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Small Employers Weigh Impact of Providing Health Insurance

Like many franchisees, Robert U. Mayfield, who owns five Dairy Queens in and around Austin, Tex., is always eager to expand and — no surprise — has had his eyes on opening a sixth DQ. But he said concerns about the new federal health care law had persuaded him to hold off.

"I'm scared to death of it," he said. "I'm one of the ones sitting on the sidelines to see what's really going to happen."

Mr. Mayfield, who has 99 employees, said he was worried he would face penalties of $40,000 or more because he did not offer health insurance to many of his full-time workers — generally defined as those working an average of 30 hours a week or more. Ever since the law was enacted in 2010, opponents have argued that employers who were forced to offer health insurance would lay off workers or shift more people to part-time status to compensate for the additional cost. Those claims have drawn considerable attention — and considerable anger in response — in recent weeks.

John H. Schnatter, the chief executive of Papa John's, the pizza chain, said some franchisees were likely to reduce their employees' hours to avoid having to provide coverage. And an unhappy Denny's franchise owner in Florida warned that he would raise prices 5 percent as a "surcharge," adding that disgruntled customers could offset that by reducing their tips.

Some health care experts said comments like those came from outliers and sometimes resulted from confusion about a highly complicated new law, the Patient Protection and Affordable Care Act. Many of the provisions do not go into effect until 2014. Federal officials are still tweaking the fine print, like defining exactly what constitutes a 30-hour workweek. Even so, restaurants and hotels are among the industries likely to be squeezed the hardest by the law because they are low-wage industries that do not offer coverage to most of their workers.

Most employers, even small businesses, already offer health insurance, and the federal law is not expected to have a significant impact on what they do over the next year or so. But businesses that rely heavily on low-income workers, many of whom do not make enough to afford their share of the cost of the insurance premiums, are being forced to rethink their business models.

Almost half of retail and hospitality employers do not offer coverage to all their full-time employees, according to a recent survey by Mercer, a benefits consultant.

"They're all developing their strategies," said Debra Gold, a senior partner with Mercer who advises several major retailers.

Many who oppose the requirement say the cost of providing health insurance could mean hiring fewer workers. "Any dollar that gets diverted, whether it's through Obamacare or increased tax rates, puts franchisees one dollar further away from being able to expand their businesses," said Don Fox, chief executive of Firehouse Subs, a fast-growing chain of 559 restaurants based in Jacksonville, Fla. At the 30 stores the corporation owns, only full-time managers are offered coverage. Mr. Fox is wrestling with whether to absorb the considerable cost of covering 100 more employees or pay the penalties — which would probably cost him less — but risk losing valued employees to competitors who choose to offer coverage.

Employee health coverage now averages nearly $6,000 for an individual plan. That is considerable for businesses like restaurants in which the majority of workers make $24,000 a year or less, according to research by the Kaiser Family Foundation. The foundation found that only 28 percent of companies that employ large numbers of low-income workers offer health benefits. "This is where the biggest set of hurdles is," said Gary Claxton, an executive with Kaiser.

By 2014, businesses with 50 or more full-time employees will be expected to offer as yet undefined affordable coverage, based on an employee's income. For employers that fail to offer such coverage, the law typically calls for a penalty of $2,000 a worker, excluding the first 30 employees. As evidence of how sensitive the issue is, Mr. Schnatter of Papa John's took some heat for his initial statements about the possibility that franchisees would cut employees' hours to avoid penalties or having to provide coverage. His comments, made during a public appearance, were reported by a local newspaper in Florida, The Naples News. After facing a storm of criticism, he wrote an opinion piece for The Huffington Post, in which he said he had only been speculating about the law's potential impact on franchisees.

"Papa John's, like most businesses, is still researching what the Affordable Care Act means to our operations," he wrote. "Regardless of the conclusion of our analysis, we will honor this law, as we do all laws, and continue to offer 100 percent of Papa John's corporate employees and workers in company-owned stores health insurance as we have since the company was founded in 1984." Through a spokesman, Mr. Schnatter declined to comment further.

Some business owners and consultants warn that opting to have more part-time workers, perhaps by converting some full-timers to part-time status, may not be the answer because many workers might decide to find jobs elsewhere.

"When you explain this to your employee who really needs the income, maybe they'll try to get a second job," said Mr. Fox, Firehouse's chief executive. "Maybe they'll try to get another full-time job and maybe a job that provides health care. There will be an incentive for the best people to search for those jobs."

Ms. Gold, of Mercer, said that when one employer analyzed what might happen if the company moved to more part-time workers, it realized that its losses in productivity would outweigh any savings on insurance costs.

Employers — often with a mixture of impatience and confusion — are waiting for the Obama administration to issue final rules on some of the law's crucial aspects, like how the government determines whether an employee meets the 30-hour threshold, given the large numbers of seasonal and part-time workers with varying hours. Similarly, the precise level of coverage an employer must provide has not yet been clearly defined.

"If you can tell me what Obamacare is, then I can tell you how much it's going to affect me," said Bob Bellagamba, who runs Concorde Limousine, a service with 75 employees, in Freehold, N.J. "All the reading I've done on this, and there are so many things that are not determined. There is no clarity to the guidelines."

In contrast to the resistance in the hospitality industry, some small business owners say the health care law has made coverage more affordable.

Lisa Goodbee, who runs a civil engineering firm in a Denver suburb, decided to offer health coverage to her 15 employees this year for the first time in the firm's 20-year history. She said the Affordable Care Act was a major reason. In past years, she said, the quotes she got from health insurers were "ridiculous"; this year, she said, they were far more reasonable.

"We're an engineering company and we need to hire the best of the best," she said, acknowledging that not offering health insurance made that difficult.

Ron Nelsen, who operates Pioneer Overhead Door, a Las Vegas business with five employees that installs garage doors, says he has already received the tax credits the law makes available to businesses with fewer than 25 employees that offer coverage.

"They're in the bank," he said.

Mr. Nelsen dismissed the notion that employers like him weigh the cost of providing health insurance in deciding whether to hire someone new. "You know what makes jobs? Consumer demand," he said. "I hire people when demand necessitates it."

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