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National Restaurant Association - National Restaurant Association member tells Congress of real impact of new health care law on busin

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National Restaurant Association member tells Congress of real impact of new health care law on business

A Michigan restaurateur and National Restaurant Association member today gave the Subcommittee on Health of the House Energy and Commerce Committee a look at what it takes to run a restaurant business in the United States -- and a daunting prognosis for what the new health care law could mean for businesses like his.

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On behalf of the National Restaurant Association, Larry Schuler described for Congress how the law will significantly impact his employees and how he runs his business. He urged early action to make fundamental changes to the Patient Protection and Affordable Care Act of 2010.

As the regulatory implementation moves quickly forward, the NRA has attempted to constructively shape the regulations. But Schuler noted that without repeal or drastic changes to mitigate the most harmful effects of the new health care law, PPACA will have drastic negative consequences for the restaurant industry and its employees. 

The committee’s hearing was on “True Cost of PPACA: Effects on the Budget and Jobs.”

“We believe that offering health care coverage is the right thing to do and we are very proud of the fact that we have offered full medical coverage to our employees for a long time.  However, faced with these very large increases in coverage costs, it will be extremely difficult for us to absorb these costs and continue offering coverage,” he said.

Schuler owns and operates three restaurants in Michigan, one a fourth-generation family restaurant opened by his great-grandfather in 1909.

Schuler is now reexamining his plans to expand his business and create jobs in light of PPACA’s costs and administrative complexity. “Entrepreneurs like me are used to dealing with uncertainty and risk.  We do so by preparing as best we can for the unknown. We have a glimpse of what is to come and have already begun preparing for the full implementation of this new law to preserve our businesses,” he added.

Schuler predicted that as a result of the new health care law defining a full-time employee as those working 30 hours per week, instead of the current 40 hours per week, and the requirement for employers to offer full-time workers health care benefits, as defined by the government, the industry will very closely manage employees’ hours to 29 hours or less. In practice, he said, it will mean a larger employee base, working fewer hours -- likely no more than 25 hours, to avoid bumping into the cap -- and an increase in labor and training costs, already one of the most significant line item costs for restaurant businesses. For employees, it will mean the need to get a second and third job to make up for lost hours and income.

Fundamental Changes Needed

If the law is not repealed, Schuler urged the committee to make fundamental changes in how the law is implemented. Congress’s goal must be to avoid job dislocation, he said -- not just in 2014, when U.S. businesses will be covered by the law’s requirement that large applicable employers provide minimum essential benefits to full-time employees or pay penalties, but before then, as employers begin planning for the law and other requirements are placed on all employers.

Schuler noted that the restaurant industry differs significantly from other industries. This will make compliance especially challenging for many restaurants.

The restaurant industry is the nation’s second-largest private-sector employer. Its nearly 1 million locations employ 12.8 million Americans, nearly 10 percent of the U.S. workforce. The industry is dominated by small businesses, with more than seven in 10 restaurants operating as single-unit establishments.

The industry’s workforce is unique, Schuler said. More than half of the industry’s employees are under age 25; restaurants have a high proportion of part-time and seasonal employees; and the industry has a relatively higher turnover rate than other businesses. Labor costs are already one of the most significant line items for restaurants, accounting for about a third of the restaurant dollar. Restaurants have narrow pre-tax profit margins, averaging between 4 percent and 6 percent of sales before taxes, depending on the type of operation, according to National Restaurant Association research.

Schuler urged changes in the following provisions of the law:

-- Employer mandate: The law requires employers with 50 or more full-time employees to either offer a specified level of health benefits to full-time employees by 2014 or pay penalties. This "will create a significant cost escalation for employers offering such coverage," he said. He asked Congress to repeal the mandate.

-- Definition of full-time employment: PPACA requires businesses covered by the employer mandate to offer minimum essential coverage to all full-time employees. PPACA defines full-time to include any employee averaging more than 30 hours a week "in a given month." Schuler predicted the law will lead to more part-time employment and asked Congress to bring the standard in line with other laws and business practices. "For consistency and to avoid having employers cut the hours of part-time workers below the new 30-hour threshold, it makes sense to continue basing full-time work under the current 40-hour workweek standard," he said.

-- Consistent timelines: The law requires covered employers to offer health benefits to eligible employees no later than 90 days after they begin work. The 90-day waiting period is inconsistent with the definition of seasonal employees (defined under PPACA as working fewer than 120 days a year) and the 30-hour-per-week monthly threshold for employees who must be offered insurance by covered businesses. Schuler asked Congress to make the timelines more consistent.

-- Benefits package: The level of benefits that covered businesses must offer employees -- specified in the law as "minimum essential coverage," but not yet defined in regulations -- will pose tremendous cost challenges in labor-intensive industries with low average profits per employee. "We fully expect many restaurants that are already operating on the margins of profitability to close," he said. Schuler also asked Congress to change the law to allow employers to offer catastrophic coverage as an option.

-- Auto-enrollment. The law requires covered employers with 200 or more full-time-equivalent employees to automatically enroll new employees in health care plans if the employer offers a plan. Schuler said this will increase costs, put employers at risk of new penalties, and add administrative burdens. The restaurant industry would be especially affected because of its higher average employee turnover rates, he said.

-- Withholding premiums. Schuler noted that because a portion of tips customers give employees count as wages, the paychecks that many tipped employees receive today aren't always big enough to accommodate required deductions, such as federal and state income and payroll taxes and 401(k) contributions. Schuler asked how employers would be able to collect health care premiums from employees when PPACA is effect. Schuler asked the committee whether employers could face new penalties under PPACA if tipped employees turn to state exchanges for premium tax credits when they do not pay their employee contribution to the employer-sponsored plan.

He also urged Congress to repeal the expanded 1099 information-reporting requirements contained in PPACA as soon as possible. He noted that large bipartisan majorities in the House and Senate have already voted to repeal the mandate that would dramatically expand the number of 1099 forms employers file starting in 2012. "The repeal bill should be sent soon to the President’s desk for signature. Otherwise, businesses will have to start wasting money, time, and resources this year to start preparing to comply with this requirement because our systems would have to be up and running on January 1, 2012."

A Business Analysis

Schuler talked about the impact of PPACA on his three restaurants. Each is separately incorporated -- one as a Subchapter S corporation, two as LLCs. The restaurants have some overlap among their employees, especially during holiday and high-tourism seasons.

Taken together, the three operations approach the threshold for being considered a covered large employer under PPACA -- that is, they employ 50 or more full-time-equivalent employees.

"Depending on the time of year and the number of hours worked by our team, the three entities considered together could be considered a large applicable employer and subject to the most stringent employer mandates in the law some months, but not others. In addition, our employees could be full-time employees one month and part-time employees the next, changing the obligation we have as a large applicable employer to each of them under the new law.” 

In considering the impact on just one of his restaurants, Shuler noted that the restaurant could experience at minimum a 282 percent jump over current coverage costs if all full-time employees accepted the offer of coverage. "We cannot raise menu prices high enough to cover these costs and to do so would drive away the customers who are just beginning to return," he said.

He said his company would weigh its options:

-- Drop health care coverage entirely and pay penalties instead.

-- Manage its workforce to stay below the 50 full-time-equivalent employee threshold that triggers the requirement that an employer offer minimum essential coverage.

-- Reduce the number of days his seasonal business is open, from 107 days to under 90. The law requires employers to offer full-time employees coverage after no more than 90 days on the job -- which means a number of his seasonal employees would have to be offered insurance from day 91 through day 107, or Schuler would pay the penalty for that month. A group of seasonal employees could be added to insurance rolls for one month, just to be dropped the next, he said.

"This is the perfect example of how this new law will drive the way restaurants across the country will run their businesses.  It will certainly change it dramatically and likely change the dynamics of our workforce as well."

If the company dropped health care coverage entirely, he calculates that he’d pay $16,500 in penalties -- less than the company now pays for health insurance. "It is not something I want to do, but given that this law will only increase my costs, I will have to do what I can to keep our 4th generation family business profitable and operating."

"The uncertainty of the regulatory process and the many rules that are yet to be clarified and fully defined worry me. The cost increase estimates we have done will only increase as we know more about this law."

He called on Congress to take other steps to address the rising cost of health care coverage, such as allowing businesses to pool across state lines or nationwide to buy insurance; letting business form cooperatives similar to risk pools, and provide coverage for high-cost claims; giving consumers the ability to control and reduce their own health care costs through more flexibility and higher contributions to Health Savings Accounts (HSA), Health Reimbursement Arrangements (HRAs), and Flexible Spending Accounts (FSAs); changing tax laws and insurance regulations to allow employees to take their coverage with them when they change jobs; and reforming medical malpractice laws.

The NRA has been working since PPACA's enactment to help shape the regulations that implement the law. But some of the law's fundamental problems can’t be fixed through the regulatory process, Schuler said. "There are limits to the scope of change we can achieve through regulations, particularly if those charged with their drafting choose to ignore the industry’s comments. Ultimately, PPACA itself needs to be repealed or drastically changed to mitigate the most harmful effects on the restaurant industry."

The nation's restaurant industry looks forward to working with Congress “to improve health care for our employees without sacrificing their jobs in the process,” he concluded.

Read the full testimony.

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