Businesses require two critical ingredients in order to expand and succeed: a clear understanding of what their costs are going to be, and access to capital. The current political and regulatory environment leaves them void of both.
When companies, (it doesn't matter if it's a mom-and-pop operation or multi-national corporation), face uncertainty, they all do the same thing: nothing. Or, at least as little as possible when it comes to spending money. Itâ€™s the reason trillions of dollars are currently sitting in corporate bank accounts; and unless itâ€™s a bank, thatâ€™s not what a company should do with its excess cash. Companies are supposed to invest it in the business in order to develop new or better products/services, increase its earnings and hire more employees.
However, thanks to new federal regulations, both enacted and pending, many businesses have put the brakes on spending- especially when it comes to hiring. Businesses are very weary of the new health-care law; six months have passed since it became law and there is still no clarity on the specific health insurance coverage companies will have to provide and what it will cost.
Michelle Dimarob, senior manager of legislative affairs at the National Federation of Independent Business (NFIB) called the uncertainty onerous.
â€śThereâ€™s a lot of criteria that have to me be met, such as a base benefit package with 10 things you have to include.â€ť But so far, many of the details are undefined.â€ť
What we do know is that if an employer decides to offer health insurance for the first time or changes providers, there 45 medical â€śpreventiveâ€ť tests/procedures for adults and children that it will be mandatory for that plan to cover free of charge. As in, an employee will not even be required to kick in a co-pay.
These run the gamut from routine mammograms to â€śinterventions during pregnancy and after birth to promote and support breastfeedingâ€ť to â€śone-time screening for abdominal aortic aneurysm by ultrasonography in men aged 65 to 75 who have ever smoked.â€ť
This leaves companies that currently provide health insurance in a tight spot. If the insurance provider theyâ€™ve been using comes back with a big price increase for next year, the business owner has to make a decision. As Dimarob puts it, it may come down to: â€śIf I switch to a new health insurer, I will expose myself to all the new requirements, including preventive care services. My new premium is higher and it stinks, but Iâ€™m going to pay it.â€ť
The Health Care Act also calls for the creation of state insurance â€śexchangesâ€ť which would allow health insurance providers to compete for business. According to Dimarob, initially, â€śwe thought this might make health insurance cheaper, but based on anecdotal evidence, itâ€™s going up.â€ť
Jim Wordsworth, a small business owner outside Washington, D.C., already provides health insurance- including coverage for dental and eye care- to his employees. But he doesnâ€™t know if the plan he currently has will meet the new government standards because â€śthey havenâ€™t even been written yet.â€ť And, he expects it will cost more: between $650-$750 per person.
Under the Health Care Act, small businesses with fewer than 25 employees(1) are excused from providing mandatory health insurance to employees. However, to give them an incentive to do so, the Act contains tax credits to offset the cost. Although the White House claims that 4 million small businesses will be helped, a spokesperson at NFIB calls that â€śa stretch.â€ť
â€śThe only businesses eligible for the maximum credit are those with ten or fewer employees earning an average wage of $25,000 or less,â€ť says Stephanie Cathcart. â€śAnd, you must pay at least 50% of the premium.â€ť Plus, every time the business owner increases the number of employees s/he has or increases their average salary, the amount of credit you receive goes down. According to NFIBâ€™s math, once you reach 18 employees and an average annual wage of $37,000, the credit completely disappears. Small business owners can see what, if any, credit they might qualify for by visiting NFIBâ€™s calculator at http://www.nfib.com/issues-elections/healthcare/credit-calculator.
Furthermore, the credit comes with additional strings attached. First, by law, it expires in 6 years. And, starting in 2014, in order to be eligible the company has to switch to one of the health insurance providers in their stateâ€™s â€śexchange.â€ť According to Cathcart, â€śIf you keep your current health insurance provider- and most employees donâ€™t want to change- you no longer qualify for the credit after 2013.â€ť
Finally, the 20 million or so self-employed individuals in this country â€śarenâ€™t eligible for the tax creditâ€ť at all, according to Brad Close, NBIBâ€™s vice president of public policy.
Wordsworth owns 8 small businesses, mostly restaurants and food service operations, employing from 6 to 100 employees. He predicts that increased health insurance requirements are â€śprobably going to be the largest cause of job losses.â€ť Thatâ€™s because firms with fewer than 50 employees donâ€™t have to meet the new standards. As a result, â€śif you have more than 40 [workers] youâ€™re not going to expand or add employees. If you have 58 employees, youâ€™re going to get rid of some because of the cost of [government-mandated] health insurance.â€ť
He also sees an increase in outsourcing. Currently, Wordsworth has two meat-cutters on staff just to meet his exacting specifications for â€śthe perfect N.Y. strip steak.â€ť If he has to lay them off in order to reduce the number of employees he has, â€śIâ€™ll just tell (food provider) Cisco to do it.â€ť
And, donâ€™t be surprised if you walk into a restaurant one day and get handed an IPad instead of a menu. Technology is another way to reduce staffing. â€śLet the customer touch what they want,â€ť says Wordsworth. The message will be sent from the IPad screen to the kitchen, no waiter or waitress required. A busboy can deliver the food to your table.
Unfortunately, new federally mandated health insurance requirements are not the only burden adding to the stress on businesses- especially small businesses- today. In Part 2, other factors that are driving up economic uncertainty and driving down hiring.
1. Or, 50 half-time employees.
Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.