Henry Waxman (D. Ca.) and other House Democrats intend to haul the CEO’s of several major companies before Congress on April 21 , and demand explanations about recent disclosures by those corporations concerning the true costs of Obamacare. Actually, the true cost of Obamacare to these corporations is sizable, but that apparently was supposed to be kept a secret.
Here is what happened. AT&T, John Deere, Caterpillar, 3M, AK Steel, and an assortment of other companies offer prescription drug coverage to their retirees. The estimated costs of providing that future coverage must be reflected on the companies’ balance sheets as a long term liability.
In 2003, when Congress passed it’s prescription drug coverage for those on Medicare, Congress was concerned that many companies would simply drop their retiree prescription drug coverage, thus forcing those retirees into the government plan, obviously driving up the government’s cost. So, what Congress did was to provide certain subsidies and tax deductions to those companies to encourage them to keep providing those benefits. From an accounting standpoint, when the government did that, the companies had to change their balance sheets to reflect the long term “income” from the government subsidies and deductions as an offset against the long term cost of providing the care.
However, Obamacare changed all that. It significantly decreased the tax deductions that the companies will be able to take in the future, which means that the companies will have to change their balance sheets to reflect the lower deductions. In accounting parlance, this change is called a “writedown of a deferred tax asset”.
Why does any of this matter, you ask? Well, generally accepted accounting principles require that this entire writedown must occur in each companies’ next quarterly financial statement. Thus, AT&T will be forced to incur a $1 billion writedown, John Deere, a $150 million writedown, Catapillar, a $100 million writedown, and on and on. And, these writedowns, in turn, also reflect the long term additional cost to these companies to continue prescription drug coverage for their retirees because of the lower tax deduction.
This is not what the administration wants to hear, particularly when one of the alleged “selling points” of Obamacare was that it would be just great for business because it would reduce the cost of providing health coverage to their employees and retirees.
Enter Henry Waxman…he apparently wants to beat up on the companies because he believes that what they are doing,
appears to conflict with independent analyses, which show that the new law will expand coverage and bring down costs.
Of course, if the companies don’t do what they plan to do, they will be in violation of federal law, and will be charged by the Securities and Exchange Commission with preparing and filing false and misleading financial statements.
Hum, the April 21 hearings should be interesting.