The federal health insurance law's prescription for curing rising costs of health care may break the backs of more than small businesses.
What. Many businesses brace for bad effects from federal health care law.
Issue. Disincentives for businesses to hire full time workers and increase pay.
Impact. Higher taxes, increased overhead costs and more paperwork stifle economic recovery.
Health care reform's biggest impacts may be a few years away, but some Gulf Coast businesses are already trying to make sense of the Patient Protection and Affordable Care Act of 2010 — and prepare for the days of reckoning ahead.
The 2,400-page act requires employers to provide health insurance for employees. Companies with more than 50 employees that do not offer coverage, and have at least one full-time employee receiving a tax credit for premiums paid, will pay a $2,000 fine per employee excluding the first 30. Businesses will pay $3,000 per employee receiving the premium tax subsidy.
The U.S. Chamber of Commerce, which opposed the law, calls those small business tax credits “unworkable” because “the extremely low wage restrictions” make few small businesses eligible.
“Why would you hire that 51st person?,” asks Rob Pariseau, president of Benefits Solutions Group, an employer benefits broker in Tampa.
Pariseau has been studying the short- and long-term effects of the reforms. “I think premiums are going to go through the roof,” Pariseau predicts.
“There's going to be a significant cost,” says Ken Cruley, chief financial officer of First Watch, a 2000-employee growing chain of breakfast and lunch restaurants. Cruley's responsibilities include assessing such major influences on his company's far-flung operations.
Based out of its corporate headquarters in Lakewood Ranch, First Watch restaurants have been sprouting up across the Gulf Coast and in 11 states from Florida to Arizona to Pennsylvania. The company site claims it's “the nation's fastest-growing daytime-only restaurant company.”
Maybe not for long.
Cruley says that though there's not much impact in the near term, “In two or three years it's going to change how we're going to do business.” Eighteen different Obamacare taxes adding up to $503 billion in the next 10 years can do that.
With mandatory health care coverage, Cruley and other business owners have little choice if they want to stay in business, much less grow. “At the end of the day we're going to be better off paying the penalty,” he says. That means health care coverage does not expand, but government coffers do.
Compared to the cost of $3,000 or more per employee for health insurance, that could be an easy decision for small businesses and bigger businesses like First Watch that have a youthful workforce. “We have a workforce that is younger so they don't see the need,” says Cruley. “Now you're going to force it on individuals.”
The company provides health insurance to all its employees, though only about 400 currently participate in its health care insurance program. Cruley says the penalties would add up to roughly $3.7 million annually.
But that's magnitudes less than the nearly $12 million price tag he says Obamacare could cost First Watch. Cruley doesn't see how that $8 million difference can be made up under the federal plan even if lower rates come from more people being forced to buy insurance, as is assumed by backers.
Pariseau has been studying the effects of the reforms. He predicts two tiers of coverage: one for low skilled workers, like Cruley's, who, Pariseau says, “will surely be in the government exchanges and subsidized,” and another for high skilled work forces that will have group insurance.
A tax on revenue
Fellow capitalist Tom Kruse, president of Hoveround, which employs more high skilled workers than First Watch, feels Cruley's pain.
The Manatee County manufacturer of power wheelchairs had every reason to be optimistic about future growth. Aging clients, a more overweight population and growing numbers of wounded warriors provide a strong market for a highly valued product for his clients. And more work for its 458 full-time employees.
However, the much-sought-after high tech manufacturer gets hit with the 2.3% excise tax on manufacturers, and also importers of certain medical devices. “There's quite a few things in the bill that will affect our company in a negative way,” Kruse says.
One problem Hoveround faces is the medical device tax set to start squeezing the top line in 2013. It hits hard, he says, because it's a tax on revenue, not on profit. “For anyone doing a lot of R and D it's a little difficult; 2.3% could be a major portion of any health care company's bottom line.”
But the biggest issue for Hoveround, says Kruse, is a small section buried in the bill that eliminates the first month purchase option for power wheelchairs. That change forces the company to go to a tight lending market to finance its receivables.
“It's always been a purchase option for power chairs,” which he says are personal items that may now get returned after 18 months requiring the chair to be sanitized. “People need them forever,” he notes.
“They've eliminated the purchase option, so now we get paid over 13 months,” Kruse says. The bottom line: “The cost of doing business is more.”
Kruse can be thankful he's not getting hit with a 10% excise tax. That's what more than 1,000 Florida tanning salons and services businesses get tagged with starting July 1.
“You can't raise prices 10% and not affect business,” says John Overstreet, executive director of the Indoor Tanning Association, a national industry group in Washington D.C. “These businesses in the recession have struggled already. They're definitely going to suffer.”
It's not just the penalties, taxes on medical devices or excise taxes costing businesses.
A recent analysis of Obamacare's impact on businesses by The Heritage Foundation, a Washington D.C.-based conservative think tank, states, “The new health care law will impose new compliance regulations, employer mandate taxes, taxes on business 'flow-through' and investment income, and numerous indirect costs on small- and medium-size companies.”
The report argues that both small and medium companies — medium meaning 50-199 workers — will react to the tax penalties resulting in employees bearing most of the burden passed on to them.
Employees can expect reduced wages, less hiring or loss of jobs. According to the report, some businesses will just increase hours for current employees instead of adding more full-time workers. Employers may also lean toward hiring more low-skilled and low-income labor or choose more temporary or seasonal employees adding to the estimated 20% underemployment crisis.
For businesses, complying with all the new regulations carries a heavy price tag too, and not just for meeting the extra compliance regulations for health insurance plans.
Beginning in 2012, all businesses must send in Corporate 1099-MISC forms for every business-to-business transaction of $600 or more. It's expected that this tax reporting change will cost small businesses more than larger ones because small firms depend more on outside accounting services.
It's estimated that 16,500 IRS auditors and other government employees may be needed to collect all the new taxes.
There's also an increase in the hospital insurance piece of the payroll tax taking effect in 2013.
The employee's portion goes from 1.45% to 2.35% for families earning more than $250,000 and singles making more than $200,000. With the employer's portion, the combined total rate goes up to 3.8%. Small businesses that file as individuals pay the Medicare surtax.
The income thresholds are not indexed to inflation, so over time income creep will mean more people paying the tax.
And for the first time, that new higher 3.8% hospital insurance tax now also gets applied in 2013 to investment income, including capital gains, dividends, rents and royalties.
The Heritage Foundation report writes, “This will discourage investment and lead to slower economic growth, fewer jobs, and lower wages.”
Already, many large companies have announced write-downs of future earnings due to elimination of the corporate deduction for retiree prescription expenses. AT&T estimates the tax changes will cost it $1 billion, or more than $3,500 per employee.
Rick Foster, the chief actuary of the Centers for Medicare and Medicaid Services, a federal health care agency, reported that the reforms will cost $828 billion over this decade while saving $577 billion, a net loss of a quarter trillion taxpayer dollars.
More D.C. warnings
Though the report says the health care overhaul will cut the number of uninsured by 34 million — and half of those may end up on Medicaid some predict — it raises several other warnings.
For one, Foster suggests that some employers will stop offering health care benefits to their employees. The actuary claims, as First Watch's Cruley notes, that the penalties “are relatively low compared to prevailing health insurance costs.”
U.S. Rep. Vern Buchanan, R-Longboat Key, says of companies expected to pay the penalties, “They're all fairly entrepreneurial. They're going to look at this instead of hiring people.”
Buchanan, who sits on the small business committee and is the Republican leader on the committee's finance and tax subcommittee, says all the spending of taxpayers' money “does nothing to help small businesses create jobs.” Employers will pay $52 billion in new taxes because of the employer mandate taxes, according to data from his office.
“This health care bill does nothing to bring down the cost, and that was the biggest issue,” Buchanan says.
The success of repeal efforts already underway may be determined by the outcome of this fall's federal elections. Without changes in Congress' composition, the days of reckoning for business become only a matter of time.
Some impacts of the new health care law on business:
• Employers who cannot offer “acceptable” health care coverage to employees must pay a $2,000 tax per employee.
• Employer mandate applies to full- and part-time workers.
• New restrictions on Health Savings Accounts, Medical Savings Accounts, Flexible Spending Arrangements and Health Reimbursement Arrangements.
• 44% of all workers employed by small businesses that could be subject to the employer mandate; that's 26.4 million people and 22% of the private sector workforce.
• 219,961 small businesses that could be subject to the employer mandate.
• $982 billion of wages paid to employees working at small businesses that could be subject to the employer mandate and associated taxes.
• $52 billion of new taxes employers will pay because of the employer mandate taxes.
Source: U.S. House of Representatives, Small Business Committee.