No doubt you have heard that the Olive Garden, Denny’s and Papa John’s Pizza all are slapping an “Obamacare surcharge” on the price of their products. They claim they have no choice.
But the news that Americans might pay 50 cents more for a mediocre $10 meal at the Olive Garden is not what bothers me most. Since President Obama was re-elected each of these restaurant chains have announced that they also plan to cut many full-time workers’ hours back to less than 30 hours a week in order to duck the cost of providing health care benefits.. This means that employees who are now working 40 hours a week will have to look for a second job—or find a way to support themselves on less than three-quarters of their current salary.
Michael Tanner, a fellow at the conservative Cato Institute, argues that companies outside the restaurant business also will be forced to down-size. Just a few days ago, Tanner wrote: “While restaurants are especially vulnerable to the cost of Obamcare other business are being hit too. For example, Boston Scientific has announced that it will now lay off up to 1,400 workers and shift some jobs to China. And Dana Holdings, an auto-parts manufacturer with more than 25,000 employees, says it too is exploring ObamaCare-related layoffs.”
Obamacare will “keep unemployment high,” Tanner claims, because under reform legislation, businesses that have at least 50 employees working over 30 hours a week are expected to offer their workers affordable health insurance. If they choose not to, and more than 30 of their employees qualify for government subsidies to help them purchase their own coverage, the employer must pay a penalty of $3,000 for each worker who receives a subsidy— up to a maximum of $2,000 times the number of the company’s full-time employee minus 30. (The Kaiser Family Foundation offers an excellent graphic explaining the rule.)
By paying the fine, the employer is, in effect, paying a share of a tax credit that would cost the government anywhere from roughly $1,700 for a single young worker to over $12,000 to help the average 35-year-old worker who has a spouse, two children, and reports $35,000 in total household income.
Conservatives like Tanner argue that that is unfair, and that small businesses– “the engine of job growth”– will be hit hardest.
What they don’t do is look at the math:
- Just how much would the penalties add to a food chain’s operating expenses?
- Would raising the price of a medium-sized pizza by 5 cents cover that cost? I
- If most of a fast-food chain’s workers are young and single, how much would a firm have to lay out to cover 65% of their premiums?
Conservatives also ignore the fact that companies with fewer than 25 employees are exempt from the penalties. And they rarely talk about how, under the ACA, many small businesses will receive generous subsidies to help pay their share of premiums. .
Finally, is Obamacare the real reason that some companies continue to lay off workers? Boston Scientific began reducing its U.S. workforce early in 2010, in part because it wanted to begin selling more devices in China– but also because it has been under intense US regulatory scrutiny in recent years because of defects in a pair of its best-selling cardiac products: tiny mesh tubes known as stents that are used to keep cleared arteries open and implantable defibrillators that send electric shocks to restore heart rhythm. (Maybe in China regulators won’t be so picky about medical device manufacturers concealing defects.)
In 2011 the Boston Globe published a long story about the layoffs at Boston Scientific. Executives at the company didn’t even mention the cost of health insurance. Instead, they emphasized the opportunities abroad: “Boston Scientific unveiled a plan on Wednesday to spend $150 million to step up its commercial activities in China, one of the world’s fastest-growing medical device markets.”
If a company like Boston Scientific wants to export jobs, Obamacare is an easy excuse.
Fox Breaks the News to Denny’s Employees
On November 15, Denny’s John Metz made his decision known on Fox News . This is how 1,200 employees of RREMC Restaurants found out that beginning in January 2, 2014, “most” of Metz’s staff will find their weekly hours slashed from 40 to 28.
Otherwise, his company might have to pay as much as $2.34 million in penalties. ($2,000 times 1,200 employees minus 30 –or 1170 employees– equals $2.34 million.) This assumes that all of his workers apply for and receive subsidies. One wonders: how much of the $2.34 million would be covered by the 5% increase in prices?
Alternatively, Metz, might offer his workers health benefits. Most of them are young, many are single. And according to Congressional Budget Office (CB0 ) estimates, comprehensive insurance for a single person under 30 will cost around $3,400 in 2014. ) Employers would be expected to cover just 65% of the premiums. Offering insurance might actually cost less than the the penalty (65% of $3,400 equals $2,210.)
And of course, Metz could write off the cost of insurance against profits. (His businesses are doing quite well.) Meanwhile his largesse would return benefits to his business: studies show that when employees have access to health care, absenteeism falls and productivity rises.
Update: Since making that statement Metz, whose company owns more than 30 Denny’s locations, heard from Denny’s corporate headquarters. Yesterday, Huffington Post reported that Denny’s “CEO John Miller privately reached out to Metz to express his ‘disappointment'” with the Florida franchisee’s controversial statements about Obamacare —which sparked a wave of backlash for the national restaurant chain over the past few days.” Customers were threatening to boycott. Other franchisees were furious: Metz’s grandstanding on Fox was costing them business.
Monday night Metz expressed ‘regret’ over his statements. He added: “We have always been and will continue to be 100 percent dedicated to our employees and customers and will work tirelessly to find solutions that are in their best interests. It is our intention is to fully comply with the law.”
Does this mean that Metz has realized that he can, in fact, offer benefits to his employees without slashing their paychecks?
What is certain is that Metz greatly exaggerated the burden that Obamacare places on employers. As I explain below, companies outside the health care industry will pay a very small share of the total cost of funding the Affordable Care Act (ACA).
The important question is: can they afford it?
Managed Care Matters’ Joe Paduda recently took a hard look at the numbers that led Papa John Pizza founder and CEO John Schnatter to announce that he’s going to have to hike the price of his pizzas by 10 to 14 cents to cover the added cost of complying with Obamacare’s provisions.
“Turns out that it’s only 3.4 to 4.6 cents” for an average-sized pie,” Paduda observes. “Let’s think about that,” he continues. “Fourteen cents a pizza gets all of his employees excellent health coverage (only about a third are covered now), even though Schnatter says he’d ‘like to cover all of them.’”
Over at Forbes, Caleb Malby eyeballed Schnatter’s balance sheet and confirms Paduda’s appraisal: Obmacare does not constitute a major threat to profit margins. “Last year, Papa John’s International captured $1.218 billion in revenue,” he reports. “Operating expenses were $1.131 billion.” Schnatter claims that Obamacare will his cost his company $5-8 million annually. “If Schnatter’s math is accurate,” Malby writes, “ the new regulation translates into a .4% to .7% (yes, fractions of a percent) expense increase.”
“Using Schnatter’s figures,” he concludes, “the costs his company will incur due to Obamacare are not equal to the price increases he mentions. Those increases would more than make up for damage done to the company’s net income through increases to operational expenses.”
Why,Then, Is Papa John Threatening to Cut Employees’ Hours? Politics, not Economics
After President Obama was re-elected Papa John announced hat he would have to turn many of his employees into part-timers. Schnatter, who was a Mitt Romney fundraiser and supporter, may not have been happy about how his fellow citizens voted. It’s beginning to seem that many of these decisions have less to do with profit margins than with ideology.
To his credit, Paduda doesn’t turn his post into a personal attack on Papa John: “This isn’t to slam Schnatter, who by all accounts is a decent guy who raises money for worthy causes and tries to stay out of public politics. He does get a bit too aggressive in his marketing efforts, but hey, that’s not the worst thing in the world.”
Paduda is more concerned about the larger trend: “Schnatter’s perspective . . . is consistent with what we’ve heard from other chain food outfits” and it “is myopic—in several ways. If his company doesn’t provide insurance for his low-paid workers, we taxpayers have to. That’s the way Obamacare works: folks with incomes below 400% of the FPL (federal poverty level) can get subsidized coverage.”
Do Employers Have An Obligation to Provide Health Benefits?
More than one of Paduda’s readers challenged the notion that Schnatter has a “responsibility” to his workers.
Bob W. wrote: “I question the phrase “Schnatter is avoiding his responsibility.” I am wondering when providing for employees personal needs (and health care is a personal need) became the employer’s responsibility. I am hoping for a bit more morally based response than “because it is the law.”
Paduda replied: “Bob—thanks as always. In response to your query as to when it became an employers’ responsibility to provide health insurance, that would have occurred when PPACA was passed, signed into law, and upheld by the Supreme Court. Laws run this country, not morals. If ‘morals’ did, we never would have invaded Iraq or water-boarded prisoners or interned Japanese Americans or overturned legitimate governments in Africa and central America or supported the Shah of Iran. ‘Morals’ are personal; laws are societal.
“As to a potential decision to cut employees’ hours, I’d reiterate that in doing so Schnatter is requiring you and I to pay for his employees’ health care costs. That is a personal decision on his part, and one he is indeed entitled to make. However, in doing so, he is choosing personal gain at the expense of society as a whole.”
I agree, When our elected representatives decided that it was time to provide access to healthcare for all Americans, they decided that this should be a matter of “shared responsibility.” They didn’t exempt Papa John. Or Boston Scientific. All of us are asked to contribute, by buying health insurance– if we can afford it. (If it will cost more than 9.5% of our income, we will receive subsidies.)
I would quibble with Paduda on just one point: He suggests that “you and I” will be footing the bill. But “we” (middle-class and upper-middle-class taxpayers) won’t be paying for the subsides. It would be more accurate to say that Papa John expects other businesses (mainly businesses in the health care industry) and very wealthy families to kick in the money to provide subsidies for his workers.
Who Will PIck Up Papa John’s Tab?
Only 2% of taxpayers (those earning more than $200,000, $250,000 for couples) are asked to help fund the Affordable Care Act. About a year ago, I wrote a brief that analyzes what the ACA will cost– and where the money will be coming from. (Better Care for Less: How the Affordable Care Act Pays For Itself, and Cuts the Deficit.) You will find a short introduction and a link to the brief in this HealthBeat post.)
That is what I discovered: Over the ten years from 2010 to 2019, reform will cost roughly $940 billion as we begin to offer near-universal coverage. The ACA does this primarily by providing subsidies for middle-income and low-income families (at a projected cost of $466 billion) and by expanding Medicaid and SCHIP, the government health programs for the poor (estimated cost, $434 billion.)
The Congressional Budget Office (CBO) calculates that asking wealthy Americans earning over $200,000 to pay an addition 0.9 percent on wages and self-employment income over $200,000 (not on the first $200,000 that they earn) and 3.8 percent on investment income over $200,000 will generate $210 billion in new revenues. The lion’s share of the rest of the $940 billion will come from five other sources:
- — $145 billion saved, over a period of ten years, by phasing out overpayments to private sector Medicare Advantage insurance companies that are not offering value (better care) to their customers.
- — $107 billion in new fees that insurers, drug makers, and medical device companies agreed to pay while Washington was hammering out the details of the ACA. This was a pragmatic decision on their part. These companies knew that if reform passed, their revenues would climb as millions of uninsured and under-insured new customers came to them, government subsidies in hand, able to pay for their products and services. Now some device-makers are beginning to whine. They must accept the fact that the deal is done.
- –As much as $196 billion (CBO’s projection) by shaving Medicare’s annual increases in payments to hospitals, skilled nursing facilities, ambulatory surgical centers, and other institutional caregivers, by 1 percent a year, for ten years, with the goal of making them more cost-conscious, and more efficient. Research shows that when hospitals are under some financial pressure (not too much) they do a better job of squeezing waste out of their systems.
- –The ACA saves another $36 billion by trimming government subsidies to hospitals that ttreat a “disproportionate share” of poor patients. (Under reform, they will no longer need most of that money because they will no longer be forced to absorb the cost of treating 32 million uninsured Americans.) Hospitals accepted a total of $232 billion in lower revenues because, like others in the healthcare industry, they realize that reform will bring them millions of paying customers. Today, unpaid bills have created a pile of debt for a great many hospitals. Now, that pile will shrink.
- —$69 billion in penalties paid by employers and individuals who choose not to purchase insurance (Note that despite complaints, employers are paying less than 4% of the $960 billion tab,)
- — $32 billion raised by taxing very expensive (“Cadillac”) health insurance policies that cost more than $27,500 for family coverage, or $10,200 for an individual plan.
What Health Reform Means for Small Businesses: Facts vs. Fiction
Arguably, successful large chains like Papa John’s or Denny’s can survive under Obamacare—especially if they raise their prices ever so slightly. But what about your favorite neighborhood restaurant? Your hair-dresser? Or the dry-cleaner down the street?
First, keep in mind that under the Affordable Care Act, employers with fewer than 50 employees are Not required to offer insurance.
Mom & Pop Shops do operate on truly thin profit margins. Unlike some restaurant chains Czars, their owners don’t take home $3 or $4 million a year. They don’t have stock options worth tens of millions. But, under the ACA, the good news—both for these very small business owners and their employees–is that their workers will be able to buy their own insurance in the Exchanges where low-income and middle-income families will be eligible for subsidies. And when they receive subsidies, their employers will not be subject to penalties.
At the same time, if very small businesses want to offer health benefits—and many are struggling to do just that—the ACA will help them. Since 2010, firms with fewer than 25 full-time equivalent employees, and average salaries of $50,000 or less, have been eligible for a tax break. To receive the tax credit, they must they cover half the cost of single (not family) policies.
From 2010 to 2013, that tax credit covers as much as 35% of the amount the employer lays out for insurance.
If a business doesn’t owe tax in a given year, it can carry the credit back or forward to other tax years. From 2014 to 2015 the maximum credit will be bumped up to 50% of the employers’ costs. In addition, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. For some businesses, this will be an extraordinarily good deal.
Finally, all small companies will benefit when state-run Exchanges called Small Business Health Options Program (SHOP) Exchanges open in 2014. There, small firms will become part of a large group, and this means that they will be eligible for lower large-group rates. (Because the administrative costs of hand-selling policies to small groups, and enrolling and dis-enrolling customers are higher, insurers charge them more.)
Without health care reform, current data suggests that by 2016, average health insurance premiums for a single policy in a firm with less than 50 employees would be approximately $6,700. According to the Congressional Budget Office, under reform, the premium for an individual plan that pays for 70% of the cost of covered benefits policy will average $5,000–$1700 less..
What both conservatives and business owners such as Metz and Shattner do not understand is that many small businesses want to provide benefits. Recently, I was surprised to learn that, last year, 71% of firms with 10 to 24 employees offered health insurance. Employers understand that they, too, benefit when their workers have access to healthcare. But small firms need the help that the Patient Protection and Affordable Care Act provides.