Subsidies To Employers Under Medicare Law Could Save Companies Combined $11.8B

Eighteen large U.S. companies have estimated in their 2003 financial reports that the new Medicare law would save them more than a combined $11.8 billion in retiree benefit costs, according to a Bear Stearns report released on Monday, Dow Jones/Wall Street Journal reports (Wei, Dow Jones/Wall Street Journal, 3/22). A provision in the Medicare law, included to encourage companies to maintain retiree prescription drug coverage, calls for the federal government in 2006 to provide subsidies to companies to cover 28% of the cost of prescription drugs that exceed $250 for each retiree; the companies can receive as much as $1,330 per retiree each year (Kaiser Daily Health Policy Report, 3/16). Earlier in the month, the Financial Accounting Standards Board proposed a guideline that would allow companies that provide certain prescription drug benefits to retirees to record the amount they expect to receive under the Medicare law as a reduction of their future health care liabilities. According to the guideline, companies should treat the reduction in future retiree health care costs as an actuarial gain. As a result, most companies will amortize the financial benefit of the Medicare law in their profit and loss statements over the average working lives of their employees, rather than as a one-time increase in income (Kaiser Daily Health Policy Report, 3/15). The guidelines remain open for comment until April 12, and a final rule will take effect in late April or May.

Some Companies Estimate Savings
Officials for General Motors have estimated that the Medicare law would save the company more than $4 billion, and officials for Ford Motor said in documents filed with the Securities and Exchange Commission on March 12 that the law would save the company $1.8 billion as of Dec. 31. In addition, AMR, the parent company of American Airlines, expects to save $415 million and UAL, the parent company of United Airlines, expects to save $280 million. However, Edward Pudlowski, head of Ernst & Young's health care and benefits practice in Dallas, said that the "vast majority of companies have deferred recognizing the Medicare effects in their year-end financial reports as they are waiting for both the accounting guidance and guidance from regulators on how exactly the Medicare plan will work," the Dow Jones/Wall Street Journal reports. Federal regulators will determine whether retiree benefits offered by companies are equal to the standard Medicare prescription drug benefit, a condition that would make companies eligible to receive subsidies under the Medicare law (Dow Jones/Wall Street Journal, 3/22).