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Doing the Dow Math on Obamacare

Several major companies have outlined first-quarter charges due to the new health care law, so we used those figures as a guide to give investors our best estimate of health care exposure for the Dow.

Updates from original publication include charge details from Johnson & Johnson, General Electric, Verizon and Alcoa.



) -- Several major companies have already outlined first-quarter charges related to Obamacare, so we used these figures as a guide then dredged through annual filings to give investors our best estimate of other firms' exposure.


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wins the prize for most stunning disclosure so far, a $1 billion charge. The telecom giant was joined by


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AK Steel

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, all of whom have outlined write-downs ranging from $85 million to $150 million. AT&T, Boeing, Caterpillar and 3M are all part of the

Dow Jones Industrial Average


These non-cash charges relate to a Medicare law implemented in 2003, which provided cash subsidies and tax breaks to companies that covered retirees' prescriptions through the federal program. But under the new health-care reform bill, which President Obama signed into law this week, one prong of the subsidy -- the tax break -- will be removed.

According to

a simple analysis, that means companies will get back $280 for every $1,000 in prescription cost, rather than the former $378 per $1,000. However, the impact isn't quite so clear cut, as it also depends on how much cost burden employers place on retirees, what their tax rates are, and the underlying assumptions being used.

Nonetheless, companies factor those subsidies into future benefits costs, and house them in an obscure balance-sheet item called "deferred tax assets," or DTA. The item is worth less once the subsidies are stripped out, and firms are being required to take the write-down during the quarter that the bill is signed into law.

The slideshow that follows ranks the remaining Dow components by how much exposure they have to Obamacare write-downs.

Expect a Major Hit



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may not be far behind its competitor AT&T when it comes to the Obamacare charge.

Both companies have a lot of the same factors working against them: Large, heavily unionized workforces, big benefits-related DTAs and big Medicare subsidy assumptions. Verizon's workforce is 222,900 vs. AT&T's 281,000, while its benefit obligations stood at $59.2 billion at year-end.

>> Who Owns Verizon?: George Soros

Factoring in a charge that's 50% to 70% of assumed subsidies, Verizon could face a charge of between $725 million and $1 billion. (Verizon outlined a $970 million charge after this story originally published.)

Nervous Verizon shareholders can take heart in the fact that AT&T's stock didn't really react to news of its charge. The shares actually rose slightly on March 26, the day the company disclosed its estimated impact.

Expect a Semi-Significant Hit


Several major Dow components are quite large in scale, but don't seem likely to take a proportionate Medicare-related write-down. That's because benefit coverage isn't widespread through the workforce, because subsidy assumptions are minor, or both.

For instance,

Bank of America's

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headcount is 284,000, but it only assumes $202 million worth of subsidies through 2019 and a $4 billion benefits-related DTA -- a pittance in the grand scheme of its $2.2 trillion balance sheet. Taking 50% to 70% of assumed subsidies, Bank of America might face a charge of $100 million to $140 million.

However, it's worth noting that a couple hundred million dollars can mean much more to one company than another.


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for instance, has 59,000 employees, and one-twelfth the market cap of Bank of America. However, the aluminum maker had been assuming Medicare subsidies of $315 million over the next decade, suggesting it may face a charge of $160 million to $220 million for the quarter. The company announced late Monday that it expects an $80 million charge to be taken for the quarter ended March 31.

Other companies that appear to face charges of $100 million to $300 million include


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United Technologies

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Procter & Gamble

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Expect a Small Hit


A few other blue-chip names make even smaller assumptions about future health-care subsidies, despite their large scale, large workforce and large benefits costs.

JPMorgan Chase

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General Electric

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all assume future Medicare subsidies within a range of $110 million to $126 million. Using the 50% to 70% metric, one might infer a charge of $55.5 million to $77.7 million for IBM; and $63 million to $88 million for JPMorgan and Coke.

Yet the impact of health-care reform won't end there. Founded in 1911, IBM was at the forefront of American technology, and has the legacy costs to prove it: $95.5 billion in benefits obligations at the end of 2009.

General Electric told

Bloomberg News

that it doesn't anticipate taking any charge related to the health-care reform, and that the bill will have no "material effect" on results. Yet GE's obligations were approaching $60 billion at year-end. It's difficult to tell how health-care reform will ultimately impact those costs going forward. On one hand, the law seeks to moderate the tremendous rise in health-care costs, but it will also force companies to cover more employees and more items.

Expect a Tap


The next rung down in blue-chip Obamacare exposure is comprised mostly of big companies without major unionization or benefits, or whose workforces aren't large enough to warrant big subsidy assumptions.


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, for instance, has just 32,000 employees and assumed $25 million in Medicare assistance through 2019. Its inferred write-down may be in the $12.5 million to $17.5 million range. For a company that earned $3.6 billion last year and had $33 billion in assets, Travelers may not consider the charge large enough to disclose ahead of time.

Walt Disney

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has the most exposure to the DTA charge from this group, since much of its workforce is unionized, and it has assumed subsidies of $68 million through 2019. But while it may face a charge ranging from $34 million to $48 million as a result, the media company was more concerned that health-care costs would continue to climb at a breakneck pace. In its 10-K filing, Disney warned investors that profits may be "substantially affected" by higher medical costs in the coming years.

>> Who Owns Disney?: Prince Al-Waleed

Perhaps the most clever of this group -- though possibly the most exposed to health-care reform risk in its business lines -- is

Johnson & Johnson

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. The health-care products and pharmaceuticals maker assumed a $9 million Medicaid subsidy for 2010, but not in years after that. Combined with a relatively small benefits-related DTA of just over $2 billion, the assumption suggests J&J may take a write-down in the $4.5 million to $6 million range - a mere fraction of its $15.8 billion in sales last year.

However, on Tuesday, Johnson & Johnson said it expects 2010 earnings to be reduced by roughly 10 cents a share, and revenue by $300 million to $500 million this year, due to the reform overhaul.

Other Dow components that don't appear to face a big health-care accounting charge include

American Express

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, whose benefits-related DTA stood at $2.4 billion at year-end; and


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, whose benefits-related DTA was $1.4 billion.


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, may not face any DTA charge at all because their exposure to unionization and benefits is minuscule. Walmart alone employs over 2 million people, but few are offered health benefits. McDonald's has $182 million in retirement liabilities for employees in Canada and the U.K., but considers other exposure "immaterial."

However, Obamacare legislation will require companies to offer health care to anyone working more than 30 hours a week, or face stiff penalties. That's a charge no business with more than 50 employees will be able to avoid.

And finally, there are a handful of Dow components that didn't provide enough data in their annual filings to make a ballpark assumption about Obamacare writedowns.


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didn't outline its DTA, benefits obligations or Medicare assumptions. The company has a small (in relative terms) workforce without widespread unionization, so its exposure may be small, if it has any at all. Similarly,


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, which has nearly 93,000 workers, didn't disclose much beyond $2.4 billion in "accrued compensation liabilities."



disclosed a $1.9 billion benefits-related DTA, making its exposure appear minimal. But with 97,000 employees working in many different facets with sporadic unionization, nearly $11 billion in benefits obligations at year-end, and no Medicare subsidy assumptions outlined, it's hard to tell what its write-down may be.

Home Depot

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, meanwhile, has a huge employee base of 317,000, but is fractured between full-time workers who receive sponsored medical coverage, and part-time workers who don't. Its benefits-related DTA at year end was relatively minor, at just $372 million, but the company didn't outline its overall benefits obligations.


Written by Lauren Tara LaCapra in New York