It's Happening, Healthcare Reform Causing Employer-sponsored Regime to Collapse

Is this a nightmare or what?

Documents reveal AT&T, Verizon, others, thought about dropping employer-sponsored benefits

By Shawn Tully, senior editor at largeMay 6, 2010: 10:42 AM ET


(Fortune) --

The great mystery surrounding the historic health care bill is how the corporations that provide coverage for most Americans -- coverage they know and prize -- will react to the new law's radically different regime of subsidies, penalties, and taxes. Now, we're getting a remarkable inside look at the options AT&T, Deere, and other big companies are weighing to deal with the new legislation.

Internal documents recently reviewed by Fortune, originally requested by Congress, show what the bill's critics predicted, and what its champions dreaded: many large companies are examining a course that was heretofore unthinkable, dumping the health care coverage they provide to their workers in exchange for paying penalty fees to the government.

That would dismantle the employer-based system that has reigned since World War II. It would also seem to contradict President Obama's statements that Americans who like their current plans could keep them. And as we'll see, it would hugely magnify the projected costs for the bill, which controls deficits only by assuming that America's employers would remain the backbone of the nation's health care system.

Hence, health-care reform risks becoming a victim of unintended consequences. Amazingly, the corporate documents that prove this point became public because of a different set of unintended consequences: they told a story far different than the one the politicians who demanded them expected.

Why the write-downs happened but the hearings didn't

In the days after President Obama signed the bill on March 24, a number of companies announced big write downs due to some fiscal changes it ushered in. The legislation eliminated a company's right to deduct the federal retiree drug-benefit subsidy from their corporate taxes. That reduced projected revenue. As a result, AT&T (T, Fortune 500) and Verizon (VZ, Fortune 500) took well-publicized charges of around $1 billion.

The announcements greatly annoyed Representative Henry Waxman, who accused the companies of using the big numbers to exaggerate health care reform's burden on employers. Waxman, chairman of the House Energy and Commerce Committee, demanded that they turn over their confidential memos, and summoned their top executives for hearings.

But Waxman didn't simply request documents related to the write down issue. He wanted every document the companies created that discussed what the bill would do to their most uncontrollable expense: healthcare costs.

The request yielded 1,100 pages of documents from four major employers: AT&T, Verizon, Caterpillar and Deere (DE, Fortune 500). No sooner did the Democrats on the Energy Committee read them than they abruptly cancelled the hearings. On April 14, the Committee's majority staff issued a memo stating that the write downs were "proper and in accordance with SEC rules." The committee also stated that the memos took a generally sunny view of the new legislation. The documents, said the Democrats' memo, show that "the overall impact of health reform on large employers could be beneficial."

Nowhere in the five-page report did the majority staff mention that not one, but all four companies, were weighing the costs and benefits of dropping their coverage.


AT&T produced a PowerPoint slide entitled "Medical Cost Versus No Coverage Penalty." A document prepared for Verizon by consulting firm Hewitt Resources stated, "Even though the proposed assessments [on companies that do not provide health care] are material, they are modest when compared to the average cost of health care," and that to avoid costs and regulations, "employers may consider exiting the health care market and send employees to the Exchanges." (Under the new bill, employees who lose their coverage will purchase health care through state-run exchanges.)

Kenneth Huhn, vice president of labor relations at Deere, said in an internal email that his company should look at the alternatives to providing health benefits, which "would amount to denying coverage and just paying the penalty," and that he felt he already had the ability to make this change under his company's labor agreement. Caterpillar felt it would have to give "serious consideration" to the penalty option.

It's these analyses -- which show it's a lot cheaper to "pay" than to "play" -- that threaten to overthrow the traditional architecture of health care.

The cost side

Indeed, companies are far more likely to cease providing coverage if they predict the bill will lift rather than flatten the cost curve. Deere, for example said, "We do expect double digit health care increases as most Americans will now have insurance and providers try to absorb the 15% uninsured into a practice."

Both Caterpillar (CAT, Fortune 500) and Verizon believe the requirement to allow dependents to remain on their parents' policies until age 26 will prove costly. Caterpillar puts the added expense at $20 million a year.

How two new taxes and the employer penalty change the health care calculus

First, there is the "Cadillac Tax" on expensive plans. This is a 40% excise tax on policies that cost over $8,500 for an individual or $23,000 for a family. Verizon's document predicts the tax will cost its employees $255 million a year when it starts in 2018, and rise sharply from there. Hewitt also isn't sure that Verizon can pass on the full tax to its employees; so it could impose a heavy weight on the company as well. "Many [have] characterized this tax as a pass-through to the consumer," says the Verizon document. "However, there will be significant legal and bargaining risks to overcome for this to be the case for Verizon."

In a statement to Fortune, Verizon said it is not, "considering or even contemplating" the plans laid out in the report, though records show the company did send the report to its board shortly after the reform plan was passed by Congress.

Second, the bill imposes new taxes on drug manufacturers, medical device-makers, and health insurance providers. Hewitt leaves little doubt Verizon will be paying for them: "These provisions are fees or excise taxes that will be shifted to employers through increased fees and rates."

Caterpillar and AT&T actually spell out the cost differences: Caterpillar did its estimate in November, when the most likely legislation would have imposed an 8% payroll tax on companies that do not provide coverage. Even with that immense penalty, Caterpillar stated that it could shave $25 million a year, or almost 10% from its bill. Now, because the $2,000 is far lower than 8%, it could reduce its bill by over 70%, by Fortune's estimate. Caterpillar did not respond to a request for comment.

AT&T revealed that it spends $2.4 billion a year on coverage for its almost 300,000 active employees, a number that would fall to $600 million if AT&T stopped providing health care coverage and paid the penalty option instead. AT&T declined comment.

So what happens to the employees who get dropped?

And why didn't these big employers drop employee coverage a long time ago? The Congressional Budget Office, in its crucial cost estimates of the bill, projected that company plans will cover more employees ten years from now than today. The reason the bill doesn't add to the deficit, the CBO states, is that fewer than 25 million Americans will be collecting the subsidies the bill mandates in 2020.

Those subsidies are indeed big: families of four earning between $22,000 and $88,000 would pay between 2% and 9.5% of their incomes on premiums; the federal government would pay the rest. So policies for a family making $66,000 would cost them just $5,300 a year with the government picking up the difference: more than $10,000 by most estimates.

As bean counters know, that's not a bad deal for a company's rank-and-file, and it's a great deal for the companies themselves. In a competitive labor market, the employers that shed their plans will need to give their employees a big raise, and those raises could be higher, even after taxes, than the premiums the employees will pay in the exchanges.

What does it mean for health care reform if the employer-sponsored regime collapses? By Fortune's reckoning, each person who's dropped would cost the government an average of around $2,100 after deducting the extra taxes collected on their additional pay. So if 50% of people covered by company plans get dumped, federal health care costs will rise by $160 billion a year in 2016, in addition to the $93 billion in subsidies already forecast by the CBO. Of course, as we've seen throughout the health care reform process, it's impossible to know for certain what the unintended consequences of these actions will be.

Former Director of CBO says Healthcare Bill Filled with Gimmicks and Fantasy

The Real Arithmetic of Health Care Reform

By DOUGLAS HOLTZ-EAKIN, former director of the Congressional Budget Office from 2003 to 2005, is the president of the American Action Forum, a policy institute.

NY Times
Published: March 20, 2010
Arlington, Va.

ON Thursday, the Congressional Budget Office reported that, if enacted, the latest health care reform legislation would, over the next 10 years, cost about $950 billion, but because it would raise some revenues and lower some costs, it would also lower federal deficits by $138 billion. In other words, a bill that would set up two new entitlement spending programs — health insurance subsidies and long-term health care benefits — would actually improve the nation’s bottom line.

Could this really be true? How can the budget office give a green light to a bill that commits the federal government to spending nearly $1 trillion more over the next 10 years?

The answer, unfortunately, is that the budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed. So fantasy in, fantasy out.

In reality, if you strip out all the gimmicks and budgetary games and rework the calculus, a wholly different picture emerges: The health care reform legislation would raise, not lower, federal deficits, by $562 billion.

Gimmick No. 1 is the way the bill front-loads revenues and backloads spending. That is, the taxes and fees it calls for are set to begin immediately, but its new subsidies would be deferred so that the first 10 years of revenue would be used to pay for only 6 years of spending.

Even worse, some costs are left out entirely. To operate the new programs over the first 10 years, future Congresses would need to vote for $114 billion in additional annual spending. But this so-called discretionary spending is excluded from the Congressional Budget Office’s tabulation.

Consider, too, the fate of the $70 billion in premiums expected to be raised in the first 10 years for the legislation’s new long-term health care insurance program. This money is counted as deficit reduction, but the benefits it is intended to finance are assumed not to materialize in the first 10 years, so they appear nowhere in the cost of the legislation.

Another vivid example of how the legislation manipulates revenues is the provision to have corporations deposit $8 billion in higher estimated tax payments in 2014, thereby meeting fiscal targets for the first five years. But since the corporations’ actual taxes would be unchanged, the money would need to be refunded the next year. The net effect is simply to shift dollars from 2015 to 2014.

In addition to this accounting sleight of hand, the legislation would blithely rob Peter to pay Paul. For example, it would use $53 billion in anticipated higher Social Security taxes to offset health care spending. Social Security revenues are expected to rise as employers shift from paying for health insurance to paying higher wages. But if workers have higher wages, they will also qualify for increased Social Security benefits when they retire. So the extra money raised from payroll taxes is already spoken for. (Indeed, it is unlikely to be enough to keep Social Security solvent.) It cannot be used for lowering the deficit.

A government takeover of all federally financed student loans — which obviously has nothing to do with health care — is rolled into the bill because it is expected to generate $19 billion in deficit reduction.

Finally, in perhaps the most amazing bit of unrealistic accounting, the legislation proposes to trim $463 billion from Medicare spending and use it to finance insurance subsidies. But Medicare is already bleeding red ink, and the health care bill has no reforms that would enable the program to operate more cheaply in the future. Instead, Congress is likely to continue to regularly override scheduled cuts in payments to Medicare doctors and other providers.

Removing the unrealistic annual Medicare savings ($463 billion) and the stolen annual revenues from Social Security and long-term care insurance ($123 billion), and adding in the annual spending that so far is not accounted for ($114 billion) quickly generates additional deficits of $562 billion in the first 10 years. And the nation would be on the hook for two more entitlement programs rapidly expanding as far as the eye can see.

The bottom line is that Congress would spend a lot more; steal funds from education, Social Security and long-term care to cover the gap; and promise that future Congresses will make up for it by taxing more and spending less.

The stakes could not be higher. As documented in another recent budget office analysis, the federal deficit is already expected to exceed at least $700 billion every year over the next decade, doubling the national debt to more than $20 trillion. By 2020, the federal deficit — the amount the government must borrow to meet its expenses — is projected to be $1.2 trillion, $900 billion of which represents interest on previous debt.

The health care legislation would only increase this crushing debt. It is a clear indication that Congress does not realize the urgency of putting America’s fiscal house in order.

Socialised Medicine - Rationed Healthcare

Doctors admit: NHS treatments must be rationed

Fertility, multiple sclerosis and migraine therapies at risk
Denis Campbell, health correspondent
Sunday May 6, 2007
The Observer

British doctors will take the historic step of admitting for the first time that many health treatments will be rationed in the future because the NHS cannot cope with spiralling demand from patients.

In a major report that will embarrass the government, the British Medical Association will say fertility treatment, plastic surgery and operations for varicose veins and minor childhood ailments, such as glue ear, are among a long list of procedures in jeopardy.

James Johnson, the BMA chairman, will warn that patients face a bleak future because they will increasingly be denied treatments. He will urge the NHS to be much more explicit about what it can realistically afford to do and ask political leaders to engage in an open, honest debate about rationing.

Read more:

---