Obamacare and Pizza Shops
by Benjamin Studebaker
Background: recently, pizza shop CEO John Schnatter decided to raise his pizza prices by up to 20 cents giving this reason:
If Obamacare is in fact not repealed, we will find tactics to shallow out any Obamacare costs and core strategies to pass that cost onto consumers in order to protect our shareholders’ best interests.
In other words, the provision in the recent health reforms that private enterprises with in excess of 50 full time employees provide health insurance or pay a penalty has convinced Schnatter that he must raise his pizza prices in order to maintain present profit margins. Today I’d like to investigate whether or not the Affordable Care Act should be opposed on this basis.
Looking at information from the Department of Health and Human Services, there are a couple things to note here that seem pertinent:
- Businesses with fewer than 50 full-time employees don’t face any mandatory increased costs
- Businesses with low wage workers that pay 50% of premium costs and have small numbers of employees can receive a tax credit of 35% today that rises to 50% of insurance costs in 2014
Taken together, this means that the impact on small businesses will be well, rather small. Of course, this depends to a certain degree on what you define as a small business–in the United States, small businesses are typically defined as businesses employing less than 250 workers, with the Small Business Association putting the definition as high as 500 and if we accept that definition we would have to concede that some small businesses will see an impact. However, in the European Union a small business is by convention defined as one that employs less than 50 workers, and in Australia the definition, established by the Fair Work Act of 2009, is one that employs less than 15. This suggests that the definition of “small business” in America has been expanded to include larger businesses for political purposes in order to obtain the tax and policy advantages that small businesses typically receive for mid-size businesses. Conveniently, this allows well-established, well-developed, mid-size businesses to claim that Obamacare is “hurting small business” when in fact the truly small businesses are protected.
The pizza shop run by Schnatter is not a small business, however–it employs 16,500 employees, making it quite large, and quite subject to the new law’s expectations regarding health insurance provision. Schnatter estimates a $10,000 to $30,000 increase in costs per individual restaurant, of which the pizza shop possesses 2,600 in the United States, for an estimated cost of between $26 million to $78 million for the company as a whole. To put this in perspective, the pizza shop has an annual revenue of $1.1 billion, and an annual profit of $52 million. This cost does appear significant, but, as Schnatter has already indicated, it can be offset with a 20 cent rise in the price of the pizzas and, since this impacts not only his pizza shop but all competing pizza shops, it is not likely to lead to a competitive disadvantage except against pizza shops that are not nationwide or regional chains, have a small number of employees, and are not subject to the requirement–in other words, small businesses.
Yet, even for all of that, other restaurants of similar prominence say it’s not such a big deal. A spokesperson for the largest fast food chain in the nation has this to say:
our current estimate is healthcare is going to impact each individual restaurant in the range of $10,000 to $30,000. That obviously a wide range, but there is a lot of different factors when you look at the healthcare law that impacts the number of employees, the number of full time employees, what is the current healthcare offering from the owner operator for McOpCo. So there are a lot of variables, but I will tell you that we are significantly increasing now that the Supreme Court has ruled increasing our conversation and disclosures with franchisees around what this mean for brand McDonald’s. So that they can be as educated as possible around what’s happening so that they can start to anticipate and make any changes that they have to try to minimize the impact of this.
And on a just a dollar basis that $10,000 to $30,000, we have years like last year where commodity cost increases were even greater than that. So while this is a significant item and it’s gaining a lot of attention as the P&L item we’ve managed through items of this magnitude in the past and I’m hopeful we can do that in future.
In other words, this increase in costs is no more substantive than what is normally to be expected in the cost increases of ingredients for these restaurants, cost increases that, for most of these fast food joints, usually do not result in significantly higher prices for consumers. It may be the case that this pizza shop owner has, by raising prices, unnecessarily doomed his business to a competitive disadvantage with other restaurants that do not raise prices. Regardless, the size of the price hike is tiny–20 cents is hardly punitive to the consumer, it accounts for about a 1% increase in the price of the pizza shop’s product.
Even if the size of this increase is not universally agreed by everyone to be insubstantial, it must be agreed that the social benefit of having 16,500 additional employees insured is a significant one (considering that, should those employees become ill, they would otherwise inevitably end up in the emergency room costing everyone, not merely pizza shop customers, quite a bit more money). There is certainly something morally questionable about a pizza shop customer who objects to paying an extra two dimes to save society that burden (and perhaps about a pizza shop owner who would rather make his customers, who, as is the case with all fast food restaurants, tend to be poorer, pay the cost instead of absorbing it himself).
There is however an interesting point raised by Marc Charisse in Hanover, Pennsylvania Evening Sun:
American companies have to compete these days in a global economy, against firms that aren’t weighed down absorbing the health-care costs of low-wage employees.
No, in the rest of the civilized world it is the government that provides that insurance, eliminating the high profits and “administrative costs” of the insurance companies.
According to managed-care consortium Kaiser Permanente, about as unbiased a source of health-care data as you can find, Americans spend more than $4,100 per person per year on health care. That’s a lot of pizzas, and the most expensive system in the world. We spend more than twice per person than, say, Japan, France or England. Yet by any statistical indicator, including patient satisfaction, we lag behind all those countries.
The question has never been, could we afford universal health care? It’s whether we can afford to be without it. Sure, the politicians and the owners of restaurant chains can afford great health care. But many Americans, and not just pizza delivery drivers, are finding they can’t afford even the most basic health insurance.
There is a real issue with the cost of health care in the United States, and a real issue with American businesses, that have to compete internationally, being made to absorb those high costs. The solution, however, is one that they themselves have rejected again and again–the single payer or multi-payer systems of Europe, with a competitive state insurance option that provides superior care at greatly reduced costs. But we already talked about such things in the Medicare post.
I will give Schnatter credit for this–at least the policies that he’s disparaging have something to do with him. The same cannot be said for chicken shop owner Dan Cathy, whose comments were grounded in simple bigotry.
Original Schnatter Comments:
Department of Health and Human Services:
Leading Fast Food Restaurant Spokesman:
Charisse in the Evening Sun: