Health-Scare Reform: "There's Still More That We Don't Know Than We Do."

Since national care reform was signed into law in March 2010, it has generated strong reaction from franchisees and small-business owners across the nation. Among its provisions, the law ("Obamacare" to its opponents and critics) requires employers with more than 50 full-time-equivalent (FTE) employees to provide healthcare or face harsh penalties. However, when it comes to the actual impact of the law, the sentiments of many franchisees can be summed up as, "There's still more that we don't know than we do."

Misty Chally, deputy executive director of the Coalition of Franchisee Associations, agrees there's still much to be learned about the law. "But as of today, in 2014 there will be a mandate for all employers with 50 or more full-time-equivalent employees to provide health insurance coverage," she says. "We don't know what types of insurance franchisees will have to provide, and we don't know how much employers will have to pay and how much they can ask employees to pay. The regulatory agencies are working on all that." However, she adds, it's clear that there will be penalties for not providing healthcare insurance that regulators consider "adequate" based on an employee's ability to pay (see study).

"This could all be devastating to franchisees because they'd have to include these costs, yet to be defined, in their budgets and be very careful when deciding how many people--part-time and full-time--to hire," Chally says. Once multi-unit franchisees reach the 50 FTE threshold, they would have to provide health insurance for every employee, likely paying at least 50 percent of the premiums. "These are significant costs, especially in times when franchisees are struggling to make any profits."

Legal, Political Question Marks

Chally suggests multi-unit franchisees follow U.S. Supreme Court hearings slated for the end of March. when the Court will hear a suit filed by 26 states on the legality of requiring individuals to purchase health This could also affect the employer mandate, says Chally, because the law does not include a severability clause. "If there is no severability clause, if one provision is deemed illegal the rest of it goes down, too. Even if they did sever the two clauses, it would be hard for the entire law to proceed without the individual mandate," she says.

Another opportunity for repeal or revision of the mandate could emerge this November, Chally says. "The elections are key. If the Senate and the White House don't swing to the Republican side, the laws are going to be hard to reverse."

IFA President and CEO Steve Caldeira says the employer mandate in the law will hit multi-unit franchisees and hard. "Clearly the new law places undue burdens that really hurt small businesses and franchisees and their employers," he says, pointing to a study the IFA conducted last fall with the Hudson Institute. "The study shows that the new law could result in the loss of up to 3.2 million jobs in franchising, while costing $6.2 billion to implement--and that doesn't even include the cost of compliance," he says.

Other fallout identified in the study could be fewer full-time employees and reduced hours that could force employees to find other work to make up for the lost hours. "Multi-unit franchisees will be trying to work around that 50 full-time-equivalent number because of their already slim profit margins. And that doesn't take into account the still-high unemployment rate and a million veterans who will be coming home over the next five years," he says.

Franchisees, says Caldeira, have an important role to play as 2014 approaches. "We're trying to educate our members at the convention and with webinars and prepare them for what will go into effect in 2014--while encouraging them at the same time to be small-business advocates and ambassadors for the franchise community, to let our elected officials know what the employer mandate would mean for net job losses, and to support pro-business candidates in the upcoming elections."

The IFA, he says, continues to work with members of Congress and the administration "to peel back the onerous costly provisions" that adversely affect franchisees and and to draw attention to other issues such as access to capital, work force policy, and support for veterans. One success came with the repeal of the requirement that would have forced businesses to send out 1099 forms for vendors they've paid as little as $600. And in February, Congress and the administration managed to agree on extending the payroll tax cut through year-end, to continue unemployment benefits, and to avert a serious cut in doctors' Medicare fees. However, in terms of additional favorable developments coming out of Washington, says Caldeira, "I'm not certain how much is going to be accomplished this year."

Paperwork Nightmares

Rank and file multi-unit franchisees have a lot to consider, says Greg Cutchall, who operates 57 locations spread among 8 brands (including Famous Dave's, Sonic Drive-In, Twin Peaks, and Domino's Pizza) in four states (Nebraska, Iowa, Kansas, Texas, and Utah). He describes the employer mandate as "flawed." "I think it's the right idea but the wrong execution," he says. "Part of me says there's merit to all of us having because one of the reasons the rates are so high is that only people who need it buy it. But on the other hand, should anyone be forced to do anything?"

Cutchall admits he has nightmares about the volume of paperwork that would be involved in compliance if the mandates go into effect. "That would be especially tough for the industry, which has higher than normal turnover," he says. "I guess I'm like a lot of other people I've spoken with: I'm hoping the law will get repealed or revised before it kicks in."

Like many organizations in recent years, Cutchall's company has been forced to cut back on the portion of insurance premiums it pays for employees. "We hated to do it, but if their portion is even $10, the young people say, 'No thanks.' It makes the group more high-risk and raises everybody's rates if you can't get your young managers to pay," he says.

Currently, the portion Cutchall's company pays depends on the level of the employee. "If it's a partner in a division--and there are only a couple of those--we pay 100 percent. If an employee is administrative, or an office worker, or a GM, we pay 75 percent. Below that, assistant managers get 50 percent, and we allow other employees who work a certain number of hours and have been with us for a while to participate in our plan at their own expense. That's still cheaper than they could get it as an individual," he says.

Tighter margins every year have become a fact of life, he says--something that can be worrisome. "It's all the nickel and diming. The other day when I was signing checks, there were 15 out of 60 that I didn't know who the companies were. I said, 'What are we buying from this company?' Most of them were legitimate line items, but it can be overwhelming," he says. "A restaurant that did $1 million five years ago definitely made more money than a restaurant making $1 million this year." One certainty in the ongoing debate: paying more for employee healthcare insurance certainly won't help the bottom line.

Red Tape and Red Flags

Gary Grace, who operates 37 Supercuts in Southern California, also sees red flags ahead. "What we see as problems are the massive red tape and the highly possible potential for penalties because there are so many different regulations about who qualifies and who doesn't," he says. "Complex compliance combined with severe penalty possibilities if you're not 100 percent compliant is expensive and translates eventually into higher prices and costs for consumers. While the red tape is not easy, we can deal with it. The potential for penalties is a different story."

Grace recently experienced what he sees as an example of the future if the employer mandate goes into effect. "I'm just coming off a class-action lawsuit against me because I mistakenly underpaid 700 employees over a four-year period. The amount I underpaid totaled $8,000, but the lawsuit asked $15 million in penalties. Of course, I paid the employees what I owed them, but was still subject to the suit. I won't be paying $15 million, but it will cost me about $300,000 for that $8,000 mistake. That's the kind of stuff that keeps you awake at night."

Everyone who works at Grace's Supercuts salons for 30 or more hours a week is eligible for health insurance, he says. A small number who were grandfathered in are covered at 100 percent, while all new employees are covered for 75 percent of their health insurance costs. "Some people don't take it," he says. "The most common reason is that they're already covered under a spouse. Then there are the young people who have no bills and don't feel it's necessary to pay the 25 percent. Others just don't want to pay the 25 percent." Grace says his company has "good policies" that run close to $400 a month.

To date, the answer to rising costs for his company hasn't been to reduce benefits or lay people off, Grace says. "We've been reluctant to reduce benefits. We have done that a little over the years. Our co-pay for a doctor's visit is now $30; it was $10 about 10 years ago. When our premiums increase, we look at the coverage and make minor tweaks to keep premiums somewhat in line. We had a big increase for this year. I was surprised at how much."

Compliant and Penalized

Rob Branca, with 60 Dunkin' Donuts and 5 Baskin-Robbins units in New England, lives in Massachusetts, where state healthcare insurance reform was enacted under former Gov. Mitt Romney in 2006. That law ("Romneycare" to its opponents and critics), many say, was the model for the new federal plan. "So I can tell you exactly what this will mean, both personally and professionally," he says.

"From a personal perspective, it's been harder to get in to see a doctor. Wait times are longer and service is not as good as it used to be. Prices have gone up. Not only has it not saved money, but cost increases are accelerating more rapidly than before. The most perverse thing I see is how the penalty system works. You can be compliant and still get penalized."

That happens because the law determining whether a plan is "appropriate" is so subjective, says Branca, who also is an attorney. "Most of our employees are not the primary breadwinners, and their spouse or parent already has them on a plan. So we have a shop of fully insured people on other plans and a few who up for our plan, but we still get penalized. We pay thousands of dollars every quarter," he says. "The problem is that the program is already broke, so it doesn't want to give up any of the money it gets in penalties by trying to fix the regulations. Companies are following the laws and are still paying penalties."

The Dunkin' Donuts Franchise Owners FedPAC, the Coalition of Franchisee Associations, and others are working hard to get these issues addressed in Massachusetts through regulations, says Branca, but it's tough sledding. "The Supreme Judicial Court of Massachusetts just struck down a regulation that limits the ability of legal immigrants to participate in the plan. That's unconstitutional, but it saved the state $150 million for a year," says Branca, whose wife's family emigrated from Portugal to become major Dunkin' Donuts franchisees all across New England. (For an in-depth profile, see Multi-Unit Franchisee magazine, 4Q11.)

Branca's company offers health insurance to all full-time employees and pays 50 percent of the premiums. "In Massachusetts, we're required to pay 30 percent, but we pay 50, and we paid more before this law was passed. We're not allowed to go across state lines for other plans with better rates. I don't mind providing insurance as a benefit, because in our industry we want to keep turnover low since that affects our bottom line more than anything. But at some point it becomes ridiculous," he says. "Unfortunately, this plan has increased coverage but done zero to address the cost of healthcare. People forget that insurance and healthcare are completely different."

The IFA's Caldeira says he continues to have confidence in the nation's franchisees and small businesses. "We're fighting on the Hill every day, reminding our elected officials that 64 percent of all net jobs in our country started with small business." Franchising, he says, is poised for modest growth in 2012 that should equate to about 168,000 new jobs and 14,000 new establishments. "But the franchise business could grow so much faster if there were greater long-term certainty on issues such as credit access, healthcare and tax reform, and a less burdensome regulatory climate--one that enables rather than stifles the kind of growth this country so desperately needs," he says.

Grace of Supercuts has one more suggestion for fellow multi-unit franchisees: "At this point, praying is a good idea."

Study Shows Reform's Costs

The following is adapted from the IFA-Hudson Institute report, "The Effects of the Patient Protection and Affordable Care Act on the Franchise Industry," September 2011. Full copies and summaries can be found on the IFA and Hudson Institute websites.

The report was based in part on employment and insurance data from 15 franchise businesses from a wide range of industries: 6 franchisors, 8 multi-unit franchisees, and 1 single-unit franchisee. Tables show how the law encourages businesses to reduce their number of full-time employees and shift to part-time and employees to gain tax credits, reduce costs, or both; and how the cost per employee increases as the number of full-time employees increases.

For example, a franchisee with several locations and 49 employees who does not offer health insurance for its full-time employees decides to hire a 50th employee. This triggers the $2,000 penalty, as follows: $2,000 per worker multiplied by 50 employees, minus an exemption for the first 30 workers. This results in $2,000 times 20 employees, or $40,000 annually.

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