• Obamacare’s big threat to business

    Last week, in the second hour of  Stand Up! with Pete Dominick, Aaron and I discussed an email that had been forwarded to Pete by his dad:

    We have a client who has six separate businesses under common ownership. [At least some of the businesses are restaurants.]  On a good year the businesses operate at a net profit of $200,000 to $300,000 per year combined. [] Annual payroll is between $6,000,000 and $7,000,000.

    If one employee receives a premium tax credit or cost subsidy in an exchange the employer is subject to a $2,000 penalty annually times the number of full-time employees minus 30. There are 140 full-time employees less the excluded 30 (which are coincidentally already receiving insurance) for 110.

    110 times $2,000 equals $220,000. […]

    This scenario puts are clients business in jeopardy as well as the jobs of nearly 240 people.

    The tone of the email certainly makes the situation sound dire. After all, the cost of the penalty, $220,000, is in the range of annual net profit. It might wipe out the business!

    I sincerely doubt it. Here’s why:

    First of all, let’s assume everything in the email is accurate. Let’s also assume that paying the penalty as described is the lowest cost approach. That is, other options like offering health insurance to all employees, moving workers to part-time status, or anything else creative business people and accountants can come up with would cost more.

    Next, let’s recognize that this business has at least $6.2 million in annual revenue, taking the low end of both the annual payroll and profit. In fact, revenue must be considerably larger to cover non-personnel costs, as restaurants and other businesses certainly have (e.g., rent, equipment, insurance, taxes, etc.).

    Nevertheless, let’s take $6.2 million as annual revenue. The cost of the penalty, $220,000, is about 3.5% of that annual revenue figure. In fact, we know it is lower since we know that annual revenue is greater than $6.2 million.

    Three-and-a-half percent.

    If we are to believe that this business is doomed because of a one-time increase in cost equivalent to 3.5% of revenue, I don’t know how it handles typical rates of inflation or other cost shocks (e.g., rent increases, sudden equipment failure, hike in minimum wage, and the like). Actually, I do know how it probably handles those. If it is already minimizing costs and doesn’t want to eat into profit, it passes them along to customers in the form of higher prices.

    Would you stop going to a restaurant because its prices went up 3.5%? I doubt it.* In any case, if this business feels like its customers cannot absorb a 3% price increase, it could split the difference, taking part of the penalty out of profit. Can its customers handle a 1.75% price increase? (And, remember, this is conservative. The actual price increase necessary to preserve profit is lower.)

    Now, if every firm in the US had to raise its prices a few percent that might be cause for concern. But the situation for the business described above is not typical. Only 25% of US firms are potentially subject to the employer mandate because it only applies to those with 50 or more employees. The vast majority of those (about 96%) offer health insurance. Granted, not all workers in every such firm are eligible for coverage, but something like ~90% are (a rough interpolation from the figures in a recent paper by Thomas Buchmueller, Colleen Carey, and Helen Levy). That’s a much higher proportion than for the business described above, suggesting the cost of complying with the employer mandate, on average, should be a smaller proportion of revenue, in general.

    My point is that though we might expect a one-time increase in price levels due to Obamacare, it’ll probably be a fraction of 1%. (This is rough, but probably not that far off.) Don’t let the seemingly frightening anecdotes scare you. Obamacare is not a huge threat to American business.

    Yes, Obamacare will cost somebody something. Expanding coverage can’t be free. We could decide not to pay for some of it through an employer penalty. In fact, that penalty has been delayed a year, so we should all stop hyperventilating about how it’ll destroy jobs. Over the course of the year, we could, and probably should, modify or repeal the employer mandate (assuming Congress can do anything.) Doing so responsibly would require finding other revenue to offset it. What are you willing to pay or cut?

    However, if the employer mandate does go into effect, I hope Pete checks back in with his dad about this business in a few years. I bet it’ll be doing just fine.

    * Papa John’s will have to raise its pizza prices 11-14 cents to meet its obligations under Obamacare. On a pizza of about $15, that’s less than 1%. If you liked Papa John’s pizza, would you stop buying it because it cost you another dime or two? Really?

    UPDATE: Wording fixes and changed the cost increase from 3% to 3.5% of revenue since that’s closer to the truth, if you do the math. (Still, I emphasize, this is very conservative. The real truth is much lower.)

    @afrakt

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