Health Care Costs and the Manufacturing Fallout

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Macroeconomics

More than a week has passed since the US House of Representatives helped pass comprehensive health reform legislation that President Obama promptly signed into law. We wanted to wait for some of the hoopla to die down to figure out what the bottom line impact of the reform will have on manufacturers as a whole, and metal producers in particular. After reading several articles in this week’s Economist, among others, two elements of the reform bill appear most contentious. The first involves the notion that health-care must be provided by employers (and not via some other mechanism) and second that the bill does little to actually control costs, which we would argue remain essential to any successful public policy around health care. Manufacturers have publicly announced some hefty charges to earnings in the current quarter including Caterpillar and Deere with $250m, according to the Wall Street Journal. AK Steel said it too would take a charge of $31m for the first quarter. Large industrial manufacturers 3M and Honeywell will each take a $90m charge and Honeywell’s will include a $.04-.05 per share charge when they next report earnings.

Small employers will also feel the impact of the legislation, “It will raise, not lower, insurance costs and it will increase both taxes and the cost of doing business for the very people they said they wanted to help ” small business,” said Susan Eckerly, spokeswoman for the Washington, D.C.- based National Federation of Independent Business, in a written statement.

Supporters of the legislation believe the benefits far outweigh the costs but the specific cost impact to manufacturers include the following (from the National Association of Manufacturers website):

  • Excise taxes on health insurance plans which would adversely impact many companies with older workforces and/or smaller self-insured plans.
  • Increase in and expansion of the Medicare hospital insurance (HI) tax, which would increase taxes on investment income and unfairly target some 70 percent of U.S. manufacturers that file taxes at the individual rate.
  • Limits on Flexible Spending Accounts (FSAs) that would curb design flexibility options for manufacturers and place an immediate tax increase on employees that use these tools.
  • New industry-specific fees that single out particular industries to pay for health care reform.
  • Repeal of the tax exclusion for prescription drug subsidies, which would significantly increase employers’ costs and make it more difficult for them to continue offering health benefits to their retirees.

Medical device manufacturers, of course will take an even bigger hit with a 2.3% excise tax to go into effect in 2013. Perhaps the device industry will learn to invest more dollars in federal lobbying efforts, which would have likely spared them the onerous and quite frankly, unfair tax burden that they must now bear. So what do all of these costs equate to? Yes, perhaps a more generous society that cares for its most needy and its sick, at least that’s the goal. But with every benefit comes a cost. And that will come in the form of jobs. With uncertainty as to how health reform care taxes, rules and regulations will get implemented, one thing we know for sure businesses will take extra precautions before hiring new workers¦.perhaps to identify ways they can pare back costs further to make up for the new legislation.

–Lisa Reisman

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