Getting a Handle on Healthcare
While the ultimate impact of the new Patient Protection and Affordable Care Act remains to be seen, some of the challenges and opportunities that it will present to pet retailers are already apparent.
Just months from its start date, Obamacare has many pet retailers scratching their collective heads and wondering—some say worrying—about not only what to do, but how to do it and how much it is going to cost them.
Some industry and healthcare experts say the new law, which goes by the official name of the Patient Protection and Affordable Care Act (ACA), will actually help many smaller pet retailers control their health insurance costs when it goes into effect on Jan. 1. They say that lower insurance costs and significant tax incentives for small businesses could help pet store owners cut costs.
Others are not so sure and fear the worst. They note that Obamacare consists of more than 1,000 pages of complex regulations that could end up putting a greater burden on chains and independents, thus actually stunting what is expected to be a healthy growth rate for pet retailers over the next several years. The result could force many retailers to cut the number of full-time employees, since the law says that all full-time workers must be offered health insurance.
For independent pet stores, a huge potential problem is the prospect of launching healthcare plans where none previously existed, a daunting and expensive task for one- and two-store operators that, according to some observers, may find the penalty for not covering employees far cheaper than paying insurance premiums.
The issue for pet stores is that their business is far more labor intensive than other segments of retailing, and the cost of labor is relatively high compared with competitors like supermarkets, big-box stores and online pet retailers. As such, industry growth could fade if new healthcare mandates force retailers to cut back on hiring and store growth.
A survey by U.S. Chamber of Commerce released in April said that requirements of the new law, as well as costs, are the biggest concern for small businesses—the category into which most pet stores fall—with 71 percent saying it will be harder for them to hire new employees, especially those at or near minimum wage. The organization has gone so far as to call ACA a “job killer,” especially for lower-income workers, whose cost of coverage would be out of proportion with their wages.
These concerns may have to be addressed sooner rather than later. The enrollment period for healthcare insurance for the coming year usually takes place in September. This alone may be a concern to independent pet retailers that were counting on access to low-cost insurance through state and federally run insurance marketplaces or exchanges. Development of these exchanges is continuing, but at a far slower pace than previously anticipated.
For larger retailers, one of the major provisions of ACA is the Employer Shared Responsibility provision, which states that employers with 50 full-time or full-time-equivalent employees—those working a minimum of 30 hours per week—must be offered an affordable and minimum level of coverage. If not, employers face a $2,000 fine for each full-time employee after the first 30.
“It creates a permanent disincentive against business growth,” according to a report by the Congressional Budget Office (CBO). “If a 50-employee small business that did not offer health insurance wanted to expand by one new employee, they would become subject to the law. So, it is actually in the business‘ interest not to hire an additional employee,” CBO notes.
Another question is whether these higher costs will result in more people losing employer-based coverage—the exact opposite of what the law was intended to do. “This could be a major shock for retailers,” says Mike Thompson, a principal in the human resource service practice at PwC, a leading consulting firm. “The biggest reason is that retailers often have low wage workers, high turnover and don’t offer comprehensive benefits to all employees because they operate on such low margins. This law requires them to reassess that at every level.”
The Kaiser Family Foundation, a non-profit organization focused on healthcare issues, estimates that it would cost employers an additional $3,000 to cover minimum-wage workers under the new law. This could be an overwhelming burden for independent pet retailers, bringing minimum labor costs to a $10.03 per hour for a single full-time employee, and $13.75 per hour for family coverage.
With more than 50 employees on their payroll, Chuck Anderson and Bob Hartzell, owners of the 24-store Chuck & Don’s Pet Food Outlet chain in Minnesota and Colorado, certainly understand that the new healthcare law will result in extra labor costs for their business, even though they already offer their full-time staff healthcare benefits. However, they are hopeful that the short-term impact will be outweighed by benefits over the long term.
“We made a decision to get behind [ACA],” says Hartzell. “Sure, it will hurt our bottom line, but we have to start turning [the overall escalation of healthcare costs] around the other way.”
One of the possible long-term benefits of ACA that Anderson and Hartzell are looking forward to is the impact that interstate competition could have in lowering healthcare premiums. Currently, the Chuck & Don’s owners have only two healthcare insurance providers to choose from in Minnesota. However, ACA should significantly increase their options by allowing providers in neighboring states to enter their market.
Even if a retailer with 50 or more full-time employees is providing healthcare coverage to full-time employees, like Chuck & Don’s does, it is critical to ensure that the coverage being offered is affordable and offers minimum value. The law says that the premium can’t cost the employee more than 9.5 percent of their household income.
“You can be subject to a penalty if the coverage is not considered affordable” says Adam Solander, an attorney and healthcare law specialist with Epstein, Becker & Green in Washington, D.C. “But I think it provides a level of certainty that small and medium sized businesses may not have had before. It’s a very positive thing and will help companies in making their plans.”
Insurance premiums will rise an estimated 6.3 percent in 2013—making them about 42 percent higher than seven years ago.
To estimate the value of coverage, the Internal Revenue Service and the Department of Health and Human Services have developed a minimum-value calculator. Employers can input information about their plan to determine if it pays at least 60 percent of the total cost of allowed benefits—the definition of minimum value.
Advantages for Small Operations
Even though they are exempt from providing mandatory coverage, small retailers may want to consider purchasing coverage in order to garner tax incentives and get a leg up in hiring people who might have avoided working for small businesses in the past.
Here, the law works to the advantage of small business owners. For example, businesses with fewer than 25 full-time employees are eligible for the small business healthcare tax credit of 35 percent of their total premium contributions this year and up to 50 percent in 2014.
These tax credits are significant considering that insurance premiums will rise an estimated 6.3 percent in 2013—making them about 42 percent higher than seven years ago. And the increase could be even higher for small retailers who cannot negotiate rates with insurance companies as effectively as their chain counterparts.
While Denny’s Pet World, a single-store retailer in Kirkland, Wash., may not qualify for the health care tax credit because it currently has 25 full-time employees on staff, general manager Thomas Nelson is no stranger to the impact of quickly escalating premium costs. “Over the past 10 years, our healthcare costs have increased exponentially—much faster than the rate of inflation,” he says.
To help soften the impact of rising premium costs, Nelson says that Denny’s switched to a health savings account—an account that allows employees to put a portion of their pre-tax salaries away for healthcare expenses. “It allowed us to dramatically lower our monthly premiums and increase our deductible,” he says.
Overall, Nelson is optimistic that ACA will have a positive impact on employers and employees alike by doing away with things like lifetime limits on coverage, as well as mandating coverage for pre-existing conditions. And like the owners of Chuck & Don’s, he is hopeful that interstate competition could help lower pricing—although on this point, he remains somewhat skeptical.
In addition to utilizing resources such as health savings accounts, as Denny’s Pet World has, small retailers will also likely benefit from being able to select plans through SHOP, the Small Business Health Options Program of exchanges, administered by the Department of Health and Human Services.
These private- and state-run insurance exchanges that would enable employers to shift from a traditional health benefit model to a more defined contribution approach to healthcare.
Exchanges, a key component of the Patient Protection and Affordable Care Act, were billed as an alternative to employer-based plans that would enable individuals to purchase the insurance plans that are best for them. Many observers expect exchanges will largely benefit lower-income people.
Exchanges, a key component of ACA, were billed as an alternative to employer-based plans that would enable individuals to purchase the insurance plans that are best for them.
As noted, development has been slow. But 18 states and the District of Columbia have said they will set up state-based insurance exchanges, seven others have opted for exchanges that will work in partnership with the federal government, and 25 states are planning to default to federally-run exchanges entirely.
Commenting on the exchanges, Drew Altman, president and CEO of the Kaiser Family Foundation says, “Governors are largely splitting along partisan lines on the exchanges. But the public is not. People like the idea.”
However, cost is once again the problem. According to the Obama Administration’s latest 2014 budget request, the government expects to spend about $4 billion on federal- and state-run exchanges for individuals and small businesses. And this number is expected to rise to $5.7 billion by 2014.
“Some employers are evaluating whether it is in their employees’ best interests not to provide coverage for those at lower income levels or offer very low coverage so these people can maintain their access to the exchanges,” says Thompson.
“Frankly, a lot of people are trying to figure out what’s going on with the exchanges,” says Robert Rosario, director of government relations for FMI. “A lot of our retailers offer very competitive health coverage and want to continue doing just that. But they have to determine if what they offer now fits into this new set of rules.”
Asked if there is any danger that more employers, facing huge healthcare costs, will push more of their employees onto the exchanges, Thompson says, “There are two issues. First is the cost of the penalties. If they offer any coverage, they can avoid the worst of them. The second is whether companies can sell the idea to employees that it is in their best interest.”
Solander adds, “It’s a function of size. Small employers might get a better deal purchasing insurance through the exchange then on their own. Large employers can negotiate a pretty good deal on their own. Those that can’t are probably the ones with a lot of older and sick people in their plans—and that’s going to boost the cost of coverage in the exchanges for everyone.”
A Learning Curve
At this point, retailers should not be overly concerned about making mistakes and incurring a penalty out of the gate. “The IRS will contact employers to inform them and give them the opportunity to respond before any liability is assessed,” says Thompson. “Consequently, companies are looking at a number of strategies including the kind of coverage they offer and how many workers will elect not to take it. They are also looking at workforce planning and how to manage the mix between full and part time in order to keep costs manageable.
“Every business will reach a different conclusion on what type of employees they need to support their customer service. Given, that, the question then becomes how to attract the types of employees they need. The Affordable Care Act has changed the dynamics of the entire business. Companies are not just looking at what they’re going to do, but what everyone else is doing—and it may not be just competing for people with other supermarkets, but against fast food chains and other places. If others offer better benefits, you will have a problem getting the people you need for your stores.”
Overall, retail industry observers and healthcare professionals agree that the next couple of years will be pivotal, setting the stage for how the entire system will evolve over the next decade. “We’ve found that over half of employers would significantly re-evaluate their benefits strategy,” notes Thompson. “But everyone needs to prepare for a new world of greater regulation and an accelerated pace of change in the economics of providing healthcare benefits.”