Corporate Losses Due To Health Care Reform?

You may have read that some big companies are announcing very large charge-offs in their quarterly income statements due to the passage of health care reform. AT&T, for instance, took a $1 billion hit to its income. 3M, Boeing, Caterpillar, Deere, and Prudential are all among the companies who have announced similar charge-offs.

So, you should ask, is reform damaging our big comapnies the way that the Chamber of Commerce says it is?

Not at all.

In fact it is revealing the extent to which our old system was propped up by government subsidies.

Here’s what’s going on:

Under the old system companies who provided prescription coverage to their retirees received a government hand out to cover the cost. But they could also take the amount they paid to provide that coverage as a tax deduction. This was an enormous loophole in the old system. Basically the government turned a blind eye to the tax dodge in order to induce the companies to continue covering prescription costs to retirees. The alternative would have been for the coverage to lapse and the retirees to have been left high and dry.

Obviously the companies loved the deal. They received cash that they used to provide coverage, and then took the tax deduction even though they had never used any of their own cash anywhere in the process. A sweet deal if ever there was one.

Unfortunately for the Chamber of Commerce, the new law closes the loophole and disallows the tax dodge. Companies still get the taxpayer cash so that they can provide prescription coverage, but they can no longer pretend that it was their money, and so they can no longer take the tax deduction.

Its called the government running a tight ship. Something we are not used to.

The surprising size of the charge-offs is due to the conservative nature of the accounting rules, and not to the size of the various prescription plans.

Basically the accounting rules force companies to recognize the loss in the same year as the law changed – 2010 – and also to take a sufficient hit to cover losses over the expected life of the program. Because the program, i.e. the provision of prescription coverage to retirees, is clearly linked to the life expectancy of the retirees, companies have to estimate the future lost tax dodges and add them all up. Then they have to take the accumulated charge this year.

Hence the AT&T charge-off of $1 billion. I have been told that the actual loss to AT&T this year is only $40 million. The rest of the charge-off relates to the next twenty-nine years, which presumably is the life expectancy of the youngest AT&T retiree.

No one on Wall Street or in the stock market sees this as big deal. Tax dodges are constantly being revoked and changed, which means companies are forever recalculating things like this. Just to prove that the market doesn’t care: AT&T’s stock actually rose a little today. So this is not a problem.

Where it could get some traction is on the political front where the Chamber of Commerce is trying to rally opposition to reform.

My guess is that this issue will simply die away, and that after a few weeks of charge-off announcements we will all forget about it.

Meanwhile we can watch the Chamber of commerce huff and puff, while the Tea Party crowd hunker down for the end of civilization.

Again.