And So It Begins

Greetings from the Left Coast!

Social media is ablaze with indignation over announcements by several businesses, many of them in the restaurant industry, who have now announced that they will be either cutting back on the number of employees or cutting back their employees' hours to less than 30 hours per week as a result of the impending employer mandates that are part of the Affordable Care Act (a.k.a. ObamaCare). Many are urging boycotts of these businesses, which seems a bit strange, because a successful boycott would necessarily harm the businesses and therefore lead to even fewer people having jobs.

But let's take an objective look at the facts about what businesses are now facing:

As of January 1, 2014, all businesses that have more than 50 full-time employees must provide them with health insurance or pay a fine. And there will be no such thing as "basic" health insurance - all plans must conform to the government mandate in terms of what must be covered, and what the deductible and annual/lifetime limits can be. One of the things that all business owners who do provide coverage will have to do over the coming year is to review that coverage to make sure it measures up to the government requirements.

The cost of a plan that does meet those requirements is estimated to average about $1.79 per hour per full-time employee. As Betsy McCaughey writes in today's New York Post, that's incidental if you're hiring neurosurgeons, but a significant incremental expense if you're hiring bus boys or sales clerks. In most cases, this will double the health care costs of employers in the retail and fast-food industries. Across all industries, for business of 101 - 1,000 employees, health care costs are expected to go up by about 9.5%. For businesses over 1,000, the increase will be roughly 4.5%.

According to a recent study by the McKinsey & Co. management consulting group, as many as a third of all employers are considering canceling their coverage altogether, because it will be less expensive to pay the $2,000 annual fine per employee than it will be to provide coverage that conforms to the government mandate. Those employees would then either go onto Medicaid (if they qualify), or purchase insurance through one of the state-run insurance pools. In the latter case, depending on their income, a portion of their premium would be subsidized by the government, paid for, in part, by those $2,000/employee fines. And, regardless of what you may have heard, part of the funding will also come from reducing payments to Medicare Advantage plans, and from slowing the growth in payments to Medicare providers such as hospitals, hospices, home health care agencies, and skilled nursing facilities - which is likely to make some of these providers less inclined to accept Medicare patients.

For some employers, hiring that 51st employee may turn out to be cost-prohibitive. Consider a restaurant with 50 employees, that currently pays minimum wage (not uncommon for employees that get a large portion of their income from tips) with few or no benefits. In fact, let's say this restaurant was paying more than Washington's minimum wage of $8.55/hour - let's say our restaurant is paying $10/hour, just to make the math simple. Today, hiring that 51st employee costs roughly $20,000 (2,000 hours x $10). But as of January 1, 2014, hiring that 51st employee would mean paying the $2,000 annual fine for employees 31 - 51: that's an additional $42,000. So hiring that 51st employee will actually cost the business $62,000, not $20,000. In all likelihood, that employer simply will not hire that 51st employee.

The other alternative, of course, is to reduce employee hours to less than 30 hours per week, which is the threshold under the ACA that defines a "full-time" employee. However, fines under the employer mandate also are imposed on workers who are not full-time, because a combination of employees working an aggregate of 120 hours per month will count as one full-time employee. This provision will be particularly painful for seasonal businesses, where it is often not cost-effective to provide insurance benefits to employees who will only be with the business for a short period of time.

Businesses have to make a profit or they don't survive, which means that all of their employees lose their jobs - which, by the way, is also the logical outcome of a successful boycott. When the government takes action that drives up the cost of doing business, something has to give, and not all businesses have the ability to simply raise prices to pass those costs on to their customers. The retail and fast-food industries in particular are extremely competitive. There is nothing in the ACA that requires a business to simply eat those increased costs, even if they are able to do so.

The most surprising thing to me is that anyone is actually surprised by this. Thanks for listening.