How Three Business Owners Are Coping With New Insurance Requirements
Updated May 29, 2013, 8:25 p.m. ET
Companies with fifty or more full-time employees will soon have choices to make to comply with the Affordable Care Act. WSJ’s Jason Bellini breaks down the options.
Small employers across the U.S. are struggling to get a handle on their health-care costs under the Affordable Care Act.
Many of them say they expect their operating expenses to jump in 2014, when the law's employee health-insurance requirements take effect. But they acknowledge that their forecasts are back-of-the-envelope calculations based on only partial information.
Starting next year, the federal government will impose penalties on any business with 50 or more full-time equivalent employees that doesn't provide adequate health-insurance coverage to workers who clock 30 or more hours a week.
If such employers choose not to offer health coverage, they will face a penalty of $2,000 for each full-time worker, excluding the first 30.
If they do offer coverage, but the insurance doesn't meet the law's minimum requirements, they face a penalty of $3,000 for each worker who gets a federal subsidy through state insurance exchanges.
Owners with between 50 and 200 full-time employees are in a particularly tough spot. These businesses are big enough to meet the government's threshold for penalties, but they lack the purchasing power to negotiate the best rates with insurers.
The Obama administration says the law will help small employers. It will let them "pool risk with other small businesses to get more competitive rates, says Erin Shields Britt, a spokeswoman for the Department of Health and Human Services, through new small-business insurance marketplaces, known as "exchanges," which are expected to open this fall.
Here's a look at how three small employers are bracing for the change:
"We don't want to curtail expansion plans" because of the health-care law, says president Richard Stark. But the business will need to find a way to absorb the law's costs.
Currently, the pizza chain doesn't offer its 350 workers an employer-sponsored health-insurance plan. It does offer its 40 salaried managers reimbursements if they obtain health-insurance coverage elsewhere.
Richard Stark, right, president of a small pizza chain in Phoenix, says he doesn't want health costs to curtail the business's expansion.
Mr. Stark was a loyal patron of NYPD—short for New York Pizza Department—for three years before becoming a part owner in 2000.
The 58-year-old, who has a professional food-service background, consulted the two brothers who founded NYPD and helped them open a second location. Mr. Stark became the majority owner in 2008. NYPD now has 11 locations, and Mr. Stark says he is on track to double the number of locations within five years.
Next year, Mr. Stark intends to offer a health-insurance plan for the first time to comply with the law. "At the end of the day, if we take care of our team members, they will take care of the guests," he says. "I philosophically believe people having health care, regardless of age, is positive."
But it could be expensive. In addition to its 40 managers, NYPD has 90 hourly workers—mostly kitchen staff—who are considered full-time under the law and who would therefore be eligible for the benefits.
Mr. Stark isn't sure how many of those workers will opt into the company's new plan, considering that most are younger, healthier and lower-paid workers who might go on a parent or a spouse's plan, or who may forgo insurance coverage and pay a minimal penalty.
One way to offset the new expense is to negotiate with vendors for lower-cost ingredients and packaging, such as pizza boxes. Mr. Stark also plans to streamline business operations, perhaps by preparing some items like sauces and dressings at an off-site location, and by investing in equipment like dough mixers and vegetable slicers to automate certain tasks, he says.
Employees may see less take-home pay "because their total compensation is increasing, from our perspective," if they take health benefits, Mr. Stark says. Managers' bonuses are tied to company profits, so if the law erodes profit, managers may get smaller bonuses, he says.
And as a last resort, NYPD would raise prices of some menu items, Mr. Stark says.
"We will have to work smarter to be more efficient and more profitable," he says. "We will need to find the pennies and nickels and dimes everywhere."
Consultant Asks a Broker
Business: Future State Inc., Walnut Creek, Calif.
Rough calculations: Health-care costs could rise by $200,000 to about $400,000 a year.
Options considered: Dropping insurance and paying a $2,000-per-employee penalty.
"I could make more money in the short term if I cut benefits," says Steven Laine, president and chief executive of business consulting firm Future State, but he fears he would lose employees.
His 93-person firm now pays more than 50% of the premiums for 32 employees who currently take the coverage it offers, spending roughly $200,000 total a year.
If all 77 full-timers were to participate in the company's plan next year, its health-care costs likely would more than double, he says. But he doesn't know how many will join the company plan, which makes it very difficult to estimate and plan for the costs.
Steven Laine, CEO of a consulting firm in Walnut Creek, Calif., decided against dropping health coverage, partly for fear of losing employees.
"Some of the folks have other sources of insurance, like a spouse," he says. "But right now I can't predict how many that might be."
Mr. Laine, 52, a University of California Los Angeles graduate with three children, says he spoke to his insurance broker in December and was told that when he renews his company's health plan for 2014, his premiums could go up by anywhere from 15% to 60%—regardless of whether more employees choose to be covered by his firm.
"The message is, 'We really don't know; we have no way to predict for you what it will cost in any reasonable way,' " he says.
On the other hand, his firm could drop insurance, and face $94,000 in penalties. But the decision is a lot more complicated than which option is cheaper. Insurance benefits are tax-free, and a lot of firms don't want to risk losing workers to competitors—or getting bad publicity for ditching coverage.
Mr. Laine is worried that it would be difficult to attract or retain staffers without a health plan. Moreover, dropping insurance "fundamentally goes against our organization's values," he says.
IT Firm Foresees an Edge
Business: Pro Computer Service LLC, Moorestown, N.J.
Rough calculations: Premiums stabilize, or perhaps even decrease.
Options Considered: No changes because the company hopes it will gain a competitive boost.
Anthony W. Mongeluzo believes the health law will lower and stabilize insurance premiums for his 13-year-old information-technology-services firm. He also thinks it could give his business a leg up against rivals.
Mr. Mongeluzo, the company's 32-year-old president, has roughly 40 employees today, but since his firm is growing—he says revenue is on track to reach $7 million in 2013, up from $6 million last year—he is hiring. He expects his head count to be above 50 by January, when the employer provisions of the health law go into effect.
The company already offers a health-insurance plan that covers hospitalizations, doctor visits, maternity care and prescriptions, so the law "isn't going to hit my wallet," he says.
Mr. Mongeluzo relies on technology and streamlined business processes to keep his overhead low, so he can afford to cover 55% of premiums for employees and their families.
"My understanding from talking to my broker is that we will be in compliance" with the law, he adds.
Under the health law, insurers must justify to regulators any plans to increase premiums more than 10% a year. For this reason, Mr. Mongeluzo, who started Pro Computer Service after graduating from college in 2000, says he doesn't expect his firm's future premiums to increase as much as they have in the past, an average of roughly 20% a year.
Mr. Mongeluzo says he has always offered his employees health benefits, in part because he believes it helps with retention, and he stresses that turnover at his firm is low.
His staff also enjoys regular office videogame competitions. "You'll see squishy balls flying around the office," he says, adding that he is a pretty eccentric entrepreneur, often working out of a sport-utility vehicle retrofitted with a three-foot-long desk, two computer screens, a fax machine and shredder.
Because many of his competitors currently don't provide health benefits to their employees, he thinks some will be forced to raise prices, or lay off workers to avoid the law. That, he figures, might give him the opportunity to offer lower rates than his rivals and land more clients.
—Christopher Weaver contributed to this article.
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