Health Care Law Puts Nation’s Job Creators Between a Rock and a Hard Place

Feb 28, 2013

As we enter Year Three of the Patient Protection and Affordable Care Act (PPACA), businesses are preparing for the employer mandate provision. The Wall Street Journal editorial board calls it a “strange new world” for hiring. They explain:

The law requires firms with 50 or more "full-time equivalent workers" to offer health plans to employees who work more than 30 hours a week. (The law says "equivalent" because two 15 hour a week workers equal one full-time worker.) Employers that pass the 50-employee threshold and don't offer insurance face a $2,000 penalty for each uncovered worker beyond 30 employees. So by hiring the 50th worker, the firm pays a penalty on the previous 20 as well.

These employment cliffs are especially perverse economic incentives. Thousands of employers will face a $40,000 penalty if they dare expand and hire a 50th worker. The law is effectively a $2,000 tax on each additional hire after that, so to move to 60 workers costs $60,000.

In an op-ed in Politico, Bruce Josten Executive Vice President for Government Affairs at the U.S. Chamber, Dan Danner, President and CEO of the National Federation of Independent Business, Matthew Shay, President and CEO of the National Retail Federation, and Dirk Van Dongen, President and CEO of the National Association of Wholesale-Distributors lay out the bind businesses are in:

Under the guise of improving access to coverage, the mandate presents a false choice for owners: provide one-size-fits-all health care coverage at the expense of higher wages and other benefits; or potentially pay a penalty. The unfortunate reality is that, with this devil’s choice, everyone ends up paying a penalty — employers, employees and the unemployed. Whatever “choice” the employer makes will lead to fewer jobs, lower wages and lost revenue.

For employers near the “large” employer threshold, we can expect to see layoffs or dramatically reduced hours. These will be tough decisions, especially for small businesses where employees are like family and benefits options are often discussed and agreed upon collaboratively. The rising cost of the mandated insurance plans will very likely force many businesses to drop coverage entirely and pay the steep penalty, a difficult choice but a necessary one in light of increasingly cost-prohibitive employee coverage. Smaller businesses that might otherwise be eyeing expansion and growth down the road will most likely reduce or cap the number of employees to avoid the expensive mandate in the future.

Here are some of the consequences:

Reducing wages by converting full-time workers into part-time workers to avoid this coverage mandate and its penalty is beginning across all industries, from conventional labor and service industries to university faculty. Ironically, reducing or eliminating insurance coverage benefits is another consequence, as employers rationally determine that a two thousand dollar penalty might be far less of a financial burden than offering the bloated coverage required by the government-mandated minimum essential benefits package. Stifling job creation is also part of the unintended consequences of the employer mandate – is there anyone who doubts that employers are even more hesitant to add workers when these costs are added to the already fragile economy?

The Wall Street Journal editorial board recently pointed out the harmful effects on franchises:

A 2011 Hudson Institute study estimates that this insurance mandate will cost the franchise industry $6.4 billion and put 3.2 million jobs "at risk." The insurance mandate is so onerous for small firms that Stephen Caldeira, president of the International Franchise Association, predicts that "Many stores will have to cut worker hours out of necessity. It could be the difference between staying in business or going out of business." The franchise association says the average fast-food restaurant has profits of only about $50,000 to $100,000 and a margin of about 3.5%.

This fits with U.S. Chamber research that found that 72% of small business owners said the PPACA would make it harder to hire workers. The study also noted: 

Many small business owners reported that, in addition to limiting hiring, the new law might force them to reduce the size of their business. For example, respondents reported considering making workers stay under [30] hours a week or replacing them with temporary or part time workers. A significant number reported the likelihood of canceling insurance coverage for employees, as paying the penalty would be less expensive for their company.

The job losses and reductions in workers’ hours caused by the PPACA can be avoided. Sens. Orrin Hatch (R-UT) and Lamar Alexander (R-TN) along with Congressmen John Barrow (R-GA), Pat Tiberi (R-OH), and Charles Boustany (R-LA) introduced the American Job Protection Act today to repeal the damaging employer mandate. 

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