Maggie's Farm

In the rush to enact ObamaCare, the uproar from Democrats should not be surprising over the few announcements so far by major corporations of billions of dollars of charges for the elimination of part of the Medicare Part D prescription drug coverage subsidy to employers.

Indeed, the Senate Republicans had not featured this explosion in employer costs before the corporations began announcing the charges, nor had the corporations (except Caterpillar).

The Democrats’ motivation to be quiet is evident.  The Republicans had a hard enough time exposing the many real direct federal budget impacts. Major corporations are not, despite liberal assertions, conservative nor brave, probably avoiding the pillorying of them that is now happening from Democrats, heads in the sand when it may have helped avoid the ill consequences to them and their retirees by ObamaCare.

Now, corporations, already under severe pressure from retiree medical plan costs, have to face the music and have further justification and impetus to reduce or abandon their retiree Rx programs. They are imploring Congress to repeal this portion of ObamaCare, but receiving back Obama administration opposition to repeal.

Prescription benefits to employer plan retirees is broader than from Part D. The Part D subsidy to corporations is to encourage corporations to continue their benefits, at a savings to the federal budget and to retirees.

The subsidy will continue.  However, after 2012 corporations will no longer be able to deduct against income that portion of their Rx plans that are subsidized. The Congressional Joint Committee On Taxation’s (JCT) March 20 calculation (page 2) estimates that $4.5 billion higher federal taxes will be paid by corporations between 2013-2019, rising from $400 million to $1 billion a year over that period.

Let’s look deeper into the numbers.

According to the 2009 Medicare Trustees Report, about 19% of those covered by Part D are in the plans of former private employers (excludes TRICARE, VA and FEHB for military and former federal employees), or 6.3 million out of 33.2 million beneficiaries. (page 160)  The employer subsidy amounts to an average $594.54 per enrollee. (page 163)  The subsidy is about 28% of employer retiree plan drug expenses.  So, the total 2009 employer retiree Rx cost in 2009 is about $2123.36 per covered retiree, or $13.4 billion.

Congressionally mandated accounting rules require employers to take current charges for the future actuarial costs of their retirement programs. Depending on the employer’s present and forecast tax bracket, each employer offering a retiree Rx program must add up to 35% or more to their tax liability for the program for the future years.  Hence the charge that employers must now take and fund is cumulatively many multiples of the $4.5 billion initial eight year increased taxes that proponents of passing ObamaCare depended  upon.  The exact amount will not emerge until all companies finish their calculations, but the $1 billion charge to AT&T alone gives us some idea of the cumulative effect.

Now, let’s look at the impact on the federal budget if all the corporations now offering retiree Rx coverage abandon their program. They should be expected to be looking at that, even more favorably now than before ObamaCare.

According to the 2009 Medicare Trustees Report, total benefit payments, including the employer subsidy, was $50 billion in 2008 (expected to increase to $140 billion in 2018).  Subtracting the entire $3.7 billion subsidy, that leaves $46.3 billion. Divide that by the 26.9 million Part D beneficiaries not covered by a subsidized employer retiree Rx plan, and you get $1721.19 budget cost per enrollee.  Let’s subtract 10% from that as a guesstimate that retirees from employers may be healthier than the other average Part D beneficiaries, and that Medicare Part D benefits are lower (though increased by ObamaCare in future years to nearer parity), and you get $1549.07.  That is $954.53 higher than the subsidy, or would have meant $6 billion increased federal budget expense in 2008, an increase of 12% if private employers had abandoned their retiree Rx programs in 2008.

Multiply that $6 billion and increase it for an average annual 7% increase in prescription costs, 7% being the Medicare estimate, and you have literally hundreds of billions of dollars of increased federal expenses, further deepening the already intolerable projected budget deficits.

The CBO estimate of ObamaCare depended upon the JCT estimate for the initial costs of ObamaCare, and did not take into account employers consequently being motivated to cease their retiree Rx programs.

Corporate, Medicare and other actuaries will be working and reworking the actual figures as this debacle unfolds.  Actual impacts may well be less than the above worst case, but the dimensions are clear.

As we can see with regards to Part D as well as most other portions of ObamaCare, to believe in the incomplete CBO forecasts or the Democrats’ thinly veiled promises deserves a big Part D for Dummy.

P.S.: Democrats charge a "CEO Conspiracy". Actually, it's the Democrats' conspiracy to keep you poor and stupid.  Doesn't seem to be working.

P.P.S.: The New York Times editorializes that the eliminated Part D tax break is "double dipping."  The NYTs conveniently, totally ignores that it saves the federal budget many tens of billions of dollars, while helping to continue better retiree Rx benefits.  The NYTs asserts that, after all, " If some retirees do lose their company drug benefits, they can buy government-subsidized coverage in Medicare..." and the added cost to taxpayers is irrelevant to the NYTs.