Forecast of Health Costs Item of Debate

By Freudenheim, Milt | THE JOURNAL RECORD, June 2, 1990 | Go to article overview

Forecast of Health Costs Item of Debate


Freudenheim, Milt, THE JOURNAL RECORD


Forecasting health costs, an uncertain art at best, has become the subject of a vigorous debate between employers and the accounting profession's rule-making board.

Under accounting rules expected to take effect for 1992 financial statements, companies must report their promises to pay for health care for future retirees.

The value of the promises, which the companies will have to subtract from reported income, will depend in large part on how fast health costs are expected to rise.

The Financial Accounting Standards Board, a private rule-making agency, says the calculations must be based on a company's recent experience with growing health costs, known as the health-cost trend.

But employers and their accountants are calling for a different basis for the forecasts.

The nation's spending on health care surged 10.7 percent last year, and government economists say if the double-digit growth continues, medical spending will climb to $999 billion in 1995 and $1.5 trillion in 2000, up from $618 billion in 1989.

But many economists and corporate financial executives insist the steep upward trend cannot go on.

Health spending is already about 12 percent of the gross national product, and they believe employers or the government will find ways to prevent the percentage from rising off the charts.

The General Accounting Office estimated last year employers' future obligations for retiree health benefits were $227 billion in all.

In a concession to business, a proposed change that would have required each company to estimate its total obligations, which could have exceeded the entire assets of some companies, has been dropped.

But enormous costs would still have to be included on financial reports under the Accounting Standard Board's rules - especially by companies with many older employees and retirees and extensive benefits protected by labor contracts.

Ford Motor Co., for example, spent $416 million last year on health care for retirees and their dependents, compared with $386 million in 1988 and $341 million in 1987.

Under the new rules, Ford's charges against income will rise considerably.

But Arthur G. Fitzgerald, Ford's manager of financial reporting, says it would be unrealistic to base the long-range projections on the recent double-digit increases. And many financial executives agree.

``We would be stuck with a charge that we do not believe will really happen,'' said Paul B.

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