Some companies with many retired workers are expected to post big earnings gains for 2003 or 2004, thanks to accounting guidelines for subsidies under the federal prescription-drug program.
When Congress approved prescription-drug benefits for Medicare recipients last year, it granted benefits for the 65% of large employers with retiree health-care plans, providing funds for companies that maintained their prescription-drug coverage for retirees.
The program is supposed to encourage employers to retain prescription-drug coverage.
But companies are entitled to the subsidy regardless of how much of the cost they pick up themselves. As a result, it does nothing to halt the current rush by some employers to shift more costs to retirees.
In fact, benefits consultants are designing employer-sponsored prescription plans to save companies more money by unloading costs on their former workers without losing out on the new subsidy.
Some of the biggest accounting gains are expected to show up at such companies as Lucent Technologies Inc., which has 240,000 retirees and dependents, General Motors Corp., Dow Chemical Co., and SBC Communications Inc. All are members of the Employers' Coalition on Medicare, which lobbied for the subsidy. Some of these companies won't take the gains immediately.
Thanks to a little-noticed provision in the new law, the government will calculate the subsidy based on both what the employer spends for prescription drugs and what the retiree spends.
So if an employer and a retiree each pay $1,000 toward the retiree's medical costs, the employer's subsidy is calculated on the full $2,000, bringing the company a total subsidy of $490, rather than the $210 that it would get if it received a subsidy only on its share.
As a result, when combined with tax and accounting rules, the program allows employers in some cases to use the subsidy to erase the entire cost of prescription drugs for retirees, or even turn a profit from a drug plan. For instance, if a Medicare-eligible retiree's prescription costs are $2,550, and his former employer pays $1,000 of it, under long-standing tax rules, the employer can deduct its full $1,000 for tax purposes, meaning the after-tax cost to the company is $650 at a 35% corporate tax rate.
Meanwhile, the company doesn't pay taxes on the subsidy it receives, thanks to another provision of the new Medicare law. So in this example, the employer would receive a subsidy of $644, based on the full amount paid by both employer and retiree, reducing the company's cost for the retiree to $6 for the year.
"It's hard to believe that any of this was an accident or an oversight," said Rep. George Miller (D., Calif.).
More accounting sleight-of-hand, from the people who brought you Halliburton's magically overpriced Kuwaiti gasoline and the energy policymakers and generous Bush-Cheney campaign donors of bankrupt Enron.