounts to two deductions, there's now a subsidy and one deduction."

Under the new law, the companies still receive a tax deduction for what they spend on the coverage.

Defenders of the new tax also point out that before 2003, companies got no subsidy at all, so they're still coming out ahead if they get a taxed subsidy.

The new law does not have an immediate effect on retirees and their benefits. But ten top companies, including Caterpillar, John Deere, Verizon, Xerox, Boeing, and Met Life, warned Congress in December that over the long term, it would.

"Taxing the subsidy means that more companies will eliminate or reduce the coverage," they warned, "and more retirees will shift to Medicare ... which will create more cost for both the government and the retirees."

Filed under: Health care
soundoff (108 Responses)
  1. tpbco

    Just Great. This will certainly add jobs.

    And the best is yet to come....

    March 26, 2010 12:23 pm at 12:23 pm |
  2. D.

    Nu... what did you guy think, it's a reason to party!???
    Ideology over all!

    March 26, 2010 12:26 pm at 12:26 pm |
  3. ken from mo

    I would like to see yhe reasons why cost would go up when he's getting a tax break for health insurance remember this is the company
    who said the stimulus package would hurt the economy but amazing
    this company is recalling jobs back I wonder who this company makes political contributions to.

    March 26, 2010 12:27 pm at 12:27 pm |
  4. j russ

    hows that no new taxes thing working out?

    March 26, 2010 12:27 pm at 12:27 pm |
  5. Bruce

    Oh...O.K....instead of an 895 million dollar margin Caerpillar will have a 795 million dollar margin. I'm playin my violin for these companies while I listen to them whine. I guess the CEO will have to accept a smaller bonus this year.That aught to cover the difference.

    March 26, 2010 12:28 pm at 12:28 pm |
  6. Chuck Anaheim, Ca

    So subsidies to huge companies for retirement benefits that the comany agreed to pay when they signed the contract years ago is being paid by us? Talk about scams! Wake up America, we do not need to fear socialism it's the corporatists taking over that we need to fear.

    March 26, 2010 12:28 pm at 12:28 pm |
  7. John Galt

    Kill business with more "worker rights" and then wonder why there is no job creation. Hope that business can just "figure it out" and stay afloat. Hope is not a business strategy.

    March 26, 2010 12:29 pm at 12:29 pm |
  8. TheCrib

    umm no. i don't think you have any extra costs until year 4. Until then i believe they will just be collecting the HC tax.

    March 26, 2010 12:36 pm at 12:36 pm |
  9. Dorothy M. Oliver

    I understand that the rise in cost is mostly due to the fact that the government subsidy to corporations is being cut. In other words, government is not carrying as much of corporate costs now. Some of us are barazen enough to call this corporate welfare. Maybe getting back to reasonable executive salaries bonuses, lavish conferences and corporate vacations can cushion the shock of their reduced allowance. This kid needs to get kicked out of the house, make it on his on steam, and live within his means.

    March 26, 2010 12:38 pm at 12:38 pm |
  10. cindy-FL

    These guys are in business, they know how it works...everything cost more in the beginning. IT will level out and insurance prices will go down, as the pool gets larger and larger. They know this, why are they acting as if this is a surprise. IT will get better!

    Companies in the USA have got to stop worring about the bottom line for there shareholders, and their CEO bonus, as if that is what is most important, they need to budget in the cost of health insurance by possably not having so many lavish vacations, and mabey doing away with a jet or two, so that they CAN pay for there share of employee insurance. It is doable without the sky falling down. After all we americans support them as consumers, and employers, they need to support us as well.

    March 26, 2010 12:39 pm at 12:39 pm |
  11. Gil

    Businesses used to want to happy healthy employees! Now all they seem to look at is their profits. Not something to be proud of!

    March 26, 2010 12:41 pm at 12:41 pm |
  12. Albert R. K.

    Time has come for the rich to "Create jobs" with all that money they got from the tax cuts they were given over the last 30 years. Once they create the jobs everything will be fine, or al least that is what we were told by the Republican presidents who gave all our money to the rich.

    March 26, 2010 12:42 pm at 12:42 pm |
  13. Preston kathy

    If the gop would work with obama may be you would not have to cut any thing

    March 26, 2010 12:44 pm at 12:44 pm |
  14. Brink

    Is that a surprise? The reform bill needed a public option to keep the insurance companies honest, so you can thank the GOP and its opposition (i.e. disinformation, misinformation, outright lies, fomenting of hysteria about "socialism").

    March 26, 2010 12:47 pm at 12:47 pm |

    Take this "real" information and go back to OBOZO, REID, PELOSI, and some of the other DUMocRATS and ask them to explain.

    The FUZZY math used by DUMocRATS with the CBO are already started to come unraveled.

    Everyone should thank their socialist govt for increasing costs and increasing Taxes and increasing the deficit.

    I hope these companies that require layoffs start with employees who are DUMocRATS. I know we are. Then, sit in front of them (when you lay them off) and quoto Obozo: "This is what change looks like".

    March 26, 2010 12:49 pm at 12:49 pm |
  16. Exactly what they want

    "Taxing the subsidy means that more companies will eliminate or reduce the coverage," they warned, "and more retirees will shift to Medicare ... which will create more cost for both the government and the retirees."

    This is exactly what the socialist administration wants to do. Get rid of private insurance and make everyone go on Medicare, which is government run. They want to control our lives in every aspect, starting with Health Care. They do not care about cost to the government, our personal taxes, and taxing companies will try to pay for it, but will fall short as we all know.
    This is all about taking away what we now already have, good solid health care programs for many of us, and making us go under thier control.
    I hope all of you libs are happy now, good people, hard working people will lose thier drug benefits so we can cover all the people who have the,, you owe me attitude.

    March 26, 2010 12:53 pm at 12:53 pm |
  17. al in memphis

    $100 million is not a loop hole– its the size of a Gulf of Mexico. In othe words, the public was subsidizing the precriptions drug plan for companies that had almost $900 million in profits.

    So the public was providing the benefit and not the company– they were just adding this to the bottom line and giving themselves bigger bonus .. Where is Joe the Plumber and Tea Party outrage on this. Let see them march on these companies with some outrage.

    March 26, 2010 12:54 pm at 12:54 pm |
  18. HypocriCNNation!

    WOW! Republican Coiffers Are Really Upset With The Reality Of What Happened Tuesday, Well They'd Better Get Used To Losing Their Profit Margins And Their Petty Cash Fund For All Their Lobbyists!

    March 26, 2010 01:01 pm at 1:01 pm |
  19. gt

    this will be the tip of the ice berg.... no jobs ,, who needs health care.

    March 26, 2010 01:01 pm at 1:01 pm |
  20. Raj

    Just another example of how much Obama hates business. Who does he think is supplying the work for these people. I was willing to give Obama the benefit of the doubt during the election but some of the worst things said about him have been correct.

    March 26, 2010 01:01 pm at 1:01 pm |
  21. Jerome Milwaukee WI

    Funny how big business does everything they can to avoid paying taxes, yet compains about have to pay what they should have in the first place. They ship american jobs oversea's yet are first with their hand out when tax payer money is needed. $895 million in pure profit and $100 million is a issue? I know that means your CEO, and Executives will only be able to afford 7 homes instead of the normal 9. Imagine the devastion their families are going to have to suffer when they have to continue to drive that 2010 Ferrari untill 2011. Your greed is sickening, un-human.

    March 26, 2010 01:04 pm at 1:04 pm |
  22. Sue

    Obamacare is a job killer---as many have predicted/said.

    Instead of them doing what the Republicans said--which would have provided more and more citizens with affordable/effective health care-–the Democrats pass this garbage Bill which will send even more citizens/workers to the unemployment lines.

    The Republicans' plan for businesses was............Allow them to group/poll together and allow them to purchase insurance from any company/any state. This would have increased competition, lowered the costs--–and enabled businesses to provide good health insurance policies to more and more citizens/workers.

    One of the Republicans plans for citizens was..........Allow citizens to buy insurance from any company/any state---which would again increase competition and lower costs---enabling more and more citizens to purchase affordable coverage/policies.

    March 26, 2010 01:06 pm at 1:06 pm |
  23. The lonely Libertarian of Liverpool NY

    American companies will see additional costs continue to rise going forward. These added expanses are the money that could have been used in creating jobs, but now this money will go to the government in the new taxes.

    March 26, 2010 01:08 pm at 1:08 pm |
  24. 8 Years of “trickle down economics” has only left a wet spot on working America's shoes!

    The key phrase is "subsidy" which means we the tax payers were taking the hit to "subsidize" the benefits provided to retirees for these 3 companies.


    Caterpillar = 895 profit – 150 non-subsidized prescription cost still leaves a very health profit of 745 million.

    But by all means, let's deny 32 million working class Americans access to health care so the Caterpillar stockholders will make an extra 1.00 in dividends as passive income which they did not work for, on the backs of hard working middle class Americans that provided the subsidies.

    It is way past time to try some "trickle up" economics.

    March 26, 2010 01:08 pm at 1:08 pm |
  25. Frank P

    All of you deserve it for putting these morons in power; and for those of you who were stupid enough not to understand what this "reform" would bring to you all let me spell it out for you: LESS JOBS, MORE UNEMPLOYMENT, and LESS FOOD FOR YOUR FAMILIES when you can not make ends meet! That idiot Pelosi and that stupid Nobama can not even understand this simple fact that when the economy is bad and when jobs are lost, you don't hit those that do the hiring and create jobs by increasing their costs! This is economics 101, but I guess what do you expect from a community organizer and a stupid Speaker of the House who has nothing but air (and botox) in between her ears!!! Way to go Dems, way to go! Just wait until Nov 2010 and 2012 and the people will teach you a lesson that you will not forget!!

    March 26, 2010 01:09 pm at 1:09 pm |
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