Creative accounting could lower health costs

(Fortune Magazine) -- In 2003, back when Continental Airlines (Charts) was losing its shirt, Gordon Bethune, its salty CEO, got sick of hearing that upstarts like JetBlue (Charts) had created a new business model that would bury the industry's dinosaurs. So he had his CFO recompute Continental's earnings assuming the company had (like JetBlue) a much younger workforce - and thus much lower health, pension and related costs.

Presto: Earnings went from a reported $388 million loss to a $420 million profit, a swing of $800 million. "It was all bull," Bethune says now of the idea that the economic laws of air travel had been repealed. "If we could fire all our workers every five years, we'd look good too."

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Though Bethune cooked up what I call "age-adjusted earnings" simply to fend off attacks on Continental, the mammoth profit swing his analysis unearthed has big policy implications.

To most of us, the idea that a firm's success could depend so greatly on the youth of its employees feels crazy. Yes, GM (Charts) and its ilk may have gotten themselves into trouble with generous giveaways when the good times rolled. But a sane nation would assess business performance separately from some socially determined sense of what makes for decent health and pension coverage for citizens. Which brings us to the new Democratic majority in Washington.

While Democrats will probably be able to get the minimum wage hiked in the next two years, there's no way they'll be able to move on broader health and pension security with President Bush in the White House. If America's social contract is to be updated for the realities of a global age, it will only be after the 2008 presidential campaign nudges us toward consensus on the need for change.

A small but surprisingly powerful way to enlist business in this conversation would be for the Dems to turn Bethune's creative bookkeeping into a new rule for public companies: In addition to the usual earnings reports, require firms to issue an "age-adjusted" income statement that shows what earnings would be if the company had, say, average-aged workers.

Why would this break through the clutter? Unlike (sensible) new accounting rules that will force firms to put health and pension liabilities on their balance sheets, age-adjusted earnings would create a media hook that becomes part of every quarterly release.

Imagine if TV anchors were saying things like "Today search giant Google reported fourth-quarter earnings of $600 million - though on an age-adjusted basis it was $150 million less."

The idea isn't to create some metric for companies to manage but rather a drumbeat people would hear - a way of making every earnings report a reminder of the inanity of tying things like health care to employment in ways that warp business, suppress wages and crimp global competitiveness.

When I floated the idea to union and seniors' advocates, they fretted that it might push "good" employers to trim health care or accelerate their retreat from defined-benefit retirement plans. Well, earth to liberals: Those horses have already left the barn. The trick now is to get business to support the new forms of security that should take their place.

Age-adjusted earnings raise constructively subversive questions. If big-company health plans today are really just socialized health republics, for example - in which the young subsidize the old while everyone pays identical premiums - why shouldn't this principle of risk pooling apply economy-wide?

Constant reminders of such anomalies may even lead business to see the wisdom of that ancient union article of faith: that businesses shouldn't be competing based on differences in benefits, but on differences in quality, efficiency, customer service - you know, actual performance.

To be sure, not everyone will cheer the bigger role for government benefit financing that prolonged exposure to age-adjusted earnings will invariably promote. Including Gordon Bethune.

"I understand the concept you're talking about," Bethune told me, "but in fairness, nobody cares." Besides, he growls, "I don't like government at all."

Sorry, Gordon. That knee-jerk loathing on the part of CEOs will need to go the way of the defined-benefit plan if we're to provide the security workers deserve while getting unsustainable costs off of business. Who else is going to pick up the tab?

Charles Kolb, president of the Committee for Economic Development, the business-led think tank, says, "The notion of age-adjusted earnings could help spark that overdue conversation." Over to you, Nancy Pelosi.

Matt Miller is a senior fellow at the Center for American Progress and the author of "The 2% Solution: Fixing America's Problems in Ways Liberals and Conservatives Can Love." He can be reached at mattino@att.net.

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