Healthcare Reform Hikes Corporate Medical Costs

Includes: AKS, ATI, BA, CAT, DE, MET, NAV
by: Zacks Investment Research

The recent health care reform has caused unrest amongst the US employers, who will now have to spend more on their employees’ medical plans. The new reform has made taxable the subsidies on retiree drugs offered by the government.

Companies that provide prescription drug benefits for retirees have been getting subsidies covering 28% of eligible costs but were allowed a 100% deduction as costs. Therefore, the subsidies received were also allowed to be deducted for computation of taxable income. However, from 2013, the health care reform will allow companies to deduct only the amount of money that is actually expended on medical cost and the subsidies will be taxable.
Earlier this month, the US government had signed the Patient Protection and Affordable Care Act into law. Under this law, the government is liable to imply taxes on subsidies on retiree drugs with effect from 2011. The retiree drug subsidy is one of the several options available under Medicare that enables employers and unions to help their Medicare-eligible retirees obtain prescription coverage. Private employers that sponsor health plans, governments, churches and union health funds are eligible to receive the retiree drug subsidy.
Consequently, Allegheny Technologies Inc. (NYSE:ATI), one of the leading specialty metals processor, announced recently that it is likely to report a $5 million non-cash charge in the first quarter of 2010 related to the health care reform. Steel company AK Steel (NYSE:AKS) expects to record a charge of about $31 million in the first quarter of 2010 resulting from the recently enacted Patient Protection & Affordable Care Act, which resulted in a change in tax treatment of the company’s Medicare Part D reimbursements.
Deere & Co. (NYSE:DE), the biggest manufacturer of farm equipment in the US, reported yesterday that the changes in the health care law would lead to an additional one-time cost of $150 million. The company stated that the imposition of taxes on the subsidy on retiree drugs would result in a one-time charge of $150 million in the second quarter of fiscal 2010. The higher costs represent nearly 12% of its projected fiscal 2010 profit of $1.3 billion.
Caterpillar Inc. (NYSE:CAT), the market leader in construction and mining equipment, diesel and natural gas engines, and industrial gas turbines, reported that the tax would result in an additional cost of $100 million for the second quarter.
Companies including aerospace giant Boeing Co. (NYSE:BA), insurer MetLife Inc. (NYSE:MET) and truck-maker Navistar International Corp. (NYSE:NAV) are likely to post similar cost increases. These companies along with Caterpillar and Deere had written to the Congress in December last year that imposition of tax on drug subsidy could reduce coverage and more retirees would shift to Medicare Part D.
Apparently, such charges would pressure profitability in the first quarter of 2010. Companies like Deere and Caterpillar have reported that such cost hikes annul their previously announced earnings guidance for the upcoming quarter.