This entry was originally posted on Monday, March 29, at 11:30pm. I’ve UPDATED it at the end with a glance at the financial impact of this news on AT&T, Caterpillar, 3M, and Deere & Company.
So, I read this article and fully understand why people prefer phrasemongering. This shit is dull. But really, if you want to figure out whether healthcare is good or bad for people and employers, you’ve got to pay attention to this stuff. And, unfortunately, you sometimes might still need an interpreter. I’ll do my best to drop some MBA larnin on ya. Please feel free to comment if I get something wrong, or it isn’t clear.
As part of Medicare Part D, which provides supplemental drug insurance to seniors, companies that provide their retirees with their own prescription drug benefits get both a subsidy and a tax credit for providing the coverage. They get a tax credit, even though they aren’t paying the full cost of the benefit, because the government wanted to give them an incentive to keep seniors on private plans, off of Medicare Part D.
Starting in 2013, the subsidy to help companies pay for retiree prescription drug benefits will continue. But the tax credit will go away. So, yes, it will cost companies something in the form of higher taxes. It won’t cost them anything in cash until then.
But, accounting rules require that when there is a regulatory change like this, you have to estimate the total future cost and post it to your financial statements. Now. (Not the full dollar amount forever into the future; it gets discounted because it is cheaper to pay somebody a dollar in a year from now than it is to pay a dollar now–paying that dollar another year later makes it worth less, etc…) So what will be a cash cost in 2013 and later needs to be recorded as an expense today, but discounted because dollars in the future are worth less than dollars today. Got it?
So the companies need to reduce their paper profits today. That is what they are complaining about. Yes, even though we are only talking about paper profits, this is still cause for complaint, because it will eventually cost them some cash money in higher taxes.
But. How much it will cost them is very difficult for anybody to calculate. Actuaries calculate this, and it is important to understand that actuaries have to make assumptions about the future in their calculations. For one thing, they have to make an estimate, a highly educated guess, about when retirees will die.
A retiree’s lifespan will obviously have an impact on how long a company is paying the benefit, so a guess about when they will die is relevant. And there are other assumptions to make, too. The actuary’s job is to make assumptions with the best statistics and as little bias as possible, but in real life it doesn’t work that way. A chief financial officer might look at the actuary’s estimate, decide it is too low or too high, and ask the actuary to change the assumptions in order to tweak the outcome. And, since the CFO pays the actuary, how much do you think the actuary will fight the CFO? A little, for the sake of professionalism, but not enough to risk losing the CFO as a paying client.
So yes, these numbers that AT&T and Caterpillar are complaining about can be manipulated… or tweaked, to use a nicer word. Not only that, good financial analysts and smart investors (admittedly a small group, and I don’t include myself in it) automatically assume these calculations were manipulated. The manipulation can make the numbers look better or worse, depending on what the company needs to report that quarter.
And the fact that they have the numbers ready to go so fast means they were prepared ahead of time to drop this news at a calculated moment. If they really want this section of the healthcare law repealed, it is obvious that they will want to make this impact look really bad.
So will it really cost them what they say it will cost them? We don’t know, but I have my doubts. At the very least, these numbers reflect worst case assumptions. The timing of these announcements outs them as politically motivated. This isn’t automatically a bad thing. If I weren’t politically motivated, I wouldn’t be writing this blog! But just remember that you have to take these estimates on the future cost of healthcare policy change with several grains of salt. If we keep in mind their incentives to make it look worse than it is, and if we recognize that they have the ability to make it look worse than it is, we can be much better critical thinkers.
The point of my post above is that managers are not going to give us an objective read on the effect of politically charged policy changes. So, what about investors? Investors lack the depth of information that managers have, but they are motivated to make money. Their political views are usually not reflected in the bid-ask spread for a security. I’m certainly not saying that investors are unbiased. But their biases are going to be different.
AT&T (ATT): Stock price closed 0.11% higher on Friday, Mar 26, than it opened on Monday, Mar 22. That’s basically flat. AT&T’s market capitalization is $1.21B. I couldn’t make out the timing of AT&T’s announcement on Google Finance.
Caterpillar (CAT): It was a big week for CAT; the stock price climbed 5.17% (mostly on Monday and Tuesday, along with many other industrials on the basis of economic recovery optimism). They made their healthcare tax cost announcement on Wednesday, March 24, and the market, apparently, said “meh.” No significant losses.
3M (MMM): 3M posted non-trivial losses of 1.17% last week. Most of those losses were incurred on Thursday. The biggest Thursday news from 3M was that their CEO’s pay increased 21% in 2009 (all in bonus and options), and they spent $440,000 in lobbying in the Q4. Their announcement about healthcare charges was widely reported at the end of the day on Friday. The company said the tax change cost them 12 cents/share, which is a lot. The market didn’t seem to agree.
Deere & Company (DE): Deere gained 2.66% over the week. They made their healthcare charge announcement on Thursday, at the beginning of the day. They lost some ground at the end of the day. If those losses were related to healthcare charges, this was an uncharacteristically slow reaction in the market.
What to make of the effects of the tax change on these companies? Here’s a general recap from Market Watch. It makes sense.