March 26th, 2010
11:41 AM ET
13 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. Shibumi

    Just like Bo Bo wants........Bye-Bye manufacturing. How does a manufacturer quickly reduce costs........(wait for it)....LAYOFFS!!!!
    Can the entire US population work for the gub'ment?

    March 26, 2010 04:27 pm at 4:27 pm |
  2. David

    Be specific! What are the new cost from; your poor planning, insurance companies, or the Health Plan? Please explain why the cost is going up rather than just throw out numbers.

    March 26, 2010 04:30 pm at 4:30 pm |
  3. Dean

    That plus a reduction in Medicare will really have an effect on retired people. We don't even have to mention what zero percent interest is doing to our retired people who worked all their lives to make this country great and were responsible and saved for their own retirement
    only to have that income taken away by the fed..
    America really knows how to care for old people.

    March 26, 2010 04:33 pm at 4:33 pm |
  4. Buck Wheat

    DUH........could you really think it wouldnt?....Anyone who got out of 10th grade would know that

    March 26, 2010 04:37 pm at 4:37 pm |
  5. Bedtime for Obonzo

    Way to go, Democrats. A huge tax increase on business in the middle of a recession. I wish you'd taken more economics courses and less art history in college.

    A partial list of the GOP health amendments offered in the Senate yesterday, which were voted down by Democrats:

    1. No Viagra for convicted rapists and pedophiles.
    2. No medical device taxes for disabled veterans
    3. No taxes on pacemakers

    Apparently Senate Democrats are pro-pedophile, anti-veteran, and anti-cardiac function.

    March 26, 2010 04:43 pm at 4:43 pm |
  6. Brian L

    "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."

    This is OUR money why did Bush and republicans give it to companies..... that isn't a FREE MARKET.... sounds like socialism to me. Bush and the Republicans must be SOCIALISTS then.

    March 26, 2010 04:45 pm at 4:45 pm |
  7. FL

    What did the left expect? Nothing is FREE. You got your health care but even more people will be out of work. The poor will be hit the hardest, the very ones Oboma and his party of socialists claimed to have helped. The essence of the United States has ceased to exist. Divide the nation and let it live on. The federal government has out lived and over grown their usefulness to the states. The States that leave the union to preserve their liberties would surely benefit from the number of businesses moving to operate within their borders free from government mandates. The government can not continue to mandate every aspect of our lives without taxing its people to the point commerce stops. By States Shedding the liabilities of the Federal government they would easily be able to provide any aid the federal government is providing to its people. The amount of waist and debt currently created by Washington makes this county extremely unstable in the very near future . We owe the federal government nothing and can preserve the essence of being TRULY FREE by ending all ties to the Federal Government.

    March 26, 2010 05:18 pm at 5:18 pm |
  8. Victor0803

    but the same companies are spending millions of $$$$$$ to stop health care bill,

    March 26, 2010 05:21 pm at 5:21 pm |
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