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Health Reform Could Prompt Retiree Drug Benefit Cuts

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December 24, 2009

Some executives, including AT&T CEO Randall Stephenson, are warning that unless modifications are made to the health care reform bill that the Senate voted to approve Thursday morning, many large companies could decide to drop drug benefits for retirees.

The reason why dates back to a provision in the 2003 law that created the Medicare Part D benefits and provided companies with a 28 percent tax-free subsidy on drug benefits worth about $600 annually per retiree, according to The Wall Street Journal. The Senate version of the bill would tax the subsidy immediately, in an effort to generate $5.4 billion over a decade’s time, while the House version would phase in the tax. 

The American Benefits Council, a group that represents large employers, teamed up with the AFL-CIO to write a letter earlier this month to Senate Majority Leader Harry Reid, D-Nev., urging him to rewrite the relevant section of the health care reform legislation. They said that if the provision becomes law, it would be destabilizing for retirees who rely on employer-sponsored drug coverage and would make an immediate impact on corporate financial statements. They also warn it would not raise the estimated federal tax revenue.

“It is clear that in drafting Section 9012, the Senate was not aware of, and therefore not able to take into consideration, the significant negative impact, required under Financial Account Standard No. 109, on the financial statements of companies currently providing retiree drug coverage,” wrote American Benefits Council president James A. Klein and AFL-CIO legislation director William Samuel. “Regardless of the effective date of the provision, accounting rules dictate that immediately upon being signed into law, this deferred tax liability would have to be reflected on company financial statements. This would substantially increase liabilities for the very companies providing the most comprehensive coverage to current and future retirees. In the current economic environment, this would be particularly ill-advised and disruptive. Moreover, it would compel many employers to cease offering the coverage and require their retirees to obtain coverage through Medicare Part D, at considerably greater cost to the government.”

Problem is that the senators who want to show that the health care reform bill will lower the federal deficit are intent on finding ways to offset the overall costs of the legislation. However, this looks like a case where the law of unintended consequences could come into play. While the government subsidy costs about $600 per retiree, proponents of the subsidy argue that dropping it could end up costing the government $1,000 per retiree as more of them are forced to switch to Medicare Part D drug coverage instead of relying on their former employers’ plans.

This will be one of many sticky issues that Senate and House negotiators will have to work out in the weeks ahead as they move to the conference phase of the legislative process.

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