March 29th, 2010

Healthcare Reform Costs 3M, AT&T, Caterpillar, John Deere Billions.  The health care reform bill is expecting to cost some American companies millions – if not billions of dollars.  Among those reported to taking a hit include AT&T, 3M, John Deere, and Caterpillar.

Of course, many more companies will feel the pinch of the effects of the legislation, and the worst hit could be small businesses that have to offer health insurance to employees for the first time ever, or else pay a $2,000 fine PER EMPLOYEE.

The good news for AT&T and other large companies is that their increased expenses are non-cash – meaning that they do not actually cost the company money. 

Let’s explain:

In 2003, Medicare part D became available and to give companies an incentive to keep retirees under their prescription drug coverage plans instead of dropping them, the government offered a 28% subsidy.  To properly account for the subsidy, the companies set up assets which were then amortized (decreased) as the subsidy was used.  All of this is required for proper accounting treatment and proper tax accounting.

The new healthcare bill doesn’t eliminate the subsidy. It changes the tax deductibility of the portion of the drugs paid for by the subsidy-  meaning that companies will have to adjust their asset downward to account for this change.

When you decrease an asset, you increase an expense – thus causing a hit to the bottom line.  In AT&T’s case the write down will be around $1.6 million.

3M reports a hit to earnings between $80 and $90 million – far from the AT&T adjustment but still quite large.

It’s good that the companies won’t have to come up with actual cash for these charges, but the hit to earnings will still affect stock prices and investments.

Small businesses won’t be as lucky. Their increaes in health care costs could be because of the requirement to offer insurance for the first time – which requires an actual cash outlay.

It will be interesting to see the true cost of the health care reform.  While it could save millions of Americans money, it could cost others millions more.

Source:

Wall Street Journal

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