March 26th, 2010
11:41 AM ET
5 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. Mike

    Remember when nobama went to the caterpillar plant and make a big specticle of himself claiming how many jobs were going to come back to that plant? Well looky here, they are now going to have to cut employees due to nobama's policies. This is just the tip of the iceberg, stand by for massive layoffs throughout the US as people can not longer afford nobamas tax and spend along with his new health care "deformity". Come on 2010 and 2012.

    March 26, 2010 02:33 pm at 2:33 pm |
  2. Sniffit

    Compare that $100M to the salary + bonus of the CEO and other top echelon executive of Caterpillar and you'll see why they're whining. They have a choice: keep employees or keep their gold-plated toilets.

    March 26, 2010 02:33 pm at 2:33 pm |
  3. BeverlyNC

    These are Republican-fronted companies who suspiciously have changed their tune in the last few weeks.
    Caterpillar was one company who has been praising President Obama and who even hosted him at one of their plants touting how many new jobs they were going to be able to create because of his programs.
    Healthcare will help all businesses afford health insurance for their employees at lower rates with better coverage.

    When Republicans get hooked on one story that they repeat ad nauseum – then you know it is most likely a distortion or an outright lie. Republicans are no longer credible on any issue. They have shown they will do or say anything – tell any lie, spread fear, whip up hate, and incite violence in their sad desperation to get attention.

    No Republican can be trusted. They are dishonorable and characterless and we need to get them all out of Congress in November so we can stop their hate and keep moving America forward.

    March 26, 2010 02:33 pm at 2:33 pm |
  4. sensible Cape Coral FL

    What John Deere MAY lose in higher premiums it will more than make up in reduced absenteeism. Too much one dimensional thinking.on this matter.

    March 26, 2010 02:34 pm at 2:34 pm |
  5. Sniffit

    Compare that $100M to the salary + bonus of the CEO and other top echelon executive of Caterpillar and you'll see why they're whining. They have a choice: keep employees or keep their gold-plated toilets. Wanna bet on which one they want to choose? Have fun with the unions guys!

    March 26, 2010 02:34 pm at 2:34 pm |
  6. Henry Miller, Libertarian

    Yeah, and wait until small businesses start laying people they can't afford to keep because of ObamaCare. And how many small businesses are going to slow or stop hiring because of it?

    This is what happens when ideologically driven, business-hostile nuts, start trying to dictate an economy.

    March 26, 2010 02:34 pm at 2:34 pm |
  7. Henry Miller, Libertarian

    Yeah, and wait until small businesses start laying off people they can't afford to keep because of ObamaCare. And how many small businesses are going to slow or stop hiring because of it?

    This is what happens when ideologically driven, business-hostile nuts, start trying to dictate an economy.

    March 26, 2010 02:35 pm at 2:35 pm |
  8. Mark from Louisiana

    Multiply that by thousands of companies........then the dems will wonder why there are no jobs.

    March 26, 2010 02:35 pm at 2:35 pm |
  9. greg morris

    what a shocker,, big buisness is siding with the big buisness party... the republicans.. have you ever wondered if corporate america does thing intentionally to keep the republicans in power.. i do.

    March 26, 2010 02:37 pm at 2:37 pm |
  10. Cathy Kayser

    The real cost to all of us is the decreased profitability of US companies. It will affect all of us, shareholders and job seekers alike. The little increase in Medicare payroll tax is the least of it.

    March 26, 2010 02:48 pm at 2:48 pm |
  11. JES

    Nothing new here we the tax payers will end up paying with higher taxes and cost of goods.

    Way to go Obama you don't care about anyone but your own angenda.

    March 26, 2010 02:50 pm at 2:50 pm |
  12. It's time for another change!

    Ignore the warnings from business. What do they know? The Democrats promised us this would save money... really, they did. no really... Yeah, I knew you wouldn't buy that story anymore.

    March 26, 2010 03:02 pm at 3:02 pm |
  13. Sheena

    Pretty soon more companies will be closing down and many more loss of jobs....
    You think these companies are going to lose all their profits to pay for welfare, I think not....
    This country is in a very sad state, and this Administration is adding more and more to destroy it every single day

    March 26, 2010 03:06 pm at 3:06 pm |
  14. Mike

    uhbama=unemployment.

    March 26, 2010 03:09 pm at 3:09 pm |
  15. Joseph

    Is there anyone who has any doubt that the cost for Obamacare will go up and the companies will have to trim the costs to make a decent profits. The only people get hurt during the process are those employees, either losing their health benefits or losing their jobs.

    March 26, 2010 03:10 pm at 3:10 pm |
  16. Gale

    Oh, that's O.K. Why should the Dems care what the people want.

    March 26, 2010 03:17 pm at 3:17 pm |
  17. jane

    More weeping and wailing and gnashing of teeth! Guess what! People will be able to get health care when they get sick.

    March 26, 2010 03:29 pm at 3:29 pm |
  18. Carmen, Miami FL

    I'll believe it when I see it. I think it's just big business bluster.

    March 26, 2010 03:30 pm at 3:30 pm |
  19. Monster Zero

    CBO projects debt based on wonder boys budget at 90% of GDP, Check out the Obama for my future clip, What future, indebtedness?

    This ain't Kansas anymore Dorothy and Obama is NOT the Wizard of OZ!

    Funny how the elected are the only ones that haven't taken a pay cut!

    March 26, 2010 03:31 pm at 3:31 pm |
  20. Stop taking my taxes

    Noooooooooo Wayyyyyyyyyyyyy! This is a entitlement program has nothing to do with health care reform. We now have to just cover a bunch of crack heads, 500lb monsters and people who have drink and smoked every day of the life. You thought that was going to bring cost down. Cars for clunkers failed to the opposite of what it was suppose to do, mortgage help failed made things work, stimulous failed now we have to live with it for the next 50years to pay off. Silly democants listening to a man whose only job was a community agitator.

    March 26, 2010 03:31 pm at 3:31 pm |
  21. so rich even obama couldn't hurt me but you middle class folk should worry

    you ain't seen nothing yet! you people for this bill are so delusionsal too bad we are gonna have to go through all this just so you people will understand. medi caid ended up 9X what the CBO scored it at, and is basically bankrupt. and I don't know if any you have had the pleasure of dealing with the VA! my dog gets better care than my dad who fought for this country! you people who trust this government to provide a decent quality service at an affordable price SCARE ME! how do you function day to day???? where does your logic stem from????? I am speechless and blown away at the fact that so many people think this is about health care and about people who don't have insurance, what are you thinking? they coulda taken care of those issues with a 30 page bill for half the money! and if it is about those poor poor souls that the dems seem to care so so much about than why couldn't they figure out a way for those to receive coverage immediately, instead that wasn't REALLY the priority that can wait till 2014 !!!! its laughable how STUPID you people are!

    March 26, 2010 03:32 pm at 3:32 pm |
  22. tpbco

    No Surprise.

    This will certainly add jobs.

    And the best is yet to come.

    March 26, 2010 03:33 pm at 3:33 pm |
  23. Sniffit

    I believe I found the data. The top 7 execs at Caterpillar made a combined $51,398,869 in 2007 (average = $7,342,695). I wonder how many employees they're going to cut so they don't have to take more reasonable compensation packages...assuming the $100M figure isn't just a fart in the wind in the first place.

    March 26, 2010 03:46 pm at 3:46 pm |
  24. billincalif

    ONCE the EMPEROR is bounced out on his ear I don't think Robert Gibbs will have any trouble finding another job in the car industry selling USED CARS.

    March 26, 2010 03:49 pm at 3:49 pm |
  25. Laura, Boston

    AT&T plans $1 billion write-down tied to health law
    Telecom giant joins Caterpillar and Deere in outlining expense. This is only the beginning of major companies who are going to increase prices and/or cut people to pay for the hugh costs they will incur due to the health care bill.

    Thanks dems!!! Now our cell phones and services as well as the food costs will go up because farmers will have to pay more for tractors and the like....

    March 26, 2010 03:50 pm at 3:50 pm |
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