The healthcare conundrum

The pending introduction of Obamacare raises plenty of questions for the supermarket industry. 

January 1, 2014.

To some, the beginning of a promising new year. To others, a day that will significantly and forever change the dynamics of grocery retailing.

moneystethThe date marks the official implementation of the Patient Protection and Affordable Care Act, a.k.a. Obamacare or ACA, which was supposed to offer healthcare to some 40 million people who do not have it. However, even its most ardent proponents concede it is going to be a rocky rollout. Chains and independents hope it will not turn into an unworkable and expensive bureaucratic nightmare.

“This could be a major shock for retailers,” says Mike Thompson, a principal in the human resource service practice at PricewaterhouseCoopers (PwC). “Retailers often have low-wage workers, high turnover and do not offer comprehensive benefits to all employees because they operate on such low margins. This law requires them to reassess that at every level. There’s a lot of math going on out there with everyone trying to determine how many employees will be covered under the new law. That’s the multi-million dollar question.”
Robert Rosado, director of government relations for the Food Marketing Institute (FMI), based in Arlington, Va., tells Grocery Headquarters: “We’ve been working with the administration to provide some flexibility so retailers can comply by 2014. But like it or not—this is the law.”

Most retailers have moved beyond the denial stage, but ACA’s impact on day-to-day operations is still being debated. Even healthcare experts are unsure about certain elements of the law such as who will be subject to penalty and what they will pay. Additionally, the U.S. Chamber of Commerce has called ACA a “job killer,” especially among lower income workers for whom the cost of coverage would be out of proportion with their wages.

At present, 3.5 million people are employed in the supermarket industry and healthcare costs are averaging 1.5% of total retail food sales, according to FMI figures. This would bring annual healthcare costs among single-store operators to about $6.5 billion.

Healthcare costs for the average employee ranged from $5,885 among retailers with two to 10 stores, to $6,685 among single-store operators, according to the 2012 National Grocers Association/FMS Independent Grocers Financial survey. This was up from an average cost per employee of $5,931 in 2010.

However premiums are set to increase a minimum of 6.3% this year and insurance companies are already warning that increases might be far higher as a result of the new law. This will affect all supermarkets, but could be even more problematic for smaller independent grocers that are unable to negotiate rates like their chain counterparts or any retailer that is part of a collective bargaining agreement.

“Independent grocers want very much to continue providing quality benefits to employees,” says Greg Ferrara, vice president, public and government affairs for Arlington, Va.-based NGA. “But some independents will have to make some tough decisions on whether to acquire another store or hold back. They are also looking at streamlining operations, evaluating how to manage their workforces more efficiently and maybe do more with less.”

The cost of all this is underscored by figures from the non-profit Kaiser Family Foundation. The Washington, D.C.-based organization estimates that it would cost employers an additional $3,000 per worker to cover minimum wage workers under the new law. This could bring minimum labor costs to a $10.03 per hour for a full time employee and $13.75 per hour for family coverage.

Another concern is that ACA, now consisting of nearly 1,000 pages of regulations and costing an estimated $1.2 trillion over the next 10 years, according to the Congressional Budget Office (CBO), simply amounts to greater government control, more expense and administrative headaches for employers while doing little to significantly lower costs to employees.

On a broader scale, some are concerned that the new law, which increases the number of employees that have to be covered, might have a negative impact on the economy if it stunts hiring by employers trying to contain costs. In fact, the CBO has stated that by 2019 an estimated 12 million people who would have had employer-based coverage could lose it under the new law.

One central provision of the new law is the requirement that businesses with 50 or more full-time or full-time equivalent employees provide health coverage or pay a $2,000 penalty for each employee after the first 30. This mandate could result in retailers hiring more part timers or it could discourage them from growing the business entirely, industry observers say.

NGA members are concerned about going over that 50-person threshold. “Some are also worried about aggregation of ownership. An independent might have five stores under different corporations or ownership with other family members. In some instances, the law may require them to aggregate all their employees because of IRS rules,” says Ferrara.

Meeting the requirements
Grocers with fewer than 50 employees will not be required to provide healthcare but may be facing certain state requirements. Furthermore, small retailers may want to consider purchasing coverage in order to be eligible for tax incentives under ACA. These retailers will also be able to select plans through SHOP, the Small Business Health Options Program of exchanges, administered by the Department of Health and Human Services.

steth“When the rule first came out it sounded like if you didn’t offer coverage to every full-timer you would be penalized $2,000 for each one not covered. The final regulation has a revision that allows for some slippage and changes it to 95%,” says PwC’s Thompson. “But it’s still a big penalty and not deductible.”

The way full-timers are defined is also an issue. They are defined as employees who work, on average, 30 hours per week. “It isn’t whether an employee is scheduled for 30 hours but whether they actually work 30 hours per week during a defined measurement period,” says Thompson.

“This period can vary from three to 12 months at the discretion of the employer and works to their advantage with both part time and variable time employees who, for example, may only work during holiday seasons. First you define a measurement period and then determine whether they averaged 30 hours per week or not,” he adds.

While this sounds simple, Thompson says that the rules around measurement are extremely complex and will be challenging for retailers to administer on an on-going basis.

FMI’s Rosado says the first thing for retailers to do is determine whether they are a large or small employer under ACA. “You may think of yourself as small but there’s a complicated calculation to go through. Thirty hours is probably a lot more than smaller retailers have as full-time. There’s no set industry standard but I highly doubt it’s 30 hours,” he adds.

NGA’s Ferrara agrees. “Thirty hours is not full-time anywhere. We’d like to see that increased to 40 hours and a change in the definition of what constitutes a large employer,” he says. “We need a legislative solution on this and also how to address the part-timer issue. We have members who voluntarily provide coverage to part-time employees. But if they want to continue doing it or have to because of a collective bargaining agreement, they automatically become subject to provisions in the law, which make providing coverage very expensive.

“We’re also asking for some transition relief. We don’t believe the government will be ready to go on January 1, nor will employers or employees. We’re asking for at least a year with no penalties so people will have a chance to figure out how to comply,” he adds.
The law does not go into effect until 2014 but retailers have to be ready for open enrollment into plans, which usually takes place in the fall for the coming year.

Calculating cost
In addition to determining which employees are eligible full-timers, retailers have to figure out if the coverage being offered is affordable and offers minimum value, says Rosado.

“The law says that the premium can’t cost the employee more than 9.5% of their household income. No employer knows what a person’s household income is nor do they want to know. We’ve been successful in getting some predictability into the law through the Safe Harbor provision. It enables retailers to determine if coverage is below 9.5% of the wages (on their W-2 form) and therefore considered affordable.”

A significant development in this area is a minimum value calculator from the IRS and the Department of Health and Human Services (HHS). Retailers can input certain information about their plan to immediately determine if it provides minimum value, which is defined as a plan paying at least 60% of the total cost of allowed benefits under the plan.

“Even if you’re a retailer with 50 or more full-time employees and offer coverage, 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, based in Washington D.C. “HHS has released a calculator that enables you to plug in details of your plan to see if you meet the test. 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.”

The $64,000 question is whether ACA will undergo further changes in the coming months. “The rules have been set pretty clearly at this point and I don’t expect to see a great deal of new guidance on how it will work,” says Thompson. “Right now shared responsibility penalties are one of the biggest concerns and one that retailers are assessing strategically.”

According to IRS guidelines, employers that do not provide affordable and minimal coverage may be subject to an Employer Shared Responsibility payment if one of their full-timers receives a premium tax credit for purchasing individual coverage on one of the exchanges. This goes into effect January 1, 2014.

The IRS will contact employers to inform them and give them the opportunity to respond before any liability is assessed. Consequently, retailers are looking at a number of strategies including the kind of coverage they offer and how many workers will elect not to take it, adds Thompson. “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,” says Thompson. “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. Retailers 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.”

Meanwhile, many more companies are developing and implementing wellness programs designed to increase personal responsibility for healthcare. “Companies are asking employees to have more skin the game when it comes to healthcare costs. That’s one reason we’re seeing plans with higher deductibles. People will be more conscious about when and how they use the system,” says Solander.

“There’s a provision in the ACA that’s designed to provide incentives for people to use wellness programs,” Rosado says. “These programs are already very popular in the supermarket industry and they offer people a discount off their premium if they achieve certain wellness incentive levels.

“The proposed rule that was published in November took a lot of incentives out of their wellness programs and could dismantle a lot of incentive programs our guys use. And we’re still trying to find out if wellness programs can be part of the equation in determining whether a program is considered affordable,” he adds.

The wellness rules are still in effect, says Solander. “They simply codified some previous rules that were in place from HIPAA (Health Insurance and Portability Act of 1996) and increased the amount of incentive for participation in wellness programs from 20% to 30% of premiums and, in some cases, up to 50% for smoking cessation programs.”

Observers say the next big hurdle is not the beginning of ACA in 2014, but in 2018 and the so-called Cadillac Tax. This refers to the amount companies spend in excess of certain thresholds, which are $10,200 for individual coverage beginning in 2017 and $27,500 for family coverage. If the cost of coverage exceeds those thresholds a retailer can owe a tax of 40%.

“The problem is that the penalty is not tax deductible,” says Solander. “It’s all based on the CPIU, the Consumer Price Index Urban. But medical inflation is at a much higher rate than the CPIU. If things continue, that 40% will get bigger every year, so you will be spending more money on benefits that are not tax deductible. And you will not be giving your employees any additional advantage.”


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