ARM Industry Not Likely to Take Massive Charges on Health Reform Like AT&T, Others

Now that health care reform is a reality, several large corporations have publicly said that they will immediately take millions in non-cash charges on their balance sheets that may lead to decreased earnings. The high-profile announcements came immediately after Congress passed the bill and it was signed into law by President Obama.

The write-downs are for regulatory changes that will impact the tax treatment of a government subsidy employers receive to help pay for prescription drug coverage for their Medicare-eligible retirees, a treatment created by Medicare prescription drug expansion in 2003.

AT&T’s non-cash charge of $1 billion is by far the biggest of the non-cash charges announced since President Obama signed the bill into law March 23. The telecommunications company, like some others, had indicated that the new tax treatment for the subsidiary could affect the prescription drug benefits it offers retired employees. Other large companies, like Caterpillar and John Deere, made similar announcements. Tax law experts say any company that provides prescription drug coverage for Medicare-eligible employees could potentially be affected by the new law. But the accounting correction will not likely affect the accounts receivable management industry in vast numbers.

ACA International, the industry’s leading trade group, told insideARM that the median employee count for member companies is 20, meaning half of its debt collection agencies have more than 20 employees and half have fewer than 20 employees. The average number of employees is 46. Additionally, most ARM companies are less than 30 years old and most employees still are years away from retirement, unlike AT&T and other centuries old companies with thousands of retired employees.

Some lawmakers are concerned that a wave of non-cash charges on the heels of the historic legislation, and the suggestion by some companies that some health care benefits may be eliminated or downgraded, is premature and harmful to the goal of health care reform. Democrat Representatives Henry Waxman of California and Bart Stupak of Michigan are questioning AT&T’s charges and have asked the company to show evidence that the charges are necessary at a hearing on April 21.

“The new law is designed to expand coverage and bring down costs, so your assertions are a matter of concern,” Waxman and Stupak wrote in a letter sent to AT&T Chairman and CEO Randall Stephenson. “They also appear to conflict with independent analyses.”

Paul Dennett, senior vice president of health care reform for the American Benefits Council, which represents 300 large employer organizations that provide health and retiree benefit for 100 million Americans, told insideARM that the council warned Congress about the changes the new tax treatment would have on employers who provide prescription drug coverage to seniors.

“It’s not something we didn’t try to tell them. But it is what it is now,” Dennett said.

Waxman and Stupak however, point to a Congressional Budget Office report that says the average premium costs per person would decrease as much as three percent by 2016 for companies insuring more than 50 employees. They also cite a November estimate by the Business Roundtable, an association of chief executive officers, of reduced health-insurance cost trends.

Ironically, the controversy stems from the passage of the Medicare Prescription Drug Improvement and Modernization Act of 2003, which established Medicare Part D prescription drug coverage – a key initiative of the George W. Bush administration that won bi-partisan support. Prior to 2003, Medicare eligible retirees had to pay all out-of-pocket expenses for prescription drug coverage unless coverage was offered by a former employer. Recognizing the role prescriptions now play in health care and fearing that employers would drop prescription drug coverage for retirees when Medicare Part D became available unless incentivized to keep it, Congress provided a subsidy to help pay for coverage. Congress also allowed employers to deduct from their taxes the amount of the subsidiary, in addition to their own out-of-pocket expenses. The subsidy and full tax deduction was estimated to cost the government less than providing prescription drug coverage for all seniors.

Still, around 17 percent of large companies dropped their prescription drug coverage for retirees. And as health care cost rose during the last decade, research shows that more companies have cut benefits to retirees or raise their share of the costs of the benefits (“Employees Leave Health Plans as Costs Rise,” Jan. 14, 2008).

“Normally the way it would work is if you received a payment from another source for something, you’d have to reduce the amount of the deduction by the payment. Congress explicitly said (in the 2003 law) that tax rule doesn’t apply (to the Medicare Part D subsidy),” noted Dennett.

Dennett said the new health care reform law still provides employers with the subsidy, which is 28 percent of their cost. But it does not allow employers to deduct the subsidy from their taxes.

“It doesn’t eliminate the benefit, but reduces the value because it increases the amount the employer will pay the government in higher taxes,” Dennett said.

Nonetheless, accounting rules require companies that accept the subsidy to show it as an asset on the balance sheets. Some companies project the value of that asset decades out, Dennett said. Although the tax deduction affecting the subsidy doesn’t take effect until January 1, 2013, any new law that affects the value of asset projections on a company’s balance sheet must be disclosed, which is what ATT&T, 3M, Caterpillar, and other companies are doing. The change also must be disclosed in the quarter the change occurs.

Although the benefits council warned Congress that this would happen, not all companies will follow AT&T’s, 3M or Caterpillar’s lead. For example, General Electric spokeswoman Anne Eisele told BusinessWeek that the company doesn’t foresee any “material effect” from the health care reform law.

“We have over 300 employers. Some have looked at this and said it’s not a big deal for them. For others, it’s a very big deal,” Dennett said.