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.

Firms Say Part Of Health Law Will Cost Them Millions

Firms Say Part Of Health Law Will Cost Them Millions

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Although President Obama's newly minted health care overhaul doesn't take effect for some time, its impact is already being felt by some American companies. They're warning that they stand to lose millions of dollars because of a single passage in the law.

Companies such as AT&T, Caterpillar and John Deere say the end of a tax break on prescription drugs may cause them to have to drop employees' drug coverage altogether.

In 2003, when President George W. Bush and Congress were finalizing plans for the new Medicare prescription drug plan, one thing worried them: They feared that once the new plan kicked in, companies that offered drug coverage to retired employees might be tempted to cancel coverage and offload those workers into the Medicare plan — costing the government more money.

So Congress started looking for ways to encourage private employers to stick with their private drug plans.

"Congress was very, very careful," says James Klein, president of the American Benefits Council, which represents large employers. "They tried to determine what kind of subsidy they would need to provide to encourage employers to retain coverage."

A Subsidy And A Tax Deduction

Congress decided to subsidize drug coverage. The government would cover 28 percent of a company's costs for a plan, and at the same time, that company could deduct the entire cost from its taxes as it had always done. It was 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 University.

"The Obama administration said, 'Well, that really doesn't 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,'" Reinhardt says.

Under the newly passed health care law, companies still get the subsidy for offering drug coverage, but they no longer get a tax deduction as well. The administration says this will add $4.5 billion to government coffers. But it will come at the expense of companies like Caterpillar, John Deere and AT&T, which says it will lose as much as $1 billion down the road.

"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," says Klein.

'Like Pulling On A Spider Web'

The Obama administration insists that comments like these are premature — and that companies may be losing a tax deduction but will gain a lot more once the health care law goes into effect.

"I think it's important to put this issue into the broader context, which is, this is a health care package that overall is going to reduce costs on businesses by billions of dollars," says Travis Sullivan, the Commerce Department's director of policy and strategic planning.

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

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

"How big that effect would be, we don't know — but some effect there will certainly be," Reinhardt says. "It just shows you how complicated everything is. It's just like pulling on a spider web. You pull on one strand, the whole web moves."

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 legislation won't let up anytime soon.