President Obama’s healthcare overhaul may well spell trouble for retired employees. Several top companies with substantial staff, both on rolls and retired, have pointed out that this overhaul makes their drug benefit program for ex-employees expensive and non viable.
AT&T recently joined a growing list of US industry majors in broadcasting its whopping $1 billion expense owing to the healthcare policy modifications, which included dramatic changes to the taxation of Medicare subsidies. This figure is nearly a third of the phone company’s latest quarterly earnings.
While this is the largest expense incurred by any company so far, owing to these changes, others like Caterpillar Inc, Deere and Co, AK Steel Corp, Valero, 3M etc have also been caught short handed by these modifications. Sources from all these major companies have confirmed that President Obama’s healthcare changes will prove very expensive for them.
Simply put, the overhaul will necessitate the payment of taxes on subsidies they have received so far for drug cost benefits which are being offered to retired employees. The Medicare provisions in force since 2003 have allowed a 28% subsidy on costs for a company which provides this prescription drug benefit. The total cost of such drug benefit could be deducted from taxable income until now, which made it attractive for companies to offer this benefit. The latest modification disallows the 28% subsidy from being deducted from taxable income thus increasing the tax impact for employers.
For retirees, this comes as bad news. As the prescription drug benefit program becomes less attractive for employers, there are indications that some may withdraw the benefits altogether or curtail it to a significant extent. AT&T has already announced that the program will be reviewed considering the modifications and tax implications. Verizon Communications Inc has also sent intimation to employees of possible changes. About 3500 companies currently use the subsidy and take advantage of the tax break. With majors like AT&T and Verizon announcing reviews, smaller companies will soon follow suit.
Analysts expect that about 2 million ex-employees will be significantly affected by the overhaul if the companies withdraw the benefits. These retirees will turn to Medicare to cover their prescription drugs expenses in future, leading to enormous pressure on the public system. At least a portion of the 4.5 billion dollars which the Government hopes to salvage thus over the next decade to divert into health overhaul will be absorbed by this increased dependency on Medicare.