Biotech Values

[DewDiligence]

If you don’t like the numbers, challenge the accounting! That’s the mantra in Washington, evidently.

http://www.ft.com/cms/s/0/1dd3c37c-3a90-11df-b6d5-00144feabdc0.html

›Washington Challenges US Companies’ Healthcare Charges

By Stephanie Kirchgaessner in Washington, Hal Weitzman in Chicago and Jeremy Lemer in New York
March 28 2010 20:40

Large US corporations that have announced they will take charges this quarter because of healthcare reform, which was passed into law last week, are exaggerating the negative impact of the legislation, a top aide to President Barack Obama has said.

Valerie Jarrett said in an interview on ABC News that a provision in the new law, which will change the amount of tax companies can deduct on a government subsidy they use to help pay for pensioner drug benefits, was “nothing compared to the enormous financial benefits” the companies would receive under other measures included in the legislation.

AT&T, the US telecommunications group, announced on Friday that it would take a $1bn non-cash charge in the first quarter to account for the change, which comes into effect in 2013.

Verizon, another telecoms company, also said its costs would increase in the short term. Caterpillar, the largest maker of earth-moving equipment and a vociferous critic of healthcare reform, said it would take a $100m charge, while John Deere, the world’s biggest maker of agriculture equipment, said it would see a $150m charge.

The announcements are a political sore point for the Obama administration and Democrats on Capitol Hill, who have insisted that healthcare reform will expand healthcare coverage and bring down costs.

Democratic lawmakers have asked Verizon, Caterpillar and John Deere to hand over more information about how they have historically accounted for the subsidy on Medicare drug benefits for their retired workers in an attempt to challenge the companies’ assertions.

Companies began receiving the subsidy under a 2003 law that was passed during the Bush administration.

Under the old law, companies received a 28 per cent tax-free subsidy if they continued to provide prescription drug coverage to their retired workers on Medicare, the government-sponsored insurance programme for the elderly.

In other words, under the old law, for every $100 that a company spent on Medicare drug costs, it received $28 from the government, which was tax-free. In addition, it could take a full tax deduction on the $100 it spent on drug costs.

Under the new law, the subsidy will still be tax-free, but can no longer be deducted on taxes. [I get what this means, but there must have been a clearer was to say this.]

Politicians are not the only ones who are playing down the projected financial impact of the bill on large companies. In a report entitled “Don’t overreact to the hit on earnings”, Credit Suisse analyst David Zion said the effect on corporate results expected this quarter was, in effect, the recognition of a future tax increase that was being put into current period results.

Mr Zion estimates that 45 companies in the S&P 500 may take a charge of more than 10 per cent of their consensus first-quarter earnings estimates.

However, he found only eight companies in which the estimated charge on earnings would be more than 0.5 per cent of the market capitalisation of the company.

S&P 500 companies may have to pay an additional $361m in taxes in 2013 as a result of the change, and $2.8bn in additional tax through 2019, with telecoms and utilities and industrial sectors accounting for 63 per cent of the new tax, said Mr Zion.‹