Economy

Health Care Law Equals Big Hits To Corporate Profits

I didn't know that many employers receive a tax-free reimbursement from the federal government for providing retirees with prescription drug coverage. I'm guessing many people who thought they were closely following the health-care debate didn't know this.

But I predict many people will be hearing about these reimbursements in coming weeks as companies announce that their profits will be lower now that those reimbursements are no longer tax free thanks to the new health care law.

And the magnitude of the profit hits some companies will be taking are of the size that investors could find alarming and critics of the law can use as evidence that it will be a drag on companies at exactly the wrong time, when the economy is so uncertain.

AT&T, for instance, announced Friday it will take an eye-popping $1 billion first-quarter charge because of the health overhaul.

The Wall Street Journal reports:

AT&T Inc. plans to take a noncash $1 billion charge in the first quarter in anticipating the impact of changes brought by the nation's health-care overhaul.

The Dallas-based telecommunications giant is the latest—and largest—company to take a charge to account for the increased costs under the new health-care plan. Specifically, the legislation prevents corporations from deducting tax-free subsidies they receive from the government for providing retirees with prescription-drug benefits.

The company will evaluate prospective changes to its active and retiree health-care benefits, according to a filing with Securities and Exchange Commission on Friday.

The size of AT&T's charge is notable. The company employs more union workers than all of the U.S. auto makers combined, and has to support a sizeable retiree base. Over the past year, AT&T has worked to sign its landline workers to a new contract with the intent of reducing its health-care costs. It is still working on one region after signing up a majority of its union employees.

Also Friday, 3M Co. said it expects to record a noncash charge of $85 million to $90 million for the first quarter due to the legislated health-care changes.

BusinessWeek reported that companies may record $14 billion in charges because of the loss of the tax-free reimbursement.

Disclosures by Caterpillar and AK Steel Holding Corp. in the two days since the signing are the first sets of health-care charges that ultimately may shave as much as $14 billion from U.S. corporate profits, according to an estimate by benefits consultancy Towers Watson. Caterpillar Chief Financial Officer David Burritt and nine peers laid out objections in a Dec. 11 letter as Congress was drafting the bill, saying they would have to account for the tax change as soon as it became law.

"This could be a huge hit for bigger companies," said Roland McDevitt, health-care research director in Arlington, Virginia, for New York-based Towers Watson. "This will be the kind of charge that will get the CFO looking and asking what are we doing here?"

Investors should expect hundreds of charge announcements in the next few weeks as the first quarter ends and companies release earnings, said Ken Sperling, leader of Hewitt Associates' Global Health Care group in Lincolnshire, Illinois.

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