Commerce Secretary, Gary Locke, Explains Impact of New Health Care Legislation on Businesses
In today’s Wall Street Journal, Secretary of Commerce Gary Locke explains the impact of the new health care legislation on businesses. Here’s the text of his op-ed:
Don’t Believe the Writedown Hype
Taken as a whole, health reform is undeniably pro business and pro jobs.
By GARY LOCKE
President Obama began his campaign to reform the American health-care system focused on three goals: protecting Americans’ choice of doctors and health plans, assuring quality and affordable health care for all Americans, and reducing costs for families and businesses.
The new comprehensive health-care legislation meets these goals, and will significantly benefit American businesses by slowing and eventually reversing the tide of crippling premium increases washing over our nation’s employers.
These cost savings are real. They will grow over time. And they will make U.S. businesses more competitive.
First, by drastically cutting the number of uninsured, this law reduces the hidden tax of about $1,000 for family coverage that those with insurance pay to cover the cost of the uninsured who rely on emergency rooms for care.
Second, the law invests $5 billion in a new reinsurance program for early retirees starting this year. For employers paying for their retirees between ages 55-64, this provision will directly reduce family premiums by as much as $1,200.
Third, the new law contains numerous reforms that a 2009 study by the Business Roundtable—an association of CEOs of leading U.S. companies—says will help slow the growth rate of health costs over time.
It places a fee on insurance companies’ most expensive plans that independent experts agree will put downward pressure on the long-term growth of health costs.
It empowers an Independent Payment Advisory Board to keep Medicare cost growth in check and promote payment and health delivery system reforms. And it realigns incentives to reward medical providers for the value, not the volume, of their care.
Based on the midrange estimates of the nonpartisan Congressional Budget Office (CBO), the present value benefit of the premium reductions from these reforms over the next three decades is in excess of $200 billion.
Add these system-wide reforms with measures like the $40 billion in tax credits that will be available to about four million small businesses over the next decade to help cover the cost of employee health coverage, and what you have is a law that is unquestionably pro-business and pro-jobs.
However, in recent days, critics have seized on a minor provision in the law to suggest it’s already increasing health-care costs for businesses. A fair reading of this provision suggests that its actual impact is quite modest, and far outweighed by the benefits for large businesses outlined above.
Let’s explain how this started. When the Medicare Part D prescription drug bill passed in 2003, businesses were given a double subsidy to help cover the cost of providing prescription drug coverage to their retirees. The government picked up 28% of the cost of their retiree prescription drug plans, and businesses were allowed to both exclude that 28% subsidy from their income and at the same time deduct that subsidy from their income for tax purposes.
In 2013, that changes. Under the new law, businesses will still get the same 28% subsidy, and it will still be tax free. They just don’t get to deduct the subsidy.
Seems reasonable, right? This is how virtually every other federal subsidy for businesses and individuals is treated by the IRS. Indeed, Donald Marron, acting CBO director for President George W. Bush, put it this way: “[A]s the Joint Committee on Taxation recently noted, that treatment is highly unusual. In my view, it’s right that the recent health legislation closed that loophole.”
This change has garnered recent headlines because, to comply with accounting laws, companies affected by the provision have taken a one-time charge reflecting the loss of future tax deductions over the decades-long duration of their retiree health-care plans. Critics have seized on this accounting adjustment to suggest these costs—as much as $1 billion in one company’s case—are going to place immediate and substantial cost burdens on America’s businesses.
This is disingenuous.
The actual cash flow impact of these provisions begins in 2013, and is only a tiny fraction of the accounting charge-offs.
This newspaper reported last Friday that while one company calculated a $100 million hit to its first-quarter earnings, its actual cost after taxes and subsidies, beginning in 2013, was closer to $7 million a year, or less than 1% of its profits last year.
Credit Suisse’s response to the tax controversy was: “don’t overreact to the hit on earnings.” Morgan Stanley referred to it as “noise” that would have “no impact whatsoever” on their view of this earnings cycle. And UBS projected that the impact in virtually all cases represented less than 1% of market capitalization for affected companies.
When you look past the hype and the overheated rhetoric, the benefits of the health reforms for America’s businesses large and small far outweigh the impact of this small tax provision.
And while critics have rushed to highlight this small accounting measure, they conveniently leave out the one fact on which every serious health-care analyst agrees: The status quo was completely unsustainable for American businesses.
The Business Roundtable study said that if current cost trends continued through 2019, the total cost of employer and employee premiums and out-of-pocket expenses would be 166% higher than it is today.
That would either force companies to decrease or eliminate employee health-insurance benefits or subject them to back-breaking costs that would make them less competitive in the global marketplace.
The bill President Obama signed into law last week helps avoid each of these equally unappealing options.
I understand that in these difficult economic times, the potential for any additional expense is not welcomed by American businesses. But in the long run, the health insurance reform law promises to cut health-care costs for U.S. businesses, not expand them.
That’s good for them. That’s good for their employees. That’s good for America.
Mr. Locke is the Commerce Secretary of the United States.