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March 16, 2004

Big Biz: Health Costs Down/Profits Up

Businesses announce a slashing of health care benefits.

Sad you know, but those rising health care costs forced them to do it.


Read this article from the Wall Street Journal.

The bottom line is that companies are using accounting tricks to make their supposed health care liabilities grow-- think Enron math-- even as their actual year-to-year spending on medical costs for employees often falls:

no matter how high health-care costs go, well over half of large American corporations face only limited impact from the increases when it comes to their retirees. They have established ceilings on how much they will ever spend per retiree for health care. If health costs go above the caps, it's the retiree, not the company, who's responsible.Whirlpool Corp. picked up $13.5 million in earnings, or 19 cents a share, in last year's second quarter from accounting gains, after imposing both caps and cuts in health care for its retirees. ..

Rather than focusing on health-care liability, which companies have so much latitude to adjust, shareholders might want to look at what a company actually spends year-to-year for retiree medical benefits. At Bank of America Corp., for example, the liability for retiree health benefits rose by $69 million, to $1.1 billion, in 2003. But federal filings show that what the bank actually spent for these benefits in 2003 declined to $63 million from $84 million the year before, a 25% drop. Retirees' portion rose 27% to $62 million.

Contrary to conventional wisdom, it isn't uncommon for companies to report declines in their actual spending on retiree health care. Those whose filings reveal lower "benefits paid" last year include Altria Group Inc. (down 5%, to $246 million); R.J. Reynolds Tobacco Holdings Inc. (down 11%, to $63 million); Clorox Co. (a 33% fall, to $4 million); Ball Corp. (down 21%, to $8 million), and Black & Decker Corp. (down 28%, to $13 million).

And the new Medicare bill is just helping them jigger the books based on expected subsidies courtesy of Uncle Sam:
Medicare's new prescription-drug benefit is giving companies a whole new source of accounting-generated income that boosts their earnings.
And some employers may get federal subsidies even after transferring costs to their retirees.

Congress was worried that if Medicare paid for prescription drugs, companies would cut retiree health-care benefits even faster than they already were. So when it passed a Medicare drug benefit last year, Congress added subsidies for companies that retain retiree drug coverage. The U.S. will reimburse employers for 28% of the cost of retiree prescription-drug spending over $250, up to a subsidy of $1,330 per retiree per year.

This means companies can reduce the liability they're carrying on their books for drug coverage. They won't get the subsidy until 2006. But accounting rules let them estimate how big a subsidy they'll get over the lives of current and future retirees and deduct this figure from their liability right now -- and start dropping immediate accounting gains to their bottom lines.

Oh and here's the sweet part-- even if a company is forcing retirees to pay the costs of their retirement "benefit" out of their own pocket, the company still gets the Medicare subsidy:
The new Medicare law means some companies can get federal subsidies (and thus fresh accounting gains and earnings) even if they shift part of the cost of their retiree drug coverage to the retirees themselves. That's because the way the law is written, the subsidy is based on the whole cost of a company's retiree drug program -- including the part retirees have to pay for.
So don't believe the hype that companies have to slash health care. Profits are way up for corporate America. Those slashed benefits are just because they are greedier for bigger profits, not because they have to do anything.

Posted by Nathan at March 16, 2004 11:29 PM