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David Minton

Cost vs. gain

Profile image for By Stephanie Daniels / For the Denton Record-Chronicle
By Stephanie Daniels / For the Denton Record-Chronicle

Small businesses weigh pros, cons

EDITOR’S NOTE: This six-part series on health care reform is a joint effort of the Denton Record-Chronicle and graduate students from the University of North Texas Mayborn School of Journalism, along with professor George Getschow, formerly with The Wall Street Journal and a Pulitzer finalist.


Scheduling his next visit to his company’s small manufacturing plant in Alamo, a windswept village within eyesight of the Mexican border, Grady Payne frets about the future.

Money is getting tight, the plant isn’t profitable enough to justify expansion and costly new federal health care regulations loom. That means between now and January 2014, Payne faces a difficult choice: move across the border or shut the plant down.

“I don’t want to be in Mexico, there’s no question about it,” Payne said. “But if we moved across, literally 20 miles across the border, we wouldn’t have to pay.”

Payne employs 450 workers at Conner Industries, an industrial wood manufacturing company. The company has 12 plants in eight states, including its original manufacturing plant and headquarters in the heart of Fort Worth.

At a time when Conner is celebrating 30 years of prosperity, the company has begun mapping out potential moves and possible plant closures in anticipation of dramatically higher costs to comply with the new health care law.

Under provisions of the Patient Protection and Affordable Care Act that go into effect Jan. 1, 2014, Payne will be required to provide health care for an additional 300 of his 450-man workforce.

The health care reform law requires employers with 50 or more full-time workers to pay for at least 60 percent of covered health care expenses for their entire workforce. If employers decide against providing insurance to their employees, they will be subject to a $2,000 fine per employee. However, the first 30 employees will be exempt from the fine. For example, if a business employs 70 full-time workers, a fine of $2,000 will be assessed for 40 employees, for a total of $80,000.

“Grady Payne’s dilemma is a great microcosm for why a one-size-fits-all approach does not work for all employers, especially small- and midsize employers,” said Kevin Kuhlman, manager of the National Federation of Independent Business, one of the plaintiffs challenging the law in court. “Conner Industries joined the National Federation of Independent Business to learn more about how the health care law affects their business and ability to create jobs. As you can see, none of his options are attractive.”

If Payne offers insurance that does not cover at least 60 percent of eligible health care expenses for his entire workforce, his employees will qualify to choose insurance through a state exchange, and he will be penalized for each full-time employee receiving a tax credit, according to a study conducted by the Kaiser Family Foundation, a nonprofit, nonpartisan leader in health policy analysis. The fine penalizes employers for not offering affordable health care, and also increases as insurance premiums rise.

If employees have to contribute more than 9.5 percent of their family income for the employer coverage, they are eligible to choose insurance through a government exchange, and the employer could face a $3,000 fine. The exchange will serve as a competitive insurance marketplace created either by the states themselves or by the federal government.

“It would be so much easier just to pay that $2,000 fine than to try to do the right thing and have to pay the $3,000 fine,” Kuhlman said. “Or do the right thing and pay for this very expensive health insurance package.”

The Congressional Budget Office estimates that the national average annual premium for bronze coverage — the lowest of the four tiers of available coverage — in a state exchange in 2016 will range from $4,500 to $5,000 per employee, or $12,000 to $12,500 for a family of four.

“More often you hear the stories of people saying, ‘It’s either going to be three-quarters of $1 million to provide insurance, and to take the penalty it’s only going to be $50,000. We just might have to drop,’” Kuhlman said.

A 2011 McKinsey Quarterly survey of more than 1,300 employers throughout the U.S. found 30 percent of employers would definitely stop offering insurance, indicating they would gain economically from dropping health coverage.

Another provision in the health care law provides assistance to those below 400 percent of the federal poverty line — about $88,000 for a family of four today. Those workers would receive a voucher from their employer to receive insurance through an exchange. If a worker receives a voucher, which is an exemption from employer-based insurance, the employer is free from both offering health insurance to that employee and the fine. Conner Industries pays competitive wages, and Kuhlman said he doesn’t see Payne qualifying for the exemption.

Payne currently covers health benefits for 100 of his 450 workers. Right now, each employee costs Conner Industries about $250 per month, or about $300,000 total per year. If the U.S. Supreme Court upholds the employer mandate provision, Payne said he’ll probably pay the $2,000 fine for each employee, or more than $800,000, and begin plans to move one plant to Mexico.

“It’s not good for us, and I don’t want to do that,” Payne said. “But that’s probably the cheapest thing we can do.”

Payne, like many other chief executives, is particularly uneasy about the steep penalties on employers who don’t provide affordable insurance.

“The midsized companies like ourselves that are labor intensive, that cater to manufacturing in the U.S., we’re getting our knees chopped out from under us,” Payne said.

The Fort Worth Chamber of Commerce surveyed almost 200 businesses last year and found nearly half had done some analysis of the health care law, while 37 percent said they didn’t know enough details to determine the impact on their businesses.

“Right now you’re seeing a lot of uncertainty among employers, big and small, about what to do come January 2014, when the mandate becomes effective,” said John McCracken, a clinical professor of health care management at the University of Texas at Dallas who has studied health care reform for years. “And I liken it to a bunch of birds on a wire. They’re waiting for one to fly off, and when one does, a lot of others will follow.”

Arnold Gachman is one of the birds on a wire. The CEO of Gamtex Industries, a 90-year-old metal recycling company, employs 125 people in 16 locations throughout Texas. His company insures 70 to 80 employees.

Gachman currently pays for about 85 percent of his employees’ premiums, at a cost of about $600,000 last year. Though he does surpass the 50-employee mark, Gachman said he’s certain he won’t go out of business.

To keep a lid on rising health care costs, Gachman has begun taking preventive health care measures more seriously. His company offers free flu shots and may begin rewarding employees who stop smoking, adopt healthy diets and take better care of themselves in other ways.

By promoting health care prevention, Gachman hopes to continue to provide full health benefits for his employees and their families.

“It’s hard to go to your employees and say, ‘Last year I covered your family, and this year I’m not gonna cover your family,’” Gachman said.

Despite the grumbling among larger employers like Payne, many small business employers say they may benefit under the new law.

Employers with fewer than 50 workers are exempt from providing health coverage. Additionally, small businesses with 25 or fewer employees may be eligible for tax credits for providing health coverage to employees. The credits give back up to 35 percent of the employers’ health care contribution as long as employees make up to $50,000 in average annual wages. For example, if a small business contributes $15,000 in health insurance, they are eligible for about $5,250 in tax credits. In 2014, that credit percentage jumps to 50 percent for employers covering workers through an exchange, but the credit would be good for only two years.

Since 1986, John Baines has owned a small accounting firm — John E. Baines P.C. — in Denton, where he employs seven people, many of whom have been working for him for years. Baines insures six of his employees, which cost about $30,000 last year, and has already received a tax credit of just less than $1,000 for his health insurance contributions in 2010. Baines can’t remember a time when he didn’t offer his employees health insurance.

“To me it’s one of the things you have to do as an employer, but not everyone sees it that way,” Baines said. “I felt that I had a responsibility to provide something for my people.”

Though Baines may see some temporary help, some small-business owners could see a big change and conclude they can’t provide health insurance. U.S. Rep. Michael Burgess, R-Lewisville, said if health care premiums continue to rise, he expects to see a lot of employers send their workers to an exchange, leaving themselves to pay the fine.

“The Kaiser Family Foundation would put [the cost of insuring] each employee at about $10,000 per employee,” Burgess said. “Do the math. The difference between $10,000 per employee versus the $2,000 fine. The fine is a lot cheaper.”

That’s why business owners like Payne are gritting their teeth and crossing their fingers in hopes of a change in the larger business mandate. If the mandate remains unchanged after a Supreme Court ruling this year, businesses of all sizes will be on the path to change, whether they like it or not.

“Today, I can’t tell you what the outcome’s gonna be,” Payne said. “And there’s gonna be a lot of cryin’ and gnashin’ of teeth, but there’s gonna have to be an adjustment, and every company is gonna have to deal with it in some way.”



•  SUNDAY: An overview of health care as it stands today. A look back shows reform isn’t a new concept. Results of Massachusetts reforms show unexpected results.

•  TODAY: Small businesses react to new law. Reform spotlights need for faster results from research.

•  TUESDAY: Prevention is key to curing cost concerns. Workers with no insurance take health into their own hands.

•  WEDNESDAY: Physicians struggle to maintain their business model. Patients try “accountable care.”

•  THURSDAY: Texas lags behind other states in setting up insurance exchange, while reform banks on student loans.

•  FRIDAY: Mental health treatment remains fragmented, affecting physical health care. Texas county jails are primary provider of mental health services.