Health Care Reform Hits Home
The convenience store industry works through realities of new law
The passage of health care reform this spring has most convenience store operators apprehensive about how they will offer health care insurance, and how the new law will affect hiring and retention practices.
Though more than 60 percent of the convenience store industry's businesses — those who have fewer than 50 full-time employees — are exempt from the new law, which in 2014 imposes tax penalties on employers who do not provide a requisite minimum level of coverage, and fines individuals who do not sign up for an affordable health care insurance plan.
"I don't have many good things to say about the law," said Julie Fields, director of government relations for NACS, based in Alexandria, Va. "Health care costs will rise for employers, and it's not clear that store employees will even be able to afford their share of the premiums if a retailer does offer a plan. Regulating the health insurance industry is necessary and cutting down on malpractice suits, waste and fraud would have been positive steps, but the direction Congress and this administration took has left the business community in a tough spot. We wanted to see more of a free-market approach."
As to assertions by its supporters that the new law will lower health care costs, Fields counters: "Between now and 2014, we are looking at the largest rewrite of the tax code since Medicare was created. This will include new taxes on pharmaceutical companies' brand name drugs and medical device manufacturers, so the prices of those products will go up. Also, the health insurance industry will be paying taxes they have never paid before, which will be passed straight through to the consumer.
"While the law throws more people into the marketplace — and there is money to be saved when individuals get preventive care and don't go to the emergency room — the costs of everything in the market will go up. It is widely assumed the taxes the law imposes are so high any cost benefit will be far outweighed by rising prices of goods and services."
As for the value of having healthier, happier, more productive employees who are receiving health care services, Fields said: "There could be business benefits to offering health care insurance, such as hiring and retaining better employees and keeping people healthier, but the cost/benefit of this reform is hard to measure now."
What's more, retailers who are exempt from the law may find it necessary to offer health care benefits just to compete with rivals for employees.
Here's how the impact of the new health care law may play out over the next few years:
This year, operators of one, two and perhaps three stores will qualify for small-business general tax credits to subsidize health care insurance. Small businesses with up to 25 workers that cover half of an employee's insurance premium and have an average annual wage of $50,000 or less will qualify for a general business tax credit of a maximum of 35 percent of the cost of the plan.
"This could be helpful for single-store operators who want to offer benefits, if they can find an affordable plan," Fields said. "How the national exchange will work to drive down costs is still to be determined, but there should be at least two plans in each state that offer the bare minimum coverage."
Roughly 40 percent of c-store retailers offer medical insurance to store associates, according to the 2010 Convenience Store News HR & Labor Survey. About 60 percent offer medical insurance coverage to store managers.
"I've talked to large companies operating in multistate areas who have never offered coverage, even for main office employees," Fields said. "There have been employees who've told me they don't want health insurance because they don't want to have to pay their share of the premiums. I've heard from other companies who offer everyone health insurance, with a generous plan across the board. One NACS member I know covers 100 percent of the premium for every employee, at the individual level. He believes he won't be able to offer that anymore, because the law requires employers to offer an option for family coverage."
From the store employee's perspective, many more will now have the option of seeking health care insurance through the c-store operator. "But this reform is so new and so comprehensive, it is hard to tell how much that insurance will cost," Fields said. "It's unclear whether this will be beneficial to individuals because they are required to pay a new premium cost they weren't required to pay before."
The mandate requiring health insurers to cover dependent children up to age 26, however, will not hurt the c-store industry, she noted. "From the retailer perspective, it would be a positive if a young employee is covered by his family's insurance."
In 2011, employers will be required to report the value of existing health care benefits on W-2 forms. "This lets the government get an idea of who is being covered before the mandate is effective in 2014 and helps determine, for 2018, the revenue that will be generated by new taxes on Cadillac insurance plans," Fields noted.
In 2013, flexible spending accounts will be capped at $2,500 a year. Medicare payroll taxes on couples making more than $250,000 and individuals earning more than $200,000 will be raised by 0.9 percent, to 2.35 percent. "This could affect a lot of c-store operators, especially small operators who report the store's earnings as personal income," Fields said.
In 2014, individual and employer requirements will be enforced. Most Americans would be required to carry health insurance, except in cases of financial hardship, or face penalties of $95 or up to 1 percent of income, whichever is greater, with fines rising to $695, or 2.5 percent of income, by 2016. Tax credits would help many middle-class households pay for premiums, while Medicaid would pick up low-income people.
Retailers with more than 50 full-time employees who do not offer health care benefits will be fined $2,000 per year, per full-time employee for every person they employ if at least one worker receives coverage through the exchange. (Employees qualify for the exchange if their required contribution under the employer's plan would be between 8 and 9.5 percent of their income, and they do not make more than 400 percent above the federal poverty level.) However, the first 30 employees will be exempted from the fine.
"Everyone with fewer than 50 full-time employees will be able to avoid lots of headaches," Fields said. "They have a choice whether or not to offer health care coverage. But those with more than 50 employees are faced with complicated decisions."
One concern is the formula used to count employees. Employers with 50 full-time employees — or 50 full-time equivalents — must comply. In short, employers may not skate around the mandate by hiring only part-timers. Employers must multiply the number of part-time employees by the average number of hours those employees worked during the month, and divide that by 120 — the number of hours a full-time employee works — to determine the number of equivalents on staff.
Sometimes companies, even if they offer a health care plan, will be penalized if the plan is not affordable to low-income workers, depending on their family's total income. "That is a really threatening business prospect," Fields said. "How do you make sure the insurance is affordable for a broad spectrum of entry-level store clerks as well as corporate office and field personnel?"
If one employee qualifies for a government subsidy based on family income, a $3,000 penalty per full-time employee is triggered if the coverage is deemed unaffordable for low-income employees. One problem is a retailer must track employee's eligibility for the subsidy. If an employee has a family of four and he and his spouse make $88,000 or less annually — 400 percent of the federal poverty line — he qualifies for a subsidy. If a husband makes $60,000 a year and the wife makes $40,000, for instance, they wouldn't qualify. But if the wife loses her job, they would qualify — and the retailer must monitor this on a monthly basis. "But how will he know? I believe the government will send some kind of notice out if a person qualifies for a subsidy," Fields said.
In 2018, a tax will be imposed on employers' high-cost "Cadillac" health care plans. These plans are not widespread in the c-store industry. "These would mostly be self-insured plans for very big companies that offer very comprehensive coverage," Fields said. "Even very generous plans with health, dental and vision coverage are usually not considered Cadillac plans."
The National Retail Federation (NRF) reacted vehemently to the reform when the House of Representatives passed it in March. "This truly is an historic moment, but not a cause for celebration. Congress has embarked on a dangerous, anti-job experiment in the midst of the worst economy our nation has seen in decades," said NRF Senior Vice President for Government Relations Steve Pfister.
"Our nation simply cannot afford more job losses during this economy, and many businesses already struggling to keep their doors open may not be able to withstand this added financial burden." He added: "Retailers have told Congress all along that we value our employees and want to expand upon the millions of workers and their families for whom we already provide coverage, but to do that we need reform that would lower costs."
Both NACS and NRF are concerned about midsized companies that are large enough for the mandates to apply, but too small to absorb health care costs.
"[Midsized retailers] could be among the hardest hit," Pfister said. "And small businesses that drive so much of the job creation in our country are going to be forced to hold their size under 50 workers to avoid the employer mandate threshold."
According to a late-April Associated Press report, government economic forecasters found the law will increase the nation's health care tab instead of bringing costs down.
A report by the Health and Human Services Department concluded the health care reform will achieve Obama's aim of expanding health insurance, adding 34 million Americans to the coverage rolls. But the analysis said the law falls short of the president's twin goal of controlling runaway costs, raising projected spending by roughly 1 percent over 10 years. That increase could get bigger, however, since the report also warned that Medicare cuts in the law may be unrealistic and unsustainable, forcing lawmakers to roll them back.
However, the report acknowledged, cost-control measures in the bill, including Medicare cuts, a tax on high-cost insurance and a commission to seek ongoing Medicare savings, may reduce the rate of cost increases beyond 2020.
The U.S. spends $2.5 trillion a year on health care, far more per person than any other developed nation, the AP reported.
At the start of the health care debate, President Obama was hopeful that bending the cost curve would enable the country to cover all citizens for about what the nation would spend absent any reforms. The report found the new law falls short, but not by much. The overhaul will increase national health care spending by $311 billion from 2010 to 2019, or nine-tenths of 1 percent of an estimated total health care spending of more than $35 trillion.
For now, c-store operators are looking at their own health insurance plans and trying to figure out what changes may have to be made. "These mandates are only four years away," Fields said.
RETAILERS REACT
When it comes to the new health care reform law, perhaps Tom Robinson of Robinson Oil Corp., operator of Rotten Robbie convenience stores, sums it up best: "I think I'm starting to understand it, but clarity is a ways off."
Like other retailers contacted by CSNews, the San Jose, Calif.-based Robinson, who also heads NACS' Legislative Affairs Committee, believes the new law will not be successful in lowering health care costs.
"The additional costs will be paid by the business, the taxpayer, the employee or the consumer," he said.
In some respects, he said the convenience store industry is in a better position than other industries, especially those who compete globally. "As my costs go up, my competitors' costs go up," he said. "We are not competing with China or Mexico or Canada; we're competing with the guy across the street. Usually, in this situation, the consumer pays."
Robinson, an operator of 34 stores who provides health care insurance for all of his full-time employees, is uncertain about advantages he may have under the law for sticking with his plan as it is grandfathered in — and whether or not his plan will be grandfathered if he makes significant changes to it, which he predicts he'll have to do to be compliant.
"While we pay for the individual, we offer insurance for a spouse or family, but the employee must pay for that," Robinson said. "I don't believe that type of plan will be compliant."
Still, with time to study the law and gather information from insurance brokers, companies and industry associations such as NACS, the retailer is confident operators will "go through the process of confusion, questions, some understanding, more confusion and more questions, until we understand the law well enough to determine wither to comply or pay the penalties.
"The key is we can't blame our employees for this and take it out on them. So, while we do have to take health care into consideration in our total compensation plan, we can't punish them."
Jim Tudor, president of the Georgia Association of Convenience Stores, based in Dallas, Ga., has been involved with state-level health care legislation since January and has kept in touch with all of Georgia's U.S. senators and representatives.
"This has been a wait-and-see situation as retailers receive more information about the actual regulations," he said. "My sense is retailers are still digesting what really happened. Georgia is an extremely competitive market and any proposal that adds cost to our industry cannot be construed as good. Whether it will help or hurt recruitment remains to be seen, but my sense is the majority of our members, who would be exempt based on the number of their employees, compete in the same gene pool with other companies that are in the 50-plus category and would offer the mandated benefits."
Anticipating new costs, Robinson and others are curious about how the law may alter the way some retailers do business — perhaps moving some company-operated stores to a dealer-operated or franchise model.
At Douglass Distributing Co. in Sherman, Texas, corporate office staff, drivers, service department employees and store managers all have health benefits. "These new provisions will bring in added costs, since the insurance companies will have to provide coverage regardless of preexisting conditions and make it totally transferable," said founder Bill Douglass, who also serves on NACS' Legislative Affairs Committee. "The premiums have to go up."
Today, store staffers are offered paid vacation, a $50,000 life insurance benefit and a limited medical plan. "These employees will cost us more, since we will be required to give them a program similar to the executives," Douglass predicted.
The c-store operator and petroleum wholesaler believes many operators will convert below-average performing stores to dealer locations. "Unless you are a sophisticated marketer, such as Sheetz or Cumberland Farms, the c-store business can be a marginal operational activity," he said. "The incentive for many in the past to operate stores was in the ownership of real estate, since these stores could help build equity on the balance sheet. Multi-store marketers may see health care costs challenging their lower-quartile store economics and they'll likely spin those marginal stores off to single-store operators."
While Robinson said he foresees some operators converting stores, he plans to stick with his company-operated business strategy and work to turn the new law's requirements into a winning strategy. "If I compete against a smaller operator who decides not to offer health benefits and can be more competitive than us, that could be a problem," he said. "But we are paying for benefits now and the reality is if we put together a good wage and benefit program for people, we can attract and keep the good ones. To the extent we can provide a good plan and others don't, it may be a competitive advantage."
Valero Energy Corp., which did not take a public stance on the legislation, hasn't done a detailed analysis of how the law will affect the oil company's benefits offering, according to spokesperson Bill Day. But Valero was one of several companies who reported it would take a charge to earnings in the first quarter 2010 due to the way the law affected tax incentives to provide prescription benefits to retirees. That charge is expected to be between $15 million to $20 million.
On the other end of the size sale, one-store operator Bruce Butler of Bridgeport Ave. Shell in Shelton, Conn., with six employees, is exempt from the law's requirements. Although Butler's employees receive no health benefits, they earn $1 to $3 more per hour than their counterparts at chain stores. "I can't afford to have it both ways," he said. "Unless someone is working for a very large chain, he ultimately ends up paying for the benefits," because their wages are lower.
Douglass and others worry most about midsized chains. "They don't have the economy of scale of the big stores and the economy of scale of the single-store operator," Douglass said. "They will carry the burden of the increase."
Like some others, Robinson is not "100 percent critical of the law," he said. "It's very difficult to create legislation for something like this. There are a number of things in this law that could lead to better health care and be positive for the individual and costs of the system," such as moving people out of the emergency rooms, or going to doctors for preventive care, he said.
"Our choice is either we can complain about it or try to deal with it. Operating in a state such as California with a lot of onerous regulation, we always complain some, but then try to move on," he said.
For comments, please contact Barbara Grondin Francella, Senior Editor, at [email protected].
"Retailers have told Congress all along that we value our employees and want to expand upon the millions of workers and their families for whom we already provide coverage, but to do that we need reform that would lower costs." Steve Pfister, NRF