Employers united: an empirical analysis of corporate political speech in the wake of the Affordable Care Act.

Author:Leonard, Elizabeth Weeks
  1. Introduction II. BACKGROUND A. Brief History of Retiree Drug Plans B. Retiree Drug Subsidy.. C. Post-ACA SEC Disclosures and Congressional Investigation III. SEC REQUIREMENTS AND ACCOUNTING STANDARDS. A. SEC Disclosure Requirements 1. Scheduled Disclosure: Forms 10-K and 10-Q 2. Current Reports: Form 8-K.. B. Generally Accepted Accounting Principles IV. Empirical Methodology A. Sample Identification B. Disclosure Venue C. Company Demographics 1. Industry 2. Size a. Number of Employees b. Assets and Market Capitalization D. Lobbying and Subsequent SEC Disclosure E. Market Nonresponse 1. Prediction Market for ACA Enactment 2. Stock Market Response to ACA Enactment 3. Prediction Market for Supreme Court ACA Decision V. Findings and Implications A. Uniquely Reportable Event B. Government Regulation of Corporate Political Speech VI. Conclusion. I. Introduction

    Securities and Exchange Commission (SEC) Form 8-K offers a unique platform for corporate political speech. The requirement that publicly traded firms issue real-time disclosures of material changes to their expected results (1) both requires and allows companies to publicly comment on the financial impact of newly enacted laws. our unique empirical study examines one such disclosure episode that immediately followed the enactment of the Patient Protection and Affordable Care Act (ACA), on March 23, 2010. (2) Following passage of that historic legislation, close to 150 companies wrote off a total of $5 billion against their 2010 earnings, triggered by just one relatively minor provision of the ACA. (3) These write-offs signaled the potentially crippling impact of the entirety of the ACA on employers and the feasibility of continuing to offer employee health insurance plans. Officials in Congress and President Obama's Administration quickly rebuked the firms for unnecessarily alarming the public about the negative effects of the Administration's signature legislation. (4)

    The Supreme Court's June 28, 2012 decision in National Federation of Independent Business v. Sebelius, (5) upholding virtually all of the ACA, means that the law is here to stay, barring dramatic changes in the November 2012 elections and repeal of the legislation. Meanwhile, employers continue to express serious concerns about the future of employer-based health insurance. (6) We recognize that SEC-compelled speech may, under certain circumstances, carry a political message and the implications of extending First Amendment protection to those statements. (7) We also recognize that the Supreme Court recently extended even greater solicitude to corporate free speech rights and political participation in Citizens United v. Federal Election Commission. (8) But what we find more troubling is the government's potential to chill otherwise accurate disclosures by damning them as political gamesmanship. (9)

    Passage of the ACA did little to quell employers' persistent concerns about escalating health care costs and their ability to continue offering health insurance benefits to retired and active employees. (10) Several provisions of the ACA, including the "Cadillac tax" on high-cost health plans, (11) restrictions on lifetime and annual benefits caps, (12) the extension of dependent child coverage, (13) employer pay-or-play penalties, (14) and new disclosure and reporting requirements, will be potentially very costly for employers. (15) Those changes are against a baseline of ever-increasing costs; in 2013, health care costs are expected to rise 7.5%, which costs employers will either have to absorb, or find ways to reduce or offset. (16)

    Although many ACA provisions will impact employers as they are implemented over the next several years, (17) only one, involving a change in tax treatment for federal subsidies to employers, (18) had an immediately reportable impact on firms' financial results in 2010. The ACA provision triggering the 147 companies' SEC filings purported merely to clarify tax treatment of a federal subsidy to employers offering prescription drug benefits to retired workers. Previously, employers accepting the federal retiree drug subsidy (RDS) could both exempt the subsidy amount from their taxable income and deduct that same amount as a business expense. (19) Under the ACA, firms still may receive the subsidy tax-free but may no longer take the deduction. (20)

    The narrative that the obama Administration and ACA proponents told was that the firms' high-dollar write-offs were nothing more than sour grapes and disingenuous attempts to perpetuate the partisan battle, even after the ACA was finally and validly enacted. (21) Our study tells a different story. First, we establish that the RDS write-offs were required under applicable SEC rules and consistent with financial accounting standards. Those firms issuing more prominent SEC disclosure statements regarding the RDS generally were the firms that experienced greater financial impact as a result of the change. Second, we note that a high percentage of firms issuing post-ACA Form 8-Ks actively and publicly opposed the RDS tax change proposal before it was enacted. Even if firms' SEC disclosures had the desired purpose and effect of reasserting their political objections to the ACA, their statements were also accurate, required, and expected. The Administration's response, more than the firms' disclosures, seem to have been politically motivated as an attempt to suppress corporate political speech critical of the newly enacted reforms.

    Part II of this Article explains the historical and legal background of the RDS controversy. Part III describes the SEC and Financial Accounting Standards (FAS) rules that required the firms' disclosures. Part IV presents our empirical methodology and findings. Part V considers the broader implications of Form 8-K as a corporate political speech venue and the government's attempts to control political messaging around the ACA.

  2. Background

    We begin with a brief history of employer-based health insurance, with particular emphasis on retiree prescription drug plans. Next, we explain the statutory enactment of the RDS in 2003 and the tax code change to the RDS in 2010, under the ACA. Finally, we discuss the political controversy that arose following several prominent firms' post-ACA-enactment SEC Form 8-K filings, reporting significant expected earnings shortfalls due to the RDS tax change.

    1. Brief History of Retiree Drug Plans

      Employer-based health insurance is a product of post-World War II wage-hour laws, (22) favorable tax treatment for employee benefits, (23) and union pressure on particular industries. (24) Retiree health insurance initially was a relatively inexpensive add-on to employer health plans and an easy concession to unions. The Big Three automakers were among the first companies, in 1967, to offer retiree health benefits. (25) The federal Medicare program, enacted in 1965, provides comprehensive health coverage for retirees aged 65 and older. (26) Accordingly, employers could supplement Medicare-eligible retirees' federal coverage at relatively little expense and provide short-term coverage to early retirees until they became Medicare-eligible. (27) As the federal Age Discrimination in Employment Act of 1967 prohibits layoffs that target older workers, firms use generous retirement benefits as a carrot to encourage aging workers to retire. (28)

      Employer-based prescription drug coverage was an especially valuable supplement because Medicare did not cover outpatient prescription drugs until relatively recently. (29) As pharmacological treatments increasingly are used to manage chronic conditions suffered by many retirement-aged individuals, prescription drug coverage became more important to retirees and at the same time, drug plans became more expensive for employers. (30) In general, employers' overall health care costs, for both active and retired workers, have continued to rise steadily in recent years. (31) One study noted that "[d]ue to rising costs, some employers and employees have been economically forced to abandon employer-sponsored health benefits entirely." (32) Small employers, in particular, have difficulty bearing the costs of providing health insurance to employees. (33)

      Retiree health plans are more vulnerable than plans for active workers. To support retiree plans, employers typically impose greater cost-sharing obligations, more restrictive drug-plan formularies, benefits caps, and increased time-in-service eligibility criteria. (34) The increased costs of providing retiree prescription drug coverage has caused some employers to eliminate those benefits altogether. (35) The number of large employers offering retiree benefits has fallen from 66% in 1988, to 26% in 2011. (36) In 2011, only 24% of large firms (200 or more workers) offered retiree health benefits. (37) Of those firms that do offer retiree health benefits, they are more likely to do so for early retirees not yet eligible for Medicare than for Medicare-eligible retirees. (38) The RDS tax change, along with a number of other ACA provisions impacting employers, will likely accelerate the decline in employer-based retiree health plans. (39)

    2. Retiree Drug Subsidy

      With passage of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 20 03, (40) Congress, for the first time since Medicare's enactment in 1965, added outpatient prescription drug coverage to the program. (41) Previously, Medicare beneficiaries received prescription drugs, if at all, through other government programs, such as Medicaid, or, in some cases, from their previous employers. (42) There was considerable concern that the creation of the Medicare "Part D" drug benefit would incentivize employers to "dump" their retirees into the new Medicare program, thereby decreasing their own health care costs and increasing the federal program's costs. (43) President Bush vowed to keep the price tag for the new Part D to...

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