Michael Cohen and “The Swamp”

Recent revelations surrounding the business clients of Michael Cohen, Donald Trump’s personal attorney, demonstrate the seedy underbelly of the lobbying business in Washington. At least one company that hired Cohen admitted that it got suckered by someone who couldn’t deliver what he promised. Many companies consider these types of expenditures the cost of doing business.

Last Tuesday, attorney Michael Avenatti released a report claiming that Cohen’s firm, Essential Consultants, received millions of dollars in payments from various companies, including one linked to a Russian oligarch. Avenatti, a Trump critic, represents onscreen prostitute Stormy Daniels in a lawsuit seeking to nullify a non-disclosure agreement Daniels and Cohen reached regarding the former’s alleged affair with Trump.

While Avenatti’s original report claimed Novartis paid Cohen just under $400,000, the company later confirmed payments totaling three times that amount, or $1.2 million. In an interview, an unnamed Novartis employee gave commentary into what amounts to a corporate comedy of errors:

He [Cohen] reached out to us…With a new Administration coming in, basically, all the traditional contacts disappeared and they were all new players. We were trying to find an inroad into the Administration. Cohen promised access to not just Trump, but also the circle around him. It was almost as if we were hiring him as a lobbyist.

To paraphrase the British phrase used when a new sovereign assumes the throne: “The (Old) Swamp is dead! Long live The (New) Swamp!”

Unfortunately for Novartis, however, the firm locked itself in to a one-year agreement at a $100,000 monthly retainer—ridiculously high by most Washington lobbying standards—only to discover that Cohen could not deliver. According to the Novartis employee, it took but one meeting for the bloom to come off of the rose: “At first it all sounded impressive, but toward the end of the meeting, everyone realized this was probably a slippery slope to engage him. So they decided not to really engage Cohen for any activities after that.”

AT&T and Novartis admitted on Wednesday that the office of special counsel Robert Mueller contacted both about their relationships with Cohen. In analyzing their behavior, assume that both companies acted legally—that their payments to Cohen were solely for consulting services, and not as part of some quid pro quo scheme directly tied to an official act, whether by Cohen, Trump, or anyone else.

On one hand, the companies exercised exceedingly poor judgment. Novartis CEO Vas Narasimhan (who was not running the company when Novartis signed its 2017 agreement with Cohen) admitted on Thursday that the company “made a mistake in entering into this engagement,” signing away more than a million dollars in shareholder money to someone without undertaking any due diligence as to whether he could deliver what he had promised.

Novartis also vastly overpaid Cohen, even if it had engaged him for more activities than a single meeting. As I noted on Twitter, I could have cautioned them about the dim chances for Obamacare repeal for half the $1.2 million they paid Cohen. (If they had asked nicely, I might have done so for even one-quarter that sum.) Very few if any Washington lobbying firms can command a six-figure monthly retainer from one client, yet Novartis paid that much to a single individual.

As Politico noted, Trump’s “2016 victory rattled corporations enough that clients were eager to pay top dollar to anyone who could help them understand the Administration in its first months.” Because no one thought Trump could win—and therefore spent little time reaching out to him or his campaign in the summer and fall of 2016— after the election corporations felt the need to overcompensate, throwing money at anyone with a connection to Trump, in the hopes of ingratiating themselves with the new administration. I saw some of this myself in late 2016 and early 2017, when companies and financial firms came out of the woodwork asking me to predict what the new Congress and administration would do on health care. (Trust me: My offers didn’t come anywhere close to $1.2 million.)

Firms often spend sizable sums on lobbying. Novartis has “nearly a dozen lobbying firms on retainer,” for which it paid $8.6 million last year. In some cases, companies or industries have so many lobbying firms on retainer that the ineffective ones often attempt to take credit for the “wins” achieved by the effective ones. However, given how federal policy initiatives can affect both a company’s revenue and its stock price—witness the market volatility surrounding President Trump’s proposals on drug pricing—companies have little choice but to play the K Street game.

It seems ridiculous to pay $1.2 million to an individual for a single meeting, and it is. But only a smaller role for the federal government—in taxing, spending, and regulations—would bring an end to the types of influence-peddling stories like those surrounding Cohen this week. Unfortunately, it’s the price of doing business for many companies—and a symptom of a government run amok.

This post was originally published at The Federalist.

Would You Like Some Chablis with That Bailout…?

As we reported on Friday, Obamacare’s early retiree reinsurance program has run out of its $5 billion allotment – thus prompting the program to be shut at the end of the year, two years ahead of schedule.  Now staff on the Energy and Commerce Committee have released updated data regarding the program – and have revealed that the top 20 recipients of program funding have received nearly half the total spent.  The top five recipients represent a good cross section of participants in the program as a whole – unions (led by the United Auto Workers, with $387.2 million received), public employee retirement systems (Ohio state retiree plan, $180.1 million, and CalPERS, $131.4 million), and union-heavy employers (AT&T, $213.8 million, and Verizon, $163 million).  All these recipients have received what amount to nine-figure bailouts from federal taxpayers for retiree health obligations they can no longer afford – and, some would argue, commitments they never should have made to begin with.

It’s also interesting to note some of the other recipients of early retiree reinsurance funding to date:

Hollywood Actors:  The Screen Actors Guild health plan received $3,049,896.15;

Big Banks:  Citigroup received $8,025,097.27, Bank of America received $4,610,027.20, Wells Fargo received $5,509,779.81, and JPMorganChase received $8,568,059.48;

Wine Makers:  The E&J Gallo Winery received $331,527.85;

Insurance Companies:  Aetna received $3,131,538.39, while Cigna received $1,346,231.13; and

Collaborators with Hostile Foreign Regimes:  Citgo received $3,390,900.84.  Citgo is wholly owned by Venezuela’s state oil company, and has in the minds of many become a political tool for Hugo Chavez’ regime.

Given that the federal government is running trillion-dollar deficits, many would argue that it was inappropriate to use taxpayer funds to bail out big banks (again), Hollywood actors, or California wineries.  Claims of the Administration aside, this kind of spending money is driving America bankrupt – one of many things wrong about Obamacare.

Will Employers Drop Coverage? Don’t Bet Against It…

A few weeks ago, the Urban Institute released a paper regarding its own analysis of the impact of the health care law on employer-sponsored coverage.  While the institute’s model alleges that employer sponsored coverage will remain largely intact, the paper itself notes that their simulation model is based on individual preferences for insurance.  In other words, if employers decide to drop coverage, the Urban model outlined in the paper is largely irrelevant, as individuals won’t be able to keep their current group health plan.

The Urban paper attempts to refute claims by former CBO Director Doug Holtz-Eakin, whose previous analysis concluded that millions of workers would benefit – as would their employers – if firms dropped coverage and raised salaries instead, with workers relying on federal insurance subsidies in the Exchanges.  The Urban study concedes that some individuals might be better off if their firm dropped coverage, but maintains that, because the existing tax subsidies for group insurance will exceed the value of the federal health insurance subsidies for most high-wage workers, most large firms will maintain their coverage plans. (The study does predict a small net decrease in coverage for firms with fewer than 100 workers.)

The above analysis however comes with a big caveat that’s worth examining closely:

The extent of dropping due to the ACA could be larger than we predict, however, if workers and firms were to re-sort or reorganize into ones employing mainly low-income workers and others employing mainly high-income workers substantially more than is the case today. Because firms already face such incentives and because a diverse mix of skills is needed for most enterprises, we think the scope for ACA-induced restructuring of firms is limited and dominated by the other considerations we have described. It is, however, an additional source of uncertainty in our estimates.

In other words, the authors concede that re-structuring that results in a bifurcation of labor into lower-income and higher-income workers would raise significant questions about the continued viability of employer coverage for the former group.  But in the corporate world, restructurings are relatively common – Yum Brands (which operates KFC, Taco Bell, and Pizza Hut outlets) was spun off from Pepsi, AOL was spun off from Time Warner (after the former acquired the latter a decade ago), and telecom company Avaya was spun off from Lucent Technologies (which itself was spun off from AT&T).  More recently, some suggested that financial institutions holding “toxic” assets could spin those assets off into a “bad bank” (how Ireland is handling its burst real estate bubble).

All this raises an obvious question:  If corporate spin-offs and re-structuring efforts are relatively common, why won’t businesses just spin-off (or otherwise re-structure) their operations to separate lower-income from higher-income workers?  The lower wage workers would receive higher wages but no health coverage – being sent instead to Exchanges, to purchase insurance on federal taxpayers’ dime – while higher-income workers would continue to receive employer-provided benefits under the current tax exclusion.  In the past, airline and auto firms used re-structuring under the bankruptcy code to shed their retiree health costs – and there is little reason to believe that firms, particularly those facing major competitive pressures, wouldn’t use a corporate re-structuring in a similar way, to minimize their financial obligations for health coverage while maximizing new federal subsidies available to their workers for same.

Even Jonathan Gruber – a paid consultant to the Administration on the health care overhaul – admitted the uncertainty behind his estimates of health coverage.  Writing in last month’s edition of Health Affairs (subscription required), Gruber admitted that employer “reactions may differ when broad market reform and large subsidies make non-group insurance more attractive,” and that “if large employers react to the new situation by reducing insurance coverage, their action could start a wider trend toward reduced employer spending.”  In other words, the Urban Institute’s claims that employer-sponsored coverage will endure in a post-reform environment are highly speculative and uncertain at best, and – if one presumes employers are willing to undertake re-structuring efforts in order to shed themselves of significant health care liabilities, as they have in the past – all but guaranteed not to materialize at worst.

How Fuzzy Reinsurance Math Will Lead to Future Calls for Bailouts

The Administration released information regarding the first round of applications to the retiree reinsurance program today.  According to the release, nearly 2,000 employer applications have been approved; a list by state is available on the HHS website.

Over and above the vast number of union employers – municipalities, school districts, or multi-employer plans maintained by union organizations – included on the list, it’s worth examining the math behind the program and its funding.  Specifically, Section 1102 of the health care law appropriates $5 billion between now and January 2014 for the reinsurance program.  Assuming 2,000 employers apply for the program, that amounts to a total subsidy of $2,500,000 per employer for the next four years – or $625,000 per employer per calendar year.

Under the law’s provisions, employers can receive a maximum of $60,000 in funding for each retiree – 80% of a worker’s medical claims above $15,000 and below $90,000.  But as noted above, the $5 billion in funding, divided evenly among 2,000 employers, provides each employer with an average of $625,000 per year, an amount that is only enough to cover full claims on 10 retired workers.  In other words, if the participating employers average more than 10 catastrophically sick employees per year, the reinsurance program will run out of money.

To be fair, not all retirees will be eligible for the full $60,000 in federal subsidies, because they won’t have $90,000 in medical claims per year; if retired workers don’t accumulate $15,000 in claims per year – and some won’t – their employer won’t receive a subsidy for that worker at all.  But how many people think that companies like AT&T, General Motors, General Electric, and the hundreds of cities whose applications were accepted really will have fewer than a dozen retirees per year making the full catastrophic claim on the federal program?  If that happens – and it seems virtually inevitable – union special interests will advocate for a taxpayer bailout of the under-funded program, just as they advocated for creation of the $5 billion reinsurance fund in the first place.

Based on this fuzzy reinsurance math, it’s clear that once again, Democrats have created another entitlement program – this one directed toward their union friends and allies – that is unsustainable, and one that will face pressure for a federal bailout before the program concludes.

A Bitter Pill: How Democrats’ Government Takeover of Health Care Will Lead Employers to Drop Coverage

If You Like Your Current Plan…Tough Luck

President Obama and Democrats in Congress promised that nothing would change for the majority of Americans who currently have health coverage.[i] But a series of developments since the enactment of the health care “reform” law demonstrates how rising costs, new taxes, and additional federal requirements will leave many employers with little choice but to drop their insurance offerings:

  • A recent survey of large employers conducted by the consulting firm Towers Watson found that “the overwhelming majority (90 percent) of employers believe health care reform will increase their organization’s health benefit costs.”[ii]
  • The vast majority of the businesses surveyed by Towers Watson will force their employees to bear the brunt of higher health benefit costs imposed by the new law. Nearly nine in ten (88 percent) of firms plan to pass on increased costs through the form of higher premiums, and nearly three in four (74 percent) plan to change plan options, restrict eligibility, or increase deductibles and co-pays.[iii]
  • According to the Towers Watson survey, more than one in ten employers plan to reduce employment—laying off existing workers, or failing to hire new ones—as a result of the law’s increased costs.[iv]
  • Similarly, a survey of several hundred chief financial officers in small and large businesses found that an overwhelming majority—nearly three in four—believe the health care law will have a negative impact on their companies.[v] These financial officers also believe that the new law will raise, not lower, their firms’ health care costs by an average of more than eight percent.[vi]
  • Findings from the business surveys comport with decisions being made by individual companies as a result of the law’s enactment. Documents subpoenaed by the House Energy and Commerce Committee suggest companies are considering dropping their health plans. For instance, an AT&T document compared the company’s $4.7 billion cost of providing coverage currently to potential tax penalties under the health care law of $600 million for dropping its plan.[vii]
  • Likewise, Caterpillar executives discussed the need to “give serious consideration” to dropping coverage outright,[viii] and noted that the law’s enactment would require the company to “figure out what this will cost us and collect that in increased premiums which we will attribute to the legislation.”[ix]
  • Even retirees will not be immune from losing their existing coverage as a result of the health care law. A study found that a single provision in the health care law—eliminating a tax subsidy for employers who cover their retirees’ pharmaceutical expenses—could result in as many as two million retirees losing their drug coverage.[x]

Particularly given the current economic environment, the massive tax increases, rising health costs, and new regulations included in the health law provide companies with strong incentives to drop their current coverage—and every sign indicates that businesses large and small may do just that. More difficult to explain are why Democrats consider higher premiums, higher costs, and less coverage to be the kind of “reform” the American people can believe in.

 

[i] See, for instance, President Obama’s September 2009 address to Congress, http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-to-a-Joint-Session-of-Congress-on-Health-Care

[ii] Towers Watson survey on health care reform, May 2010, http://www.towerswatson.com/united-states/research/1935, p. 1

[iii] Ibid., p. 4

[iv] Ibid.

[v] Financial Executives International, “CFO Quarterly Outlook Survey,” April 2010, http://www.financialexecutives.org/ferf/download/2010%20final/2010-011.pdf, p. 15

[vi] Ibid., p. 16

[vii] “Health Care Bill Legislation,” AT&T Presentation subpoenaed by House Energy and Commerce Committee, available at http://money.cnn.com/2010/05/05/news/companies/dropping_benefits.fortune/index.htm

[viii] Caterpillar internal e-mail subpoenaed by House Energy and Commerce Committee, November 19, 2009, CAT_WAXMAN_000361

[ix] Caterpillar internal e-mail subpoenaed by House Energy and Commerce Committee, March 23, 2010, CAT_WAXMAN_000300, available at http://dailycaller.com/2010/04/28/why-waxman-really-canceled-his-health-care-%E2%80%98show-trial%E2%80%99/

[x] “Assessing the Coverage and Budgetary Implications of Legislation Modifying the Deductibility of Retiree Drug Spending Eligible for Subsidies,” American Benefits Council report by The Moran Company, March 16, 2010, http://www.americanbenefitscouncil.org/documents/hcr_rds-report_031610.pdf, p. 5

Obamacare’s First Week: Where’s the Reform?

One short week after President Obama signed his health care overhaul into law (P.L. 111-148), a string of press stories has already revealed the broken promises, double standards, and economic damage created by Democrats’ government takeover of health care:

Broken Promises: On the very day the President signed the health care bill into law, an Associated Press article highlighted that one of Democrats’ immediate “deliverables”—a ban on pre-existing condition exclusions for children—“provided a less-than-complete guarantee that kids with health problems would not be shut out of coverage.”[i] Specifically, while the law requires insurance companies to cover all pre-existing conditions for children enrolled in their policies, it permits carriers to deny new applications outright. Thus this “reform” could have the perverse incentive of encouraging insurance companies not to accept children with pre-existing conditions at all, rather than imposing some limitations on their coverage.

Likewise, news articles have pointed out that the funding for a national high-risk pool may be insufficient to meet the coverage needs of all individuals with pre-existing conditions.[ii] The pool, which the law requires be established within 90 days, received only $5 billion in funding to last through 2014.[iii] As states’ risk pools spend a total of $2 billion annually, it seems unlikely that $5 billion could meet both existing and expected demand—raising the prospect of yet more federal spending on health care to meet the new influx, or no coverage options for individuals with pre-existing conditions.[iv]

Double Standards: While the Senate was debating a reconciliation bill designed to “fix” problems in the original health care law, press reports focused on another loophole that exempted some from the law’s requirement that Congressional staff obtain their health benefits in the new exchanges, beginning in 2014.[v] Many considered it an “inequity” and an “outrage” that staff in leadership and committee offices—including the staff for the Democrat leaders who wrote the health bill—would be exempted from the law’s new regime.[vi] Yet when Republicans offered an amendment to close this loophole, and to make sure that executive branch political appointees—including officials in the Departments of Health and Human Services and Treasury charged with implementing the law—would also receive their health benefits through the new exchanges, 56 Democrats voted to kill this common-sense reform.[vii]

Economic Damage: Within days of the bill being signed into law, companies came forward to revise their balance sheets, reflecting the damage that the law’s new taxes would have on their earnings. Caterpillar went first, taking a $100 million hit due to loss of a tax subsidy for providing retiree prescription drug coverage;[viii] John Deere[ix] and AT&T[x] followed, reporting impacts of $150 million and $1 billion, respectively. The actions by these three companies represented the leading edge of an expected $14 billion drop in corporate earnings as a result of the law’s enactment—losses that will harm businesses’ ability to grow and re-hire workers in the middle of a struggling economy.[xi] Perhaps most ominously, AT&T noted that it “will be evaluating prospective changes to the active and retiree health care benefits offered by the company” as a result of the bill’s passage, proving the falsehood of President Obama’s claim that “If you like your current plan, you can keep it.”[xii]

Just as worrisome, the market for Treasury bonds suffered a drop-off in demand last week, as “passage of [the] health bill rekindle[d] worries about rising deficits.”[xiii] If the health law results in a rapid spike in interest rates as investors lose confidence in America’s ability to curb skyrocketing federal spending, mortgage buyers and businesses large and small will suffer.

In addition, states must work to calculate the cost of the law’s many unfunded mandates on their Medicaid programs. California’s department of health estimated that raising physician reimbursements in Medicaid will alone cost $2 billion per year, which may be passed on in the form of additional job-killing taxes at the state level on top of the more than $500 billion in new federal taxes already enacted into law.[xiv]

Unfortunately, rather than re-evaluating the scope and breadth of their health care takeover in a way that would not wreak havoc on the nation’s struggling economy, Democrats seem intent on “shooting the messenger” by extracting retribution for companies that dare speak politically inconvenient truths. The House Energy and Commerce Committee scheduled an April 21 hearing to examine the claims made by Caterpillar and others that the law will increase their taxes and health care costs. Committee Chairman Henry Waxman wrote a threatening letter to the companies demanding a rash of information, and calling the companies’ assertions about rising costs “a matter of concern”—leading some to question whether the entire hearing stands as an attempt to intimidate companies who have the temerity to challenge Democrats’ rosy view of health care “reform.”[xv]

With losses for companies already piling up, promises broken, and Democrats voting to exempt the officials charged with implementing the new law from most of its direct effects, many may wonder how the first week of Democrats’ brave new health care world in any way resembles the “reform” promised by President Obama and the majority.

 

[i] Ricardo Alonso-Zaldivar, “Gap in Health Care Law’s Protection for Children,” Associated Press March 24, 2010, http://finance.yahoo.com/news/Gap-in-health-care-laws-apf-4272209396.html/print?x=0

[ii] Anna Wilde Mathews, “High-Risk Health Pool Faces Start-Up Hurdles,” Wall Street Journal March 27, 2010, http://online.wsj.com/article/SB10001424052748703409804575144161178237490.html.

[iii] Ibid.

[iv] Ibid.

[v] Erika Lovley and Patrick O’Connor, “Health Bill May Exempt Top Hill Staff,” Politico March 24, 2010, http://dyn.politico.com/printstory.cfm?uuid=8D6D0626-18FE-70B2-A84ECBF02A169921.

[vi] Ibid.

[vii] Senate Record Vote 69 of 2010, http://senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=2&vote=00069.

[viii] Bob Tita, “Caterpillar Takes Hit on Health Care,” Wall Street Journal March 25, 2010, http://online.wsj.com/article/SB10001424052748703312504575142313494421460.html.

[ix] “Deere Sees $150 Million Hit from Health Care Reform,” Reuters March 25, 2010, http://www.reuters.com/article/idUSN2521686220100325.

[x] “AT&T to Book $1 Billion Cost on Reform,” Bloomberg March 26, 2010, http://www.businessweek.com/news/2010-03-26/at-t-to-take-1-billion-charge-on-health-care-reform-update1-.html.

[xi] “Obama Tax’s $14 Billion Charge Starts at Caterpillar,” Bloomberg March 25, 2010, http://www.businessweek.com/news/2010-03-25/obama-drug-tax-s-14-billion-profit-cut-starts-with-caterpillar.html.

[xii] “AT&T to Book $1 Billion Cost.”

[xiii] Tom Lauricella, “Debt Fears Send Rates Up,” Wall Street Journal March 26, 2010, http://online.wsj.com/article/SB10001424052748704094104575144244213486742.html.

[xiv] Michael Luo, “Some States Find Burdens in Health Law,” New York Times March 27, 2010, http://www.nytimes.com/2010/03/27/health/policy/27impact.html?hp.

[xv] Byron York, “Democrats Threaten Companies Hit Hard by Health Care Bill,” Washington Examiner March 29, 2010, http://www.washingtonexaminer.com/politics/Democrats-threaten-companies-hit-hard-by-health-care-bill-89347127.html.