The health care overhaul will cost U.S. companies as much as $14 billion this year and make them more likely to drop prescription drug coverage for retirees because of a change in how the government subsidizes those benefits.

In the first two days after the law was signed, three major companies – Deere & Co., Caterpillar Inc. and Valero Energy – said they expect to take a total hit of $265 million to account for smaller tax deductions in the future. That hit will be a one-time cost as companies report a new cost estimate for the benefits over the lifespan of all retirees.

With more than 3,500 companies getting the tax break as an incentive to provide coverage, others are certain to announce similar cost hikes as they sort out the impact of the change.

Figuring out what it will mean for retirees will take longer, but analysts said as many as 2 million could lose the prescription drug coverage provided by their former employers, leaving them to enroll in Medicare’s program.

For the government, the tax changes are expected to raise roughly $4.5 billion over the next decade to help pay for the health overhaul. Some of the savings would be negated by retirees enrolling in the Medicare plans.

“You’re increasing the incentive for companies to say ‘We don’t want to be in the health care business any more,’” said James Gelfand, senior manager of health policy for the U.S. Chamber of Commerce, which fought the overhaul.

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American industrial companies that are struggling to compete globally against companies with much lower labor costs are particularly likely to eventually drop retiree coverage, said Gene Imhoff, an accounting professor at the University of Michigan.

“Anything that they can use to justify pushing something away from the employees, pushing it back on the employees or the government, they’re going to do it,” Imhoff said. “I’m not sure you can really blame them for trying to do this.”

Spokesman Jim Dugan said Caterpillar is still studying the health care law and doesn’t yet know what the full impact will be. But he acknowledged that benefit changes are possible.

“Obviously, there’s greater cost pressures on us that could drive changes to plans, but we haven’t made any decisions on that,” Dugan said.

Spokesmen for Deere and Valero said it was to soon to say how the change would affect the benefits they offer retirees.

White House spokesman Robert Gibbs defended the tax law change Thursday, saying the original law allowing companies to write off the subsidies was a “loophole” that will be closed by the health care overhaul.

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When Congress approved the Medicare prescription drug program in 2003, it included government incentives for employers to provide drug benefits to retirees so the public system wouldn’t be overwhelmed. Employers that provide drug benefits for retirees can receive subsidies covering 28 percent of eligible costs.

Under the 2003 law, companies could deduct the entire amount they spent on the drug benefits from their taxable income – including the government subsidy, an average of $665 per retiree.

The health care law signed Tuesday by President Obama prohibits companies from writing off the subsidies starting in 2011, meaning they will no longer be able to deduct them from their taxable income.

For example, if a company spent $100 on benefits, including a $28 government subsidy, it could write off the full $100 on its taxes under the old rules. The new rules would allow the same company to write off only $72.

The follow-up health care bill to reshape parts of the overhaul delays the changes until 2013.

As many as 1.5 million to 2 million retirees could lose the drug benefits provided by their former employer because of the tax changes, according to a study by the Moran Company, a health care consulting firm.

James Klein, president of the American Benefits Council, said between 6 million and 7 million retirees currently get the benefits. But the number of companies offering them has been dwindling for years.

Industry groups say they lobbied hard against the change in the tax rules before it was added to the health care law over the winter. Deere and Caterpillar were among a group of 10 companies that sent a letter to congressional leaders warning of the cost increases.Deere & Co., Caterpillar Inc. and Valero Energy say they expect to take a $265 million hit to account for smaller tax deductions.

 


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