FedUpUSA

Archive for May 6th, 2010

Fortune

(Fortune) — The great mystery surrounding the historic health care bill is how the corporations that provide coverage for most Americans — coverage they know and prize — will react to the new law’s radically different regime of subsidies, penalties, and taxes. Now, we’re getting a remarkable inside look at the options AT&T, Deere, and other big companies are weighing to deal with the new legislation.

Internal documents recently reviewed by Fortune, originally requested by Congress, show what the bill’s critics predicted, and what its champions dreaded: many large companies are examining a course that was heretofore unthinkable, dumping the health care coverage they provide to their workers in exchange for paying penalty fees to the government.

That would dismantle the employer-based system that has reigned since World War II. It would also seem to contradict President Obama’s statements that Americans who like their current plans could keep them. And as we’ll see, it would hugely magnify the projected costs for the bill, which controls deficits only by assuming that America’s employers would remain the backbone of the nation’s health care system.

Hence, health-care reform risks becoming a victim of unintended consequences. Amazingly, the corporate documents that prove this point became public because of a different set of unintended consequences: they told a story far different than the one the politicians who demanded them expected.

Why the write-downs happened but the hearings didn’t

In the days after President Obama signed the bill on March 24, a number of companies announced big write downs due to some fiscal changes it ushered in. The legislation eliminated a company’s right to deduct the federal retiree drug-benefit subsidy from their corporate taxes. That reduced projected revenue. As a result, AT&T (T, Fortune 500) and Verizon (VZ, Fortune 500) took well-publicized charges of around $1 billion.

The announcements greatly annoyed Representative Henry Waxman, who accused the companies of using the big numbers to exaggerate health care reform’s burden on employers. Waxman, chairman of the House Energy and Commerce Committee, demanded that they turn over their confidential memos, and summoned their top executives for hearings.

But Waxman didn’t simply request documents related to the write down issue. He wanted every document the companies created that discussed what the bill would do to their most uncontrollable expense: healthcare costs.

The request yielded 1,100 pages of documents from four major employers: AT&T, Verizon, Caterpillar and Deere (DE, Fortune 500). No sooner did the Democrats on the Energy Committee read them than they abruptly cancelled the hearings. On April 14, the Committee’s majority staff issued a memo stating that the write downs were “proper and in accordance with SEC rules.” The committee also stated that the memos took a generally sunny view of the new legislation. The documents, said the Democrats’ memo, show that “the overall impact of health reform on large employers could be beneficial.”

Nowhere in the five-page report did the majority staff mention that not one, but all four companies, were weighing the costs and benefits of dropping their coverage.

AT&T produced a PowerPoint slide entitled “Medical Cost Versus No Coverage Penalty.” A document prepared for Verizon by consulting firm Hewitt Resources stated, “Even though the proposed assessments [on companies that do not provide health care] are material, they are modest when compared to the average cost of health care,” and that to avoid costs and regulations, “employers may consider exiting the health care market and send employees to the Exchanges.” (Under the new bill, employees who lose their coverage will purchase health care through state-run exchanges.)

Kenneth Huhn, vice president of labor relations at Deere, said in an internal email that his company should look at the alternatives to providing health benefits, which “would amount to denying coverage and just paying the penalty,” and that he felt he already had the ability to make this change under his company’s labor agreement. Caterpillar felt it would have to give “serious consideration” to the penalty option.

It’s these analyses — which show it’s a lot cheaper to “pay” than to “play” — that threaten to overthrow the traditional architecture of health care.

The cost side

Indeed, companies are far more likely to cease providing coverage if they predict the bill will lift rather than flatten the cost curve. Deere, for example said, “We do expect double digit health care increases as most Americans will now have insurance and providers try to absorb the 15% uninsured into a practice.”

Both Caterpillar (CAT, Fortune 500) and Verizon believe the requirement to allow dependents to remain on their parents’ policies until age 26 will prove costly. Caterpillar puts the added expense at $20 million a year.

How two new taxes and the employer penalty change the health care calculus

First, there is the “Cadillac Tax” on expensive plans. This is a 40% excise tax on policies that cost over $8,500 for an individual or $23,000 for a family. Verizon’s document predicts the tax will cost its employees $255 million a year when it starts in 2018, and rise sharply from there. Hewitt also isn’t sure that Verizon can pass on the full tax to its employees; so it could impose a heavy weight on the company as well. “Many [have] characterized this tax as a pass-through to the consumer,” says the Verizon document. “However, there will be significant legal and bargaining risks to overcome for this to be the case for Verizon.”

In a statement to Fortune, Verizon said it is not, “considering or even contemplating” the plans laid out in the report, though records show the company did send the report to its board shortly after the reform plan was passed by Congress.

Second, the bill imposes new taxes on drug manufacturers, medical device-makers, and health insurance providers. Hewitt leaves little doubt Verizon will be paying for them: “These provisions are fees or excise taxes that will be shifted to employers through increased fees and rates.”

Caterpillar and AT&T actually spell out the cost differences: Caterpillar did its estimate in November, when the most likely legislation would have imposed an 8% payroll tax on companies that do not provide coverage. Even with that immense penalty, Caterpillar stated that it could shave $25 million a year, or almost 10% from its bill. Now, because the $2,000 is far lower than 8%, it could reduce its bill by over 70%, by Fortune’s estimate. Caterpillar did not respond to a request for comment.

AT&T revealed that it spends $2.4 billion a year on coverage for its almost 300,000 active employees, a number that would fall to $600 million if AT&T stopped providing health care coverage and paid the penalty option instead. AT&T declined comment.

So what happens to the employees who get dropped?

And why didn’t these big employers drop employee coverage a long time ago? The Congressional Budget Office, in its crucial cost estimates of the bill, projected that company plans will cover more employees ten years from now than today. The reason the bill doesn’t add to the deficit, the CBO states, is that fewer than 25 million Americans will be collecting the subsidies the bill mandates in 2020.

Those subsidies are indeed big: families of four earning between $22,000 and $88,000 would pay between 2% and 9.5% of their incomes on premiums; the federal government would pay the rest. So policies for a family making $66,000 would cost them just $5,300 a year with the government picking up the difference: more than $10,000 by most estimates.

As bean counters know, that’s not a bad deal for a company’s rank-and-file, and it’s a great deal for the companies themselves. In a competitive labor market, the employers that shed their plans will need to give their employees a big raise, and those raises could be higher, even after taxes, than the premiums the employees will pay in the exchanges.

What does it mean for health care reform if the employer-sponsored regime collapses? By Fortune’s reckoning, each person who’s dropped would cost the government an average of around $2,100 after deducting the extra taxes collected on their additional pay. So if 50% of people covered by company plans get dumped, federal health care costs will rise by $160 billion a year in 2016, in addition to the $93 billion in subsidies already forecast by the CBO. Of course, as we’ve seen throughout the health care reform process, it’s impossible to know for certain what the unintended consequences of these actions will be.

Moral Hazard –> Mortal Hazard

Posted by Karl Denninger

“Kick the can”
“Quantitative easing”
“Bail ‘em out”
“The system needs the taxpayer to help it”

The Greeks have rendered their verdict on this sort of thing with molotov cocktails, murder and mayhem.

Let’s take a critical view of this: Was it murder and mayhem, or was it justified violence?

Wait a second: All violence is not justified, right?

Well, no.  If someone kicks your door in at 3:00 AM intending to rape your wife, and you shoot them, that’s certainly violence.  But most people would call it justified violence – that is, lawful self-defense.

On the other hand if you’re walking peaceably down the street, someone decides they want your wallet, and they proceed to mug you, that’s clearly criminal violence – even if the person doing the mugging is dead broke and starving.

This is a bit more complicated.  The Greeks have had decades of ever-increasing entitlement.  The government has conspired with private parties, most particularly the largest and most-powerful banking interests in the world, with the intent (and execution) of falsely misrepresenting fiscal health.  The ECB and rest of the Europeans intentionally went along with what they had to know was radically cooked books.

Having habituated the economy to the government spending money it didn’t have, just like a heroin junkie when the drugs stop flowing the response was not something suitable for polite company. 

The lesson contained within this sad episode is that we have committed the same sins here in America, as have other nations around the world.  Repeatedly we have believed that the solution to too much debt is more debt.  The merchants of that debt have become entrenched and privileged within our governments, and have bent the ear of politicians (either through persuasion or outright bribery of various sorts) in furtherance of their schemes.

I know I keep coming back to this series of charts, but it is damn important as the key to the puzzle palace is found right here:

The last time we had a positive economic environment was 2000.  The 1990s in fact, despite the fraud and games in the Internet sector, grew quickly enough that the government was able to essentially withdraw stimulative efforts entirely.  Productivity and economic output grew quickly enough to displace the government’s efforts from the previous recession. 

But if you notice on that graph above after the 2000 recession the government never pulled back from the spending.  The so-called “recovery” was in fact false:

We never went materially under 4% of GDP from 2002 onward, and as such when the 2007 blowup started the government had no room to maneuver, as is shown by what happened in 2008/2009.

Here’s the composite of both the above overlaid with alleged reported GDP and actual private-demand GDP:

Greece is said to be asking for a program that will reduce everyone’s standard of living by about 20%.

If we withdraw the artificial supports our embedded structural distortion to GDP is slightly over 50% (!) from the last decade.  Not all of this would disappear if we were to withdraw the “borrow and spend”, but a lot of it would.  That is, our $14 trillion GDP isn’t really $14 trillion, it’s closer to $11 trillion when one only counts private demand.

We, like the Greeks, have habituated the economy and people to this unsustainable federal spending.  Social Security, Medicare and Medicaid, along with the solid-gold salaries and pensions in the public sector simply can’t be sustained. 

It doesn’t matter if people want it to be or not.  Math IS.

We may still choose to do what needs to be done voluntarily before it is imposed on us.  We can force those banking institutions to eat their own cooking.  We can expel those in government who were part of the web of scams and fraud from government and take our nation back – peacefully.

We can force the large financials to mark to market – for everything.  We can force all assets back onto balance sheets, and ban by law, with criminal felony penalties, all gaming attempts through “off sheet” vehicles.  We can reverse with the stroke of a pen the CFTC override on state gaming laws that made naked Credit Default Swaps a monstrous casino with no social utility.  And we can demand that any attempt to game claimed asset valuations by claiming non-performing loans are “money good”, as is going on right now with homes where people haven’t made a payment in 2+ years yet their first and HELOC are carried at above recovery value, result in criminal prosecution for bank fraud.  Fannie and Freddy’s hidden gameplaying, which has now cost in losses over two years more than they earned in the previous 30, will end.

Doing so will cause a number of large financial institutions to either disintegrate into their constituent parts, with some worth zero and bond and shareholders getting severely haircut, or if they resist, they will fail.  Home prices will fall to the point where they are truly affordable nationwide, perhaps to as low as 2x incomes on average. 

The average family that decides to live in an austere fashion and save will be able to buy for cash within a decade’s time.

The use of credit and “asset extraction” games as a lifestyle choice will end.

Removing The Bezzle out of the system will also turn force governments to live within its means, as will the people. 

Schools will teach 3Rs instead of installing video games for so-called “physical education”, public pensions will be slashed and despite the whining, adjustments will be made – because they have to be.

Yes, austerity sucks.

But voluntary austerity can be peaceful, even if it’s painful.

Externally-imposed austerity at best usually leads to civil unrest and can result in civil war.  Should the Greek situation result in the police flipping to the side of the demonstrators, they will lose their government.

It’s that close folks.  Right here, right now, and “in your face.”

There are schools closing right now, today, due to being out of money.  That’s right – a month early the kids are going home.  Los Angelas is just about broke, Illinois hasn’t been paying Medicaid bills (or anyone else for that matter) and dozens of other state and local governments are pretending to be solvent and a “going concern” when they are not – usually by failing to pay vendors for extended periods of time. 

We are, right here and right now, in America, on the edge of what is happening in Greece.  I know you’re not being told this on ToutTV, but it is nonetheless true.  Look around you; Illinois cannot even buy ammunition from some vendors for their State Police because they haven’t paid their suppliers, who are now in turn refusing orders.

“Kick the can” is both intellectually dishonest and economically bankrupt.  It has a finite life beyond which it causes destruction instead of (even temporary) redemption or reprieve.

We must stop it now and accept the austerity that must come lest what we now see in Greece come to visit our shores in the coming months and years.

The time for game-playing and clown-car politics has passed; this is a serious time for serious people, not “funtime pumpers” in Washington and on ToutTV.