Corporate America weighs in on health law costs

BOSTON/NEW YORK Thu Mar 25, 2010 11:49am EDT

BOSTON/NEW YORK (Reuters) - A pair of top U.S. industrial companies gave some of the first estimates of what the nation's healthcare overhaul will cost them, although an Obama administration official called the moves premature.

Deere & Co and Caterpillar Inc said they were expecting a combined $250 million in charges this year as a result of changes to the $2.5 trillion U.S. healthcare system that President Barack Obama signed into law this week.

But U.S. Commerce Secretary Gary Locke criticized those estimates as premature. The final law is still being tweaked, with the Senate expected to send a revised version of the landmark legislation back to the House of Representatives later on Thursday after eliminating two minor provisions.

"A lot of the regulations on how this will affect big business haven't even published yet, so for them to come out, I think is premature and irresponsible," Locke said in an interview on CNBC business television.

At issue is a provision of the health care reform package that makes a subsidy paid to companies to provide prescription drug coverage to their employees taxable; previously this benefit had not been taxed.

Investors appeared to the take the news in stride, as each company's shares were up about 2 percent, outpacing the broad Standard & Poor's 500 index in late morning trading.

"This is a near-term, quick-hit charge," said Jeff Windau, an industrial analyst at Edward Jones in St. Louis, who follows both Caterpillar and Deere. "A lot of investors are still looking through to the longer-term question of what's the economy doing? There's growth out there and we can handle this one-time charge."

INVESTOR CONFIDENCE

Despite the political furor around the legislation, Windau said many investors may feel confident that companies that just survived the worst recession since the Great Depression of the 1930s will be able to handle a change in the health care system.

"Investors have confidence that they can manage these costs as well," Windau said.

Deere, a maker of farm equipment, said on Thursday it expects its after-tax expenses to rise by about $150 million this year as a result of healthcare reform.

The Moline, Illinois-based company, which expects the bulk of the costs to come in its current second fiscal quarter, had forecast full-year earnings of about $1.3 billion.

Analysts, on average, looked for second fiscal quarter profit of $450.6 million, or $1.06 per share, from Deere with full-year profit forecast at $1.37 billion, or $3.21 per share, according to Thomson Reuters I/B/E/S.

Caterpillar, the world's largest maker of earth-moving equipment, said in a filing with the SEC after the close of trading on Wednesday that it expects to record a $100 million after-tax charge in the first quarter related to the new law.

Analysts, on average, had looked for a first quarter profit at Caterpillar of about $280 million, or 45 cents per share.

Caterpillar and Deere are not the first companies to project their costs related to the reform package, which is high on corporate America's radar since more than 150 million working-age Americans get health benefits from their employers.

Diversified U.S. manufacturer Honeywell International Inc in January estimated that healthcare reform would trim its first quarter earnings by four to five cents per share.

That move -- which came at a time when it was unsure if health care reform would pass at all, let alone what form it would take -- surprised investors, who sent Honeywell shares down despite a fourth-quarter earnings report that topped Wall Street forecasts.

A Honeywell spokesman said on Thursday that the company had not updated the earlier cost estimate and would continue to review the legislation.

(Reporting by Scott Malone and Nick Zieminski; Editing by Tim Dobbyn)