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Gauging the Reach of Reform

CFOs are still mulling the impact of health-care reform, with little immediate visibility.
Alix Stuart and Marie Leone, CFO Magazine
May 1, 2010

If the battle over the passage of the Patient Protection and Affordable Care Act, aka health-care reform, seemed endless, assessing its impact on companies may require even more patience. Finance executives are trying to understand what PPACA means for their companies, but so far that has not been easy.

"People have asked me, 'Do we have a Cadillac plan?'" says Joel Quall, corporate controller at Knight Capital Group, referring to the high-value health plans that will eventually incur a 40% excise tax. "I've looked, and I can't tell if we do or not."

Quall says that while some of the 800 employees at the electronic trading services firm praise certain elements of the legislation, such as being able to cover children up to age 26 and the lifting of lifetime caps on insurance coverage (an issue that resonates personally for Quall, who saw his late father worry about such limits during a protracted series of cancer treatments), others are concerned that their premiums will increase, or that they will have to pay more in taxes.

Even CFOs in the health-care industry say the effects of the new laws are unclear. Tenet Healthcare saw its stock reach a 12-month high when the new legislation was passed, but CFO Biggs Porter admits that weighing the positive effects against the negative is very subjective and will be better understood over time.

Some executives fear their companies will miss out on even the positive effects. Mike Mitternight, head of Louisiana-based Factory Service Agency, a heating and air-conditioning service firm with about 10 workers, pays 100% of health-care coverage for his employees, at a cost of more than $4,000 per month. He says the new 50% tax credit for businesses with 25 or fewer employees likely won't apply to his firm, since his workers make more than the required $25,000 annual average cap. He also notes that a tax credit won't help unprofitable businesses, and may prove frustrating when monthly cash flow is tight, since the credit would be available only annually. "For a small business, cash flow can make or break you," he says.

When water- and air-treatment equipment maker Rainsoft renegotiated its health-care insurance late last year, the private-equity-backed firm faced a 20% increase to cover its 175 employees — and that was after negotiations. CFO Cal Stuart believes such increases represent a preemptive strike on the part of the insurance companies, and fears the new law does not do enough to limit rising health-care costs. "We feel that, to a certain extent, we've already felt some of the impact of this reform," he says.

Despite the uncertainty, few CFOs say they plan to change their current insurance offerings at this point. In late March, a group of 300 large companies pushed for repeal of one part of the law that reduces tax breaks for companies that cover retired workers' prescription costs, citing substantial first-quarter accounting charges as being prohibitively costly. But Credit Suisse analyst David Zion cautioned investors in a recent report not to overreact to the large write-downs, which they said are due to a quirk in accounting rules that require companies to recognize the present value today of a cost that will likely extend out many years into the future.

Company valuations will be little affected by the elimination of a tax deduction for drug subsidies.


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