Risk & Compliance

Survey: Health-Insurance Crisis Looming

Most employers plan to pass some cost hikes on to workers; many small businesses considering dropping coverage entirely. Plus: SEC sues Merrill Lyn...
Stephen TaubMarch 18, 2003

In case you’re still not convinced that health care is the next great corporate crisis, read on.

According to a nationwide survey of 600 large and small businesses, 92 percent say they are likely to increase the amount their employees pay for health-insurance premiums next year.

The study was part of a report for Cover the Uninsured Week, and was released by several business and labor groups and The Robert Wood Johnson Foundation.

The survey found that companies of all sizes expect health-insurance costs to jump an additional 18 percent during the next year. This comes on top of the mid-teens growth forecasts in most surveys these days.

Meanwhile, more than 70 percent of employers say the number of uninsured will grow in the next decade. This is bad news, given that 41 million people were without health-care insurance for all of 2001. That’s an increase of 1.4 million from the previous year, according to the most recent census figures. The rise in the number of uninsured was the largest one-year increase in nearly a decade.

The survey also found that for this year (and the next five years), employees will be expected to pay more of their health-insurance premiums, as well as larger deductibles and co-pays.

This does not mean workers will get stuck paying the entire bill, however. Companies in the survey expect to bear the bulk of the anticipated spikes in health-insurance premiums. The respondents said their companies will pass on just one quarter of the rising expenses to employees.

Other survey findings:

  • To cope with surging health-insurance premiums, 45 percent of employers say they will reduce employee health benefits during the next five years.
  • Just 4 percent of businesses say they are likely to drop employee health-care coverage entirely next year. But if faced with rising costs for the next five years, businesses are increasingly likely to drop coverage, particularly small business that have fewer than 50 employees.
  • If faced with cost hikes for the next five years, one in seven of the small businesses that currently offer insurance to employees say they would likely drop coverage entirely.
  • These small employers said they expect an average premium increase of about 20 percent per year for the next five years.

SEC Sues Merrill Lynch, Four Execs over Enron Deals

The Securities and Exchange Commission charged Merrill Lynch & Co. and four of its former senior executives with “aiding and abetting” Enron Corp.’s securities fraud.

The commission’s complaint, filed in U.S. District Court in Houston, alleges that Merrill Lynch and its former executives helped Enron manipulate its earnings by engaging in two fraudulent year-end transactions in 1999. The transactions had the purpose and effect of overstating Enron’s reported financial results.

Specifically, Enron allegedly used these transactions to add approximately $60 million to its fourth quarter of 1999 income.

The commission also agreed to accept Merrill Lynch’s offer to settle the matter. Under the settlement, the investment banker, without admitting or denying the allegations in the complaint, agreed to pay $80 million in disgorgement, penalties, and interest, and agreed to a permanent antifraud injunction prohibiting future violations of the federal securities laws.

The four former Merrill Lynch executives named in the complaint are Robert S. Furst, Schuyler M. Tilney, Daniel H. Bayly, and Thomas W. Davis. All four are contesting the matter.

“This action is a message to all who would help a reporting company commit fraud: we will bring the full weight of our enforcement arsenal against you. Our commitment to protect investors demands nothing less,” said SEC chairman William H. Donaldson in a statement.

According to the SEC, the first transaction was an asset-parking arrangement. The commission says that on December 29, 1999, Merrill Lynch bought an interest in certain Nigerian barges from Enron with an express understanding that Enron would arrange for the sale of this interest by Merrill within six months at a specified rate of return. Because the risks and rewards of ownership of the interest in the barges did not pass to Merrill Lynch, the SEC claims the transaction was, in reality, a bridge loan.

The SEC also claims that Merrill Lynch and the four executives knew that Enron would record $28 million in revenue and $12 million in pretax income in connection with the barge deal. It added that Merrill and the executives entered into this transaction solely to accommodate Enron—despite express concerns that Merrill Lynch could appear to be aiding and abetting Enron’s earnings manipulation.

In 2000, Enron arranged to take Merrill Lynch out of the barge deal on the agreed time frame at the agreed rate of return, the SEC added.

In the second transaction, also closed in the last few days of 1999, Merrill Lynch and Enron entered into two energy options (one physical and one financial). The SEC claims that Merrill Lynch knew the options would inflate Enron’s income by approximately $50 million.

Indeed, the complaint alleges that, at year-end 1999, the trading under these options was not scheduled to begin for approximately nine months. Before the transaction was closed, Enron managers allegedly told Merrill Lynch that, despite a nominal term of four years, it might want to unwind the transaction early.

“Merrill Lynch believed that the two trades were essentially a wash and knew that the transaction would have a significant impact on Enron’s reported results, bonuses, and stock price,” the SEC complaint stated. “Merrill Lynch demanded a multi-million dollar fee for entering into this transaction; Enron ultimately agreed to pay Merrill Lynch a structured fee to be paid over four years with a net present value of $17 million.”

In 2000, Enron approached Merrill Lynch seeking to unwind the transaction before trading under the energy options was scheduled to begin. The deal was unwound in June 2000 after Merrill Lynch agreed to reduce its fee to $8.5 million to terminate the transaction, the SEC claims.

SEC Indicts Former CFO, Others

In more SEC news, the commission announced that the U.S. Attorney for the Northern District of Illinois indicted six former executives, including the chief financial officer and other employees of Anicom Inc., for 30 counts of securities fraud, books and records violations, and bank fraud in connection with a massive financial fraud at the now-bankrupt company.

The indictment charges that from at least January 1, 1998, through at least May 31, 2000, the six workers caused Anicom to falsely report millions of dollars of nonexistent sales, including sales to a fictitious customer, and used other fraudulent techniques that overstated Anicom’s reported revenues and net income.

The indictment also charges former CFO Donald C. Welchko with obstruction of justice by providing the commission with false documents during its investigation of Anicom.

The SEC said there are two aspects to the fraud.

First, the indictment charges that CEO Carl E. Putnam, chief operating officer John P. Figurelli, vice president of sales Daryl T. Spinell, vice president of accounting Ronald M. Bandyk, and billing manager Renee L. LeVault improperly recognized numerous fictitious sales that overstated reported revenues and net profits.

In addition, the defendants allegedly caused Anicom to improperly recognize in 1999 more than $10.4 million in sales to a fictitious customer called SCL Integration.

The indictment also charges that the defendants entered journal entries that improperly reduced expenses and accelerated the recognition of sales between reporting periods. The indictment also states that Putnam and Welchko defrauded Anicom’s lenders by falsely representing that the company’s financial statements accurately represented its financial position.

Last May the commission filed a civil lawsuit against the same six defendants.

Short Takes

The Goodyear Tire & Rubber Co. said it will record a noncash charge of $1.1 billion for the fourth quarter of 2002 to establish a valuation allowance against its net U.S. deferred tax assets, in accordance with the Statement of Financial Accounting Standards No. 109 (“Accounting for Income Taxes”). The company also said its shareholders’ equity at December 31, 2002, will also be reduced by $1.3 billion to reflect an increase in its unfunded pension-benefit obligations.

  • World Wrestling Entertainment Inc. named Philip Livingston chief financial officer and director. Livingston will oversee the company’s financial, accounting, and investor-relations strategies and activities.

Previously Livingston served as CFO for Catalina Marketing Corp. and Celestial Seasonings. He has also held financial and accounting positions with Genentech Inc. and Arthur Young and Co.

He most recently was the president and chief executive officer of Financial Executives International (FEI).

  • Terror-risk insurer SRIR, launched by six insurance companies a year ago, terminated its operations earlier this month due to a lack of demand for its products, according to Reuters. SRIR shareholders were Allianz, Zurich Financial Services, Swiss Re, Hannover Re, XL Capital, and SCOR. “Our perception that client interest would be high has simply not developed into reality, in spite of the fact that today there is a greater awareness and knowledge of terrorist activity and of the potential for substantial loss,” SRIR chief marketing officer Thomas Baumgartner told the wire service.
  • Chip-maker Applied Materials Inc. said it will cut 2,000 jobs, or 14 percent of its staff, in its second major round of layoffs in five months.