Retailers Bracing for Higher Health Care Costs

Some say they plan to change, drop coverage, or "stay small" to avoid thresholds

WASHINGTON -- Employers in the retail and restaurant industries are more likely than other companies to drop their health plans or cut workers' hours when new Affordable Care Act requirements take effect in 2014, according to new data from consulting firm Mercer, reported The Wall Street Journal.

Retail and restaurant franchisees are bracing for higher costs as part of the law, and several said they planned to change workers' health benefits.

The CEO of the Papa John's International pizza chain, John Schnatter, said this week that the law's requirements for employers would add 11 cents to 14 cents to the cost of a pizza. Schnatter is a supporter of Republican presidential candidate Mitt Romney, who has pledged to repeal the law signed by President Barack Obama.

Randall Tabor, who owns two Quiznos sandwich restaurants in Virginia Beach, Va., once aspired to triple the number of outlets he owns. But after the federal health-care overhaul passed in 2010, he shelved those plans, he told the Journal. The law requires that employers with 50 or more full-time workers provide health insurance to employees by 2014 or pay a penalty. Tabor, who employs 36 people, wants to stay small so he doesn't trigger the requirement.

Restaurants and retailers are industries historically among the least likely to provide insurance to workers, the report said. Many franchisees of big chains hover around the threshold at which they will be required to start insuring workers or pay the penalty. They also have high turnover and a large percentage of part-time and seasonal workers.

McDonald's Corp. CFO Peter Bensen told analysts last week that the law will add between $10,000 and $30,000 in added annual costs to each of the 14,000 McDonald's U.S. restaurants, 89% of which are franchisee-owned.

Burger King Worldwide Inc. expressed a similar concern. "Many of our franchisees will struggle with how to reconcile the financial implications … and will likely take other measures to reduce costs," Steven Wiborg, president of the chain's North American arm, said in a prepared statement obtained by the Journal.

Operators of outlets including Subway, Burger King and Dunkin' Brands Group Inc.'s Dunkin' Donuts last week met with more than a dozen lawmakers in Washington to complain about the law, said the report. Industry trade groups are also pushing the White House to soften the requirements through regulations that will spell out exactly how employers must comply with the law.

"I don't have the profit margin to pay for it," said Tabor, who doesn't offer health benefits to his Quiznos workers.

Some restaurant owners who offer limited health-benefit plans say they will drop them and pay penalties rather than provide the more expensive insurance required under the law. For employers above the threshold, the penalty starts at $2,000 a worker, although the first 30 employees don't count toward the levy.

John Motta, who owns 10 Dunkin' Donuts in New Hampshire and 10 in Virginia, said he offers workers a choice of two insurance plans and pays half the premiums. He is weighing whether to drop coverage, but told the newspaper that the cost of the penalty could put him out of business in Virginia, where his stores are struggling.

Other franchisees are looking at ways to avoid the requirement by cutting workers' schedules so they work fewer than 30 hours a week--the law's definition of a part-time worker--since only full-time workers are counted toward the insurance coverage requirement.

A question for franchisees is whether the federal government will count their employees based on the combined number at all their outlets or treat each outlet as a separate business.

Obama administration officials say they have listened to the concerns of the restaurant and retail industry and that regulators might offer some flexibility, the report said.

Some employers can use new insurance exchanges created by the law to shop for coverage, while the smallest businesses will receive tax credits to offset the cost of covering lower-wage workers.

Jody Hall, who has six cupcake stores in Seattle with 100 employees, 55 of whom are full-time, said she welcomes the law. She said she has been providing insurance to employees since shortly after opening shop, and pays around 75% of their premiums. The exchanges will give her the "same kind of access I had in corporate America at similar prices," she told the paper. Jason Furman, an economic adviser to the president, said states such as Massachusetts that imposed requirements for employers to provide coverage haven't seen declines in employment as a result. "The vast bulk" of large businesses already offer insurance, he said. "We want them to continue to do that."

Skeptics say they fear disruption in the insurance market. "We don't know how to plan for it," Kathie Veasey, owner of a True Value hardware store in Wilmington, Del., told the paper. She said she pays the full cost of insurance coverage for 10 of her 11 full-time employees. Her business won't be subject to the insurance-coverage requirement because of her payroll's size, but she said she doesn't expect the law's changes to bring down her premiums.

According to a Mercer survey of 1,203 employers released Wednesday, about 9% of retail and hospitality employers were planning to drop their existing health plans once new insurance exchanges are set up in 2014, compared with 6% of companies across all sectors, said the report.

The survey also found that retail employers who don't currently offer coverage were more likely to consider cutting employees' hours to avoid requirements of the law.

Many retail employers are close enough to the 50-worker threshold that it might make financial sense to cut hours and avoid the penalties for not offering coverage. Manufacturing employers, by contrast, were more likely to say that they would create new health plans or expand existing plans to respond to the law.

Mercer found that about 46% of restaurant and retail companies said they would have to change in some way once the law comes into effect, compared with 16% of financial-services companies.