Employers Lose Drug-Benefit Tax Break In Health Care Overhaul Under the newly passed health care law, companies still get a subsidy for offering prescription coverage, but they'll no longer get a related tax deduction. Some say the change will cost them millions of dollars, and they may have to drop drug coverage altogether.
NPR logo

Firms Say Part Of Health Law Will Cost Them Millions

  • Download
  • <iframe src="https://www.npr.org/player/embed/125380056/125380104" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
Firms Say Part Of Health Law Will Cost Them Millions

Firms Say Part Of Health Law Will Cost Them Millions

  • Download
  • <iframe src="https://www.npr.org/player/embed/125380056/125380104" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript


This is MORNING EDITION from NPR News. I'm Renee Montagne.


And I'm Mary Louise Kelly.

President Obama signed into law, yesterday, final changes overhauling the U.S. health care system. Most of the law doesnt take effect for some time, but its impact is already being felt by some American companies. AT&T, Caterpillar and John Deere, among others, have warned they stand to lose millions of dollars because of a single passage in the law. NPR's Jim Zarroli explains what this dispute is all about.

JIM ZARROLI: In 2003, President Bush and Congress were finalizing plans for the new Medicare prescription drug plan and one thing worried them. They knew that some companies already offered drug coverage to their retired employees. Once the new drug plan kicked in those companies might be tempted to cancel that coverage and simply offload their employees into the Medicare plan greatly raising the program's cost.

So Congress started looking for ways to encourage private employers to stick with their private drug plans. James Klein is president of the American Benefits Council, which represents large employers.

Mr. JAMES KLEIN (President, American Benefits Council): Congress was very, very careful. They tried to determine what kind of a subsidy they would need to provide to encourage employers to retain coverage.

ZARROLI: What Congress did was give any company that offered drug coverage subsidies. The government would cover 28 percent of the cost of the plans. At the same time, the companies could still deduct the entire off their taxes as they always had. It would be like the government giving you money to pay your mortgage and also letting you write off the mortgage interest.

It seemed, on the surface, like a pretty sweet deal, and when Democrats started overhauling the health care system last year, they decided to scrap it, says Uwe Reinhardt, professor of economics and public affairs at Princeton.

Professor UWE REINHARDT (Economics and public affairs, Princeton University): The Obama administration said, well, that doesn't really make sense because you now allow this company to deduct, from its income taxes, an expenditure that was actually not made by them but by the U.S. taxpayer.

ZARROLI: Under the newly passed health care bill, companies still get the subsidy for offering drug coverage, but they no longer get a tax deduction as well. The administration says this will bring in $4.5 billion to the government. But that will come at the expense of companies like AT&T, which says it will lose as much as a billion dollars over time. Again, James Klein of the American Benefits Council.

Mr. KLEIN: Now the rug is being pulled out from under employers by requiring them to immediately take an accounting charge for this future change in tax liability.

ZARROLI: The Obama administration insists that remarks like these are premature. They say companies may be losing a tax deduction, but they'll gain a lot more once the health care bill takes effect.

Travis Sullivan is director of policy and strategic planning for the Commerce Department.

Mr. TRAVIS SULLIVAN (Director of policy and strategic planning, Commerce Department) I think it's important to put this issue into the broader context, which is this is a health care package that is going to, overall, reduce costs on businesses by billions of dollars.

ZARROLI: But businesses say those cost savings are pretty speculative. What's clear right now is that they're losing a big tax break. And as a result, companies like Caterpillar are hinting they may drop drug coverage altogether if Congress doesn't restore the deduction.

Of course a lot of these companies have union contracts, so they can't just eliminate benefits whenever they want to. But Princeton's Uwe Reinhardt says some employers may succeed in dropping drug plans, and that says something about just how complex the health care economy really is.

Prof. REINHARDT: I mean, how big that effect would be, we don't know but some effect there will certainly be. It just shows you how complicated everything is. You know, it's just like pulling on a spider web. You pull on one strand, the whole web moves.

ZARROLI: The dispute over this tax break says something else as well. Although the bill itself is now law, many parts of it remain controversial. And the pressure to change the bill won't let up anytime soon.

Jim Zarroli, NPR News, New York.

Copyright © 2010 NPR. All rights reserved. Visit our website terms of use and permissions pages at www.npr.org for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.