Health Care Reform Critics Were More Than Justified Over Cost Criticism and Burden Shifting

I wish "I told you so" means something, but I told you so. You were warned that health care costs would soar and that companies would consider dropping their health care coverages for employees because they would see the costs of maintaining the health care benefits were greater than the penalties that the government was imposing. It would be cheaper for the companies to dump the employee benefits on the government. Well, four of the largest companies in the nation were examining their options:

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.

Incidentally, this would mean that the coverage that those employees received would be quite different from what they had been accustomed to, and that was one of the things that the Administration and backers had been claiming all along would not happen, even though the legislation explicitly allows companies and individuals to reevaluate their position at the end of their existing coverage periods (which is an annual occurrence).

Congressional Democrats cancelled their hearings on the matter because the information that the companies provided would have blown the lid off this fact that everyone was dreading - that the government would be saddled with costs that it simply didn't account for and could not afford because companies would shift the burden onto the government.

Hewitt, which produced the Verizon review, also provides such health care processing for a wide range of Fortune 500 companies, and if they reached the conclusion for Verizon, you can be sure that other large companies were going to reach similar conclusions and make similar considerations. So, while Verizon is saying that for now they're not going to drop coverages and shift employees into the exchanges, if they see that the costs are increasing as a result of the HCR changes, they may take the penalties rather than see their companies get hit with higher health care costs (which will get passed on to their employees).

UPDATE:
As if all that wasn't enough, the paperwork obligations of all businesses will increase significantly due to provisions of the recently enacted health care bill beginning in 2012.

Right now, the IRS Form 1099 is used to document income for individual workers other than wages and salaries. Freelancers receive them each year from their clients, and businesses issue them to the independent contractors they hire.

But under the new rules, if a freelance designer buys a new iMac from the Apple Store, they'll have to send Apple a 1099. A laundromat that buys soap each week from a local distributor will have to send the supplier a 1099 at the end of the year tallying up their purchases.

The bill makes two key changes to how 1099s are used. First, it expands their scope by using them to track payments not only for services but also for tangible goods. Plus, it requires that 1099s be issued not just to individuals, but also to corporations.

Taken together, the two seemingly small changes will require millions of additional forms to be sent out.

"It's a pretty heavy administrative burden," particularly for small businesses without large in-house accounting staffs, says Bill Rys, tax counsel for the National Federation of Independent Businesses.

Eliminating the goods exemption could launch an avalanche of paperwork, he says: "If you cater a lunch for other businesses every Wednesday, say, that's a lot of information to keep track of throughout the year."

This isn't some mere drafting error, but a significant burden on all businesses that will require countless more paperwork that does nothing to improve efficiency or productivity. In fact, the net result will be reduced productivity as more effort will necessarily be expended to fulfill the filing requirements.