The health care overhaul will cost U.S. companies billions and make them more likely to drop prescription drug coverage for retirees because of a change in how the government subsidizes those benefits.
In the first two days after the law was signed, three major companies — Deere & Co., Caterpillar Inc. and Valero Energy — said they expect to take a total hit of $265 million to account for smaller tax deductions in the future.
With more than 3,500 companies now getting the tax break as an incentive to keep providing coverage, others are almost certain to announce similar cost increases in the weeks ahead as they sort out the impact of the change.
Figuring out what it will mean for retirees will take longer, but analysts said as many as 2 million could lose the prescription drug coverage provided by their former employers, leaving them to enroll in Medicare’s program.
White House spokesman Robert Gibbs defended the tax law change Thursday, saying the original provision allowing companies to deduct the federal subsidies from their taxable income was a “loophole” that will be closed by the health care overhaul.
For the government, the tax changes are expected to raise roughly $4.5 billion over the next decade to help pay for the health overhaul. Some of the savings would be negated by retirees enrolling in the Medicare plans.
“You’re increasing the incentive for companies to say ‘We don’t want to be in the health care business any more,’” said James Gelfand, senior manager of health policy for the U.S. Chamber of Commerce, which fought the overhaul.
American industrial companies that are struggling to compete globally against companies with much lower labor costs are particularly likely to eventually drop retiree coverage, said Gene Imhoff, an accounting professor at the University of Michigan.
“Anything that they can use to justify pushing something away from the employees, pushing it back on the employees or the government, they’re going to do it,” Imhoff said. “I’m not sure you can really blame them for trying to do this.”
Caterpillar spokesman Jim Dugan said the company is still studying the health care law and doesn’t yet know what the full impact will be. But he acknowledged that benefit changes are possible.
“Obviously, there’s greater cost pressures on us that could drive changes to plans, but we haven’t made any decisions on that,” Dugan said.
Spokesmen for Deere and Valero said it was too soon to say how the change would affect the benefits they offer retirees.
When Congress approved the Medicare prescription drug program in 2003, it included government incentives for employers to provide drug benefits to retirees so the public system wouldn’t be overwhelmed.
Employers that provide prescription drug benefits for retirees can receive subsidies covering 28 percent of eligible costs; those subsidies totaled $3.7 billion in 2008.