Medicare Watch

[Guest guest]

Hi folks,

Since the Medicare reform bill was passed a few weeks ago, it seems that

more and more information is coming out about some of the less

publicized effects of the law.

Because many of us are disabled and/or seniors therefore, dependent on

Medicare, I think it is important that we keep ourselves informed about

this law.

The original publicity reassured the retired and disabled who received

private drug benefits from former employers that money had been alloted

in the law for companies to continue existing drug plans.

However, this article from today's Wall Street Journal states:

" 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. "

Ellen

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http://online.wsj.com/article/0,,SB107350927860976500,00.html?mod=sp%2Drmkmedica\

re%5Fl

U.S. Drug Subsidy Benefits Employers

By ELLEN E. SCHULTZ and THEO FRANCIS

Staff Reporters of THE WALL STREET JOURNAL

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.

The subsidy won't be paid for another two years, but the Financial

Accounting Standards Board of Norwalk, Conn., gave permission Wednesday

for companies to book the value of their anticipated government payments

in 2003 financial statements, if they believe they can accurately

predict the effect of the 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.

GM won't report the impact of the Medicare subsidy in its 2003 year-end

results but will sometime later, said Toni Simonetti, a spokeswoman for

the auto maker.

With roughly 440,000 retirees and dependents receiving health coverage,

" our retiree medical expenses are going up despite the Medicare relief, "

she said.

A Dow Chemical spokeswoman said the company is still calculating the

effect of the subsidy, which would be reflected in the year-end 2003

financial statement released on Jan. 29, but not on the income

statement. The spokeswoman said the effect of the subsidy would be

recognized as an actuarial gain over 10 to 15 years.

The new federal program calls for employers to be reimbursed for 28% of

the cost for prescriptions of more than $250 per retiree, up to an

annual subsidy of $1,330 per retiree, beginning in 2006. The subsidy

will be significant at companies with thousands of retirees ages 65 or

older, because prescription-drug costs make up a large part of the

expenses that employers incur for seniors under their retiree medical

plans.

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. (D., Calif.).

Benefits consultants confirm they are working out the details necessary

to structure drug-benefits programs to take advantage of this quirk in

the legislation. If a company can hold its costs to 40% to 50% of each

retiree's prescription costs, shifting the rest to the retirees, the

subsidy means " there is virtually no cost to the employer in setting up

a plan like that, " said Mark Beilke, director of employee benefits

research at benefits-consulting firm Milliman USA.

But he said he didn't expect employers to use the new federal program to

cut benefits. " It will keep employers offering whatever it is that they

offer now and possibly offering more -- or offering plans where there

aren't any " currently, Mr. Beilke said.

Critics of the legislation said that is unlikely. " It is unconscionable

for companies to receive billions of dollars in corporate welfare

courtesy of the American taxpayer by slashing prescription-drug coverage

and retiree health benefits, " said Rep. Bernie , an independent

from Vermont.

In December, the FASB had said it might not let companies start

reporting the effect of the Medicare savings until sometime in the

future, because it was premature for employers to estimate the subsidy.

But companies with big retiree health obligations, including SBC, asked

the standard-setters for permission to report the savings in their 2003

financial results. " It's important to provide the best information to

shareholders, " said s, SBC's comptroller.

Under FASB's move Wednesday, companies accounting for the subsidy in

2003 must disclose the effect on a separate line on the income

statement.

In booking the payments, companies will use the value of the projected

subsidies to offset liabilities previously recorded to reflect drug

benefits they promised retirees.

Reversing the liability will generate a noncash accounting gain that

flows to net income.

Those that don't believe they currently can estimate the subsidy are to

wait for additional guidelines from the accounting board, including over

such issues as whether companies must take any resulting gains

immediately or can spread them over years, said Durbin, an FASB

practice fellow.

Write to Ellen E. Schultz at ellen.schultz@... and Theo Francis at

theo.francis@...

Updated January 8, 2004

   

[Guest guest]

Yep, it knocked my disibility down by about $66, so even lower than

this year. No increase. A decrease.

> Hi folks,

> Since the Medicare reform bill was passed a few weeks ago, it seems that

> more and more information is coming out about some of the less

> publicized effects of the law.

>

>