S&P 500: When Health Care Costs Improve Too Much: Once feared, now forgotten. That’s the short story of other postemployment benefits obligations and their effects on corporate earnings. These costs were expected to grow to the sky forever when they were first being accounted for over twenty years ago. A funny thing happened on the way to the stratosphere: firms learned how to manage their own health costs, the primary “other postemployment benefits,” once they were forced to measure them.
The size and breadth of health care benefit cuts have long been the stuff of labor force fears. Recent decisions by major companies to shift even more of the administrative and cost burden to employees signal that employers intend to continue shifting responsibility to employees. Yet this is not a new trend. Quietly, as employers have been managing their health care costs over the last couple decades, their obligations have been minimized. Because of the accounting standards for such plans, the cuts in benefits have made for decreasing OPEB costs, as one would expect. At the same time, it’s reached the point where the costs at some firms have actually become negative, becoming a kind of non-cash phantom income. More anomalous, this happens even as the firms continue to pay benefits. It’s a weird situation, for sure, and it’s attributable to the accounting standard in use. Negative costs can be a significant part of earnings, but firms do not always single them out in their earnings presentations, even in “non-GAAP performance measures” – and if investors don’t know the negative costs exist, they won’t search for them.
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