Published March 6, 2013, Los Angeles Daily Journal – Saint Bernard of Clairvaux, the 12th century Catholic Church leader, is frequently credited with saying that “the road to hell is paved with good intentions.” A timeless axiom that rings as true today as it did 1,000 years ago, the saying has befallen scores of men who have created chaos in the wake of well-intended order.
To be sure, President Barack Obama’s legacy will be stamped with the success – or failure – of his sweeping healthcare reform, the Patient Protection and Affordable Care Act. Signed into law on March 23, 2010, Obamacare, as it has become known, aims to provide health insurance for the many who are currently without.
The law has withstood U.S. Supreme Court review and endured public scrutiny in a hotly-contested 2012 presidential election, but can it survive actual implementation? This is the question that has many business owners stirring.
According to the Congressional Budget Office (CBO), there are currently 53 million uninsured persons in the U.S., 11 million of which are illegal aliens. The CBO estimates that after the legislation has been fully implemented in 2019, that 30 million people will remain uninsured – a reduction of about 7 percent. What remains unknown, however, is how businesses both small and large will respond to the legislation.
In broad strokes, starting in January 2014 all citizens will be required to have health insurance, or pay a penalty of $95 per year (which will increase to $695 by 2016). Insurance companies will be required to issue policies regardless of a person’s medical condition, and all applicants of the same age and geographical location must be given the same premium, regardless of pre-existing condition. Businesses of 50 employees or more will be required to provide insurance to all full time employees, or pay a penalty of $2,000 per employee (exempting the first 30).
To see what might happen, it is necessary to understand the current state of affairs. According to the Kaiser Family Foundation, in 2012 the average health premium was $5,615 per year for an individual. The U.S. Bureau of Labor Statistics reports that businesses with fewer than 50 employees provided health benefits to 39 percent of their workforce, and businesses with 50 or more (who will now be required to offer insurance) provided the benefit to 59 percent of their employees.
Economists far and near are hypothesizing how business owners will respond to the new law, with varying conclusions – a result likely driven by the person’s political affiliation. But politics aside, human behavior is driven, in large part, by a scarcity of resources and a desire to prosper.
Employees of small businesses (defined as fewer than 50 employees) will likely experience two behavior modifications. Currently, 61 percent of these employees are not provided insurance by their employer. Under the Affordable Care Act, all of these individuals will be required to obtain insurance, and this is where things get interesting.
Many insurance analysts expect that premiums will radically increase when the act takes effect in January 2014. Because insurance will be a “guaranty issue” (it must be provided irrespective of the person’s pre-existing conditions), it is expected that many will choose to pay the $95 fine and forego the insurance until they get sick. The result will be insurance pools that are smaller and sicker, and therefore more expensive. As Mark Bertolini, the CEO of Aetna, recently stated: “We’re going to see some markets go up by as much as 100 [percent].”
For the small business employee who is not provided insurance through the workplace, the increase in premiums may prove too great to bear. They may simply pay the $95 penalty and get the guaranteed insurance when they need it. It is also reasonable to believe that employees who currently obtain their own policy may remove themselves from the insurance pool, saving the premiums, and similarly get insurance when they need it.
For small businesses that do currently provided insurance, this too may change. Consider a business that employs 25 people. If the increase in premiums is just 50 percent of current rates (and it could be more), the employer’s annual expense will increase by $70,000 virtually overnight. This too could result in a price tag that may prove too great to bear, leading to a reduction of small businesses that offer the benefit. Given that insurance is typically the third largest expense (behind rent and payroll), don’t be surprised if this is the result.
But the real problem will be experienced with businesses of 50 or more, which will now be required to provide insurance to all full time employees or pay a fine of $2,000 per employee. For owners of these businesses, life is about to dramatically change.
Take a business that employs 100 people and currently does not provide insurance. For this business owner, starting in 2014 the businesses will have an added annual expense of $561,500 (based on today’s average of $5,615) to over $1 million if the prediction of 100 percent premium increases holds true. Given the enormity of this cost, many will opt to pay the $140,000 fine ($2,000 for each employee over 30 employees), and avoid the problem altogether.
Of the 59 percent of large businesses who do offer insurance, this too could change. If the increase in premiums is anywhere near the 100 percent mark, many employers may elect to pay a fine of $2,000 per employee, as opposed to an $11,230 insurance premium. The larger the business, the larger the incentive to not provide insurance.
The law strikes a particular nerve for certain industries that trend right around the 50 employee mark. New car dealerships, for instance, employ an average 53 employees, putting them squarely in the sights of the mandate. For the 17,450 new car dealers across the U.S. that employ nearly 1 million, this is an issue that has not gone unnoticed.
Because of the high cost of penalties and increased premiums, the legislation likely will lead to significant underemployment. Not only will businesses cram-down their workforce to under 50, but many will reclassify employees as “part time.” Because the law only requires insurance for full time employees (30 hours per week or more), many will hold their employees to 29 hours per week, and then make up the lost labor by adding more part time employees. This is particularly true in industries that do not historically have 9-to-5 jobs, such as retail, education and hospitality.
If there is any doubt that employers will game the system, consider that the state of Virginia will be requiring all part-time state to employees work no more than 29 hours per week, so that they will not qualify for the mandatory insurance. Others will do the math and surely follow. As a natural result of all of this, a substantial portion of the workforce will become underemployed, and yet still be required to obtain coverage. Only now they will have fewer paycheck dollars to obtain the expensive insurance.
President Obama was certainly well-intentioned in trying to provide affordable health care, but perhaps this falls under the category of “no good deed goes unpunished.” This law will squeeze many individuals out of the insurance market, under-employ many at a time when we can least afford it, and increase the cost of consumer goods, as businesses try to recoup the cost of penalties they incur. This is a cost that will be borne by us all, solely for the purpose of chasing the seven percent.