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Sub par reporting on the ACA

Ken Jacobs, chair, UC Berkeley Center for Labor Research and Education | September 23, 2013

In a story that purports to illustrate how the Affordable Care Act (ACA) will hurt fast food businesses, Venessa Wong at Bloomberg News  inadvertently shows how small those impacts are likely to be in reality. She gives the example of Firehouse Subs, which currently does not offer health benefits to anyone working 30 hours a week or more. If they were to do so, according to CEO Don Fox it would cost the company an estimated $4,000 a year per store. You read that right, $4,000 a year. He says this will slow down the expansion of the sandwich shops. The article gives only two options for employers to meet the costs — reduce hours or take it out of their margins.

Looking quickly at the helpful graphics in the article, we see that the average shop has $800,000 a year in sales. A $4,000 annual increase on a store with $800,000 in sales is an increase of 0.5% relative to sales.  A quick look for a Firehouse Sub menu on the internet shows the price of a sandwich at $5.79. If all of the additional cost was passed on to consumers, it would be a whopping 3 cents per Sandwich, raising the price to $5.82. I suspect that most customers won’t mind paying an additional 3 cents to know that the people handling their food have access to health care.

Even a 3 cent increase assumes all of the costs are passed on to consumers.  Health benefits have positive impacts on worker productivity and reduce absenteeism and turnover.  Replacing one worker in the fast food industry is estimated to cost about $2,000 a year. Once this is factored in, the actual cost to the sub shop is likely to be well under the already very low $4,000. The notion that these costs would effect growth in any way defies economic logic.

The article mentions the employer requirements in Hawaii and San Francisco, but unfortunately, ignores the research on both. The article even cites a brief by my colleague Dave Graham-Squire and myself, which summarizes the research on Hawaii which found no measurable impact on employment, and a small increase (1.4 percent) in part-time workers as a result of that state’s much stronger employer requirement.  Research by Will Dow here  at the UC Berkeley School of Public Health, Carrie Colla and Arindrajit Dube, likewise found no negative employment impact in the restaurant industry in San Francisco after the passage of that city’s health care policy.

The employer requirement could have been structured better. San Francisco provides a good model, scaling the amount paid by hour and so avoiding incentives to change hours to avoid the law. However, the solution proposed by the restaurant industry – raising the threshold to 40 hours a week – would only make the problem worse. Cutting full time workers’ hours below 30 is a costly proposition in most industries once you factor in the costs of turnover, unemployment insurance, administration and supervision.  Reducing hours from 40 to 39 to avoid the penalty would be relatively costless. While we can expect some employers to cut workers’ hours as a result of the current law, the number would explode if the restaurants’ proposal was adopted.

The employer responsibility provisions in the Affordable Care Act are designed to reduce the incentive for employers to drop coverage and shift costs onto the public. If employers choose not to provide coverage, they are required to contribute towards the public cost of the care for their workers.  For better or worse, the Affordable Care Act was designed to leave our system of employer-sponsored insurance in place as the main source of coverage for Americans under the age of 65. The employer responsibility provisions are a necessary part of the law.

Comments to “Sub par reporting on the ACA

  1. ‘…I suspect that most customers won’t mind paying an additional 3 cents to know that the people handling their food have access to health care.’

    What if you’re suspicions are incorrect? Have you ever tried to run a business with only $800,000 in revenue? If you had, you wouldn’t pooh pooh a $4,000 hit to your bottom line.

    This is what happens when do-gooders who won’t be the ones suffering the consequences, force their bright ideas on other people.

  2. I am also compelled to point out that when you increase prices, 100% of the incremental price does not flow through to the bottom line. The author’s estimate on what it would take to offset the cost of providing insurance is understated. The inherent flaw in many commentator’s position is that they paint with too broad a brush; each employer’s financial position is unique, and should be respected.

    I should add that many commentators would be well served if they worked harder to understand the underlying financial dynamics of the businesses or industries they criticize (that is just a general statement, and not a direct criticism of Mr Jacobs).

  3. I also am compelled to correct or clarify two of Mr. Jacobs comments:

    I DO currently provide insurance to many of my full-time employees. (more than half of that population of our team). In fact, I have done so for many years, and it is an outstanding plan that I would be put up against any other company or organizations offering.

    As I believe was stated in the article, we WILL be offering insurance now to the balance of our full time employees. Mr. Jacobs choice of words seems to make it somewhat more speculative.

    A final comment:

    During the days since the article was published, we have seen a bit more information about the projected premiums for qualified coverage. There has been some encouraging news on that front. However, we still do not have final, firm quotes (all of our company-owned operations and HQ employees are based in Florida).

    • “I DO currently provide insurance to many of my full-time employees. (more than half of that population of our team).”
      I assume that Fox is saying I provide insurance to more then half of the full time employees.
      But this is a totally misleading statement, as most of the employees at a store (per the graphic in the orignal article) are NOT full time

  4. There is one inherent flaw in some people’s thinking (including the government), and that is that just because a business is LARGE (per the government’s definition of 50 FTE’s or greater), that that business is PROFITABLE. The bottom line is that if a business does not have the cash flow to pay for health insurance (or alternatively, not enough cash to pay the penalty for not offering insurance)the business owner will be forced to seek other remedies to keep their business afloat.

    A decision to raise prices cannot be done in the vacuum that Mr. Jacobs suggests. The factors involved when considering price increases are basic, competitive marketplace considerations (Business 101, so I won’t bore the audience here).

    I am proud of the fact that at Firehouse, we have built a strong brand and company, and are in a position where I feel I can extend the offer of insurance to our full time employees. Our employees will benefit, which in turn will benefit our brand (the two interests are not mutually exclusive…quite the contrary). However, not all businesses are so fortunate, and the consequence is that it will be the employees of those companies who most likely suffer, in some form of fashion. Some of this could have been headed off through some more prudent crafting of the law; I hope that, over time, reforms will be introduced that help improve it.

    • another flaw is not knowing how much the owner is taking out; if, to be speculative, the owner is taking 1,000,000 a year and not paying health insurance, what kind of person is he or she ?
      Second, Mr Fox may know biz101, but he dosn’t seem to know biz201: price is NOT all – look at starbucks
      If Mr Fox put a sign in his store, 3 cent/item increase pays fo health insurance, does he think he would loose sales ?

      Of course, if the answer is yes, Mr Fox has, unwittingly, provided the reason we need single payer, so there is a level playing field for all stores.
      Think about it mr fox: if single payer was the same, all your employees would get health insurance (I assume that you agree taht this is desirable) and you could compete on a level field with other sub shops

      • Does Mr. Abrams also support a single income rate (aka flat rate) for business and a single income tax rate for individuals? This would, per the logic above, help ensure a level playing field for all.

  5. I would strongly suggest that everyone reading this blog follow the link to the actual article and make up their own mind about whose reporting is subpar.

    The breakdown of the $4,000 per store figure that Jacobs harps on (3 cents per sandwich!) has some interesting details. First of all, it assumes only 3 workers per store (out of 16 – not counting the manager – total) are eligible, only 1 of the 3 participates, and that the fast food employee will pay $1,000 of the $5,000 total cost. Jacobs says, “I suspect that most customers won’t mind paying an additional 3 cents to know that the people handling their food have access to health care.” Yet the odds are 15 out of 16 that your sandwich artist still doesn’t have employee provided health care.

    I won’t go so far as to say Jacob’s article is misleading, but I’m certainly glad I read the article he criticizes.

  6. Nice piece, Ken. The bottom line for me has been that the Affordable Care Act (not the pejorative ‘Obamacare’), in providing ways for more Americans to receive health care, is a good thing, regardless of cost. The data that shows that it’s actually affordable makes it even better, despite what Papa John says!

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