NCPA - National Center for Policy Analysis

Prescription-Drug Law, Healthy Effect on Corporate Finances

March 16, 2004

The Medicare prescription-drug law passed late last year is having a healthy effect on the outlook for corporate finances, say experts. Within the past few weeks, a handful of large companies have reported they expect to collectively save more than $2.5 billion over time, thanks to the new government subsidy for employers that offer prescription-drug benefits to retirees.

These include estimated savings of $572 million at BellSouth, $415 million at AMR Corporation's American Airlines, $300 million to $400 million at Deere & Co., $190 million at Alcoa Inc., $450 million at U.S. Steele Corp., and $500 million at Delphi Corp.

  • The projected savings come from a tax-free subsidy built into the Medicare program, which lawmakers created in an effort to encourage companies to maintain their prescription-drug programs for retirees and prevent Medicare from having to assume their coverage.
  • Even though companies will not receive government cash until 2006, under accounting rules they can estimate the value of the flow of cash over the lives of their current and future retirees, and use that amount to reduce their liabilities; this could enable many companies to enjoy a boost to earnings this year.
  • The subsidy does not discourage companies from cutting benefits and shifting more costs to retirees; what is more, the language of the legislation indicates that employers can be reimbursed even for amounts retirees pay.

BellSouth said it expected the Medicare bill to contribute 10 cents a share to net income this year, after it disclosed a reduction in its retiree medical obligation by $572 million, or 8 percent.

Source: Theo Francis, "Medicare Drug Law Helps Business," Wall Street Journal, March 2, 2004.

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