[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE HEALTH CARE REFORM LAW: ITS PRESENT AND FUTURE IMPACT ON SMALL
BUSINESS AND JOB CREATION
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HEARING
before the
SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT, AND REGULATION
of the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MARCH 16, 2012
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 112-058
Available via the GPO Website: www.fdsys.gov
_____
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76-465 WASHINGTON : 2012
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
CHUCK FLEISCHMANN, Tennessee
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, General Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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OPENING STATEMENT
Page
Hon. Mike Coffman................................................ 1
WITNESSES
Dr. Keith Small, Dentist, Cody Dental Group, Denver, CO.......... 3
Mr. Matt Tynan, Secretary and Treasurer, Tynan's VW, Nissan, Kia,
Aurora, CO..................................................... 4
Mr. John W. Leevers, President, Leevers Supermarkets Inc,
Franktown, CO.................................................. 7
Mr. Mark Rogers, President and Chief Operating Officer, Roaring
Fork Restaurants, Castle Rock, CO.............................. 10
APPENDIX
Prepared Statements:
Dr. Keith Small, Dentist, Cody Dental Group, Denver, CO...... 19
Mr. Matt Tynan, Secretary and Treasurer, Tynan's VW, Nissan,
Kia, Aurora, CO............................................ 22
Mr. John W. Leevers, President, Leevers Supermarkets Inc,
Franktown, CO.............................................. 29
Mr. Mark Rogers, President and Chief Operating Officer,
Roaring Fork Restaurants, Castle Rock, CO.................. 34
Questions for the Record:
None.
Answers for the Record:
None.
Additional Materials for the Record:
2011 Economic Impact Report: The Economic Impact of
Franchised New Car Dealerships on the Colorado Economy..... 39
THE HEALTH CARE REFORM LAW: ITS PRESENT AND FUTURE IMPACT ON SMALL
BUSINESSES AND JOB CREATION
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FRIDAY, MARCH 16, 2012
House of Representatives,
Subcommittee on Investigations,
Oversight and Regulations,
Committee on Small Business,
Washington, DC.
The subcommittee met, pursuant to call, at 10:06 a.m., at
the Greenwood Village City Hall Auditorium, 6060 South Quebec
Street, Greenwood Village, Colorado, Hon. Mike Coffman
[chairman of the subcommittee] presiding.
Present: Representative Coffman.
Chairman Coffman. Good morning. This hearing will come to
order.
I would like to thank each of you, especially our
witnesses, for taking time out of your schedules to be here
with us today as we examine the impact of the President's
health-care law on small businesses.
Before we begin, I would also like to sincerely thank all
of the staff here at Greenwood Village City Hall for hosting
this hearing.
Over the past few years, our committee has held several
hearings on topics related to health care and small businesses.
Many agreed the health-care system needed reform because the
cost of health care continued to escalate.
Small-company owners said that although they had
traditionally offered health care to their employees and wanted
to continue to do so, the concentration of health insurers gave
them few options for purchasing coverage, and those options
were extremely expensive.
Witnesses at our hearing suggested a number of solutions,
such as allowing small businesses to join together to purchase
health insurance across State lines, which could increase
competition and reduce costs; tort reform to bring down the
cost of physicians' malpractice insurance; and permitting
physicians assistants, nurses, and other health-care
practitioners to expand their duties to reduce the cost of
health-care delivery.
Very few of them suggested that we should mandate employers
to provide health insurance, raise Medicare and other taxes, or
increase penalties for health savings account withdrawals.
Unfortunately, each of these provisions are found in the
President's health-care law.
Of specific interest to us in this hearing is the employer
mandate and how that provision will affect small-business job
creation. Beginning in 2014, the new health-care law requires
any employer with more than 50 full-time equivalent employees
during the preceding calendar year to provide health insurance
to their employees. If the employer fails to do so, he or she
faces penalties up to $2,000 or $3,000 for each employee.
My concern is what happens to those businesses who are
right around 50 employees, and there are a lot of these
companies. According to the Small Business Administration
Office of Advocacy, there are approximately 143,000 firms that
employ between 40 and 74 people, with a total of about 7.5
million employees at those firms.
Is a company that is just below the 50-employee threshold
likely to hire more workers if they are unable to provide
health insurance? Is a company that has 52 employees going to
maintain a contract in face of penalties?
Regardless of the answers to those questions, the greater
concern here is why, with the economy struggling with
historically high unemployment, is the President so intent on
implementing laws that make small-business owners make those
kinds of decisions. We ought to be making it easier for them to
expand and produce jobs, not harder.
That leads me to another point I would like to discuss at
this hearing, the confusion and uncertainty the President's
health-care law is causing small businesses as it is
implemented over the next few years.
Between now and full implementation in 2018, 46 new
provisions will be implemented. This is on top of the 46 that
have already been implemented over the past 2 years. The sheer
number of things to track and comply with has got to be
confusing for small mom-and-pop shops struggling to get by in
difficult economic times. And it all goes back to the question:
Why are we making hard things harder for small businesses
instead of easier?
We have an excellent panel to discuss these issues, and I
again would like to thank everybody for being with us today.
Our first witness is Dr. Keith Small from Denver. Dr. Small
is the senior member of the Cody Dental Group, joining the
staff in 1967. For 7 years, he was a member of the visiting
faculty at the L.D. Pankey Institute for Advanced Dental
Education in Key Biscayne, Florida.
He is currently a clinical associate professor in the
Department of Restorative Dentistry at the University of
Colorado School of Dentistry.
He also serves as mentor to the Centennial Dental Study
Club in Denver, is a member of the Advisory and Leadership
Board of Directors of the University of Colorado at Denver
Health Sciences Center School of Dentistry, and is a member of
the Denver Academy of Restorative Dentistry.
Thank you for being with us today, Dr. Small.
Dr. Small, could you go ahead and move that microphone
closer to you? Thank you.
STATEMENTS OF KEITH SMALL, DMD, CODY DENTAL GROUP DENVER,
COLORADO; MATT TYNAN, SECRETARY AND TREASURER, TYNAN'S
VOLKSWAGEN, NISSAN, KIA, AURORA, COLORADO, ON BEHALF OF THE
NATIONAL AUTOMOBILE DEALERS ASSOCIATION; JOHN W. LEEVERS,
PRESIDENT, LEEVERS SUPERMARKETS INC., FRANKTOWN, COLORADO, ON
BEHALF OF THE NATIONAL GROCERS ASSOCIATION; AND, MARK ROGERS,
PRESIDENT AND CHIEF OPERATING OFFICER, ROARING FORK
RESTAURANTS, CASTLE ROCK, COLORADO, ON BEHALF OF THE
INTERNATIONAL FRANCHISE ASSOCIATION
STATEMENT OF KEITH SMALL
Dr. Small. I would like to take this opportunity to thank
you for this chance to present our small-business concerns of
the health-care reform law, perhaps even to the continued
existence of our 66-year-old dental practice.
Our corporation attorney for the professional corporation
has advised us that if there are not significant changes, that
it would raise question as to whether we can continue to exist
in our existing organization. And part of that is that we are
just above the 50 threshold of employees.
The Cody Dental Group was founded January 1, 1946, and is
now the oldest dental group practice in the United States. We
have 62 employees, 14 dentists, 14 hygienists, two x-ray
technicians. And since 1986, we have had a cafeteria plan in
place for our employees.
The cafeteria plan has three different components, the
medical insurance category, the flexible spending accounts with
a maximum of $8,000 per year, and the child or daycare with a
maximum limit of $5,000 per year. The cost of the medical
insurance aspect of the health plan right now seems to have
more questions than it does answers, in terms of determining
what those actual costs will be.
But with a typical overhead cost in a dental office easily
in the range of 70 to 80 percent or more, the impact on small
business is a major, major concern.
I would like to address some comments specifically to the
flexible spending account portion, because that has such a
major impact on our employees.
During the health-care reform legislative debate, there
were numerous comments made to the media that there would be no
adverse impact on the so-called middle class. I think that was
defined as $200,000 per year income for single filers, or
$250,000 for joint filers. And at the signing, President Obama
had the observation that within 10 years, the new law would
produce a $1.4 trillion surplus. I am not sure how that math
comes about.
However, the major impact on the health-care reform law
comes into the flexible spending category of the cafeteria
plan. January 1, 2011, the coverage for over-the-counter
medical-related products was deleted. And my observation is
that probably has more of an impact on the family units with
children.
But the biggest impact will be January 1, 2013, when the
maximum flexible spending account will be lowered from $8,000
per year to $2,500 per year.
This represents an almost 70 percent reduction in coverage.
Since 1986, employees in our office who were faced with major
medical expenses were able to plan ahead and obtain coverage
for the major part of those by setting aside up to the $8,000
limit in their cafeteria plan.
One of the current reference points in terms of cost is
superior performing hearing aids will cost in the range from
$7,000 to $8,000 today. The January 2013 maximum so then would
not even cover the cost of one hearing aid. There are also a
number of prescription costs, newer drugs, which typically are
much higher in cost, where your annual cost will exceed $2,500
per year for that single prescription.
So I would submit that the severity of the reduction
targets the very individuals in that so-called middle class
that weren't really supposed to be severely impacted by this
new law.
The flexible spending accounts do have a use-it-or-lose-it
proposition, so there is built-in protection there against
overuse, and the protection is also provided so there will not
be a conduit for tax-free funds to flow to the pocket of that
participant.
So basically, the abrupt change in the flexible spending
account of the reduced medical over-the-counter items in
January 2011, and then almost 70 percent reduction taking
effect next January in 2013, does represent a major and sudden
negative impact on the budget of the people who need the help
the most.
Thank you.
Chairman Coffman. Thank you, Dr. Small.
Our next witness is Mr. John Leevers--oh, I'm sorry. I
stand corrected.
Next, we have Mr. Matt Tynan, secretary and treasurer of
Tynan's Volkswagen, Nissan, Kia in Aurora. A native of Denver,
he earned his bachelor's of arts degree from Benedictine
College in 1987, and a master of science degree from Emporia
State University in 1990. Matt has previously served as cochair
of the Legislative Policy Committee for the Colorado Automobile
Dealers Association and as a trustee of the Catholic Foundation
of Northern Colorado from 2005 through 2011.
He has been active in his family's automobile dealership
since 1994. Combined, his company employs approximately 200
individuals in Aurora and Fort Collins.
Thank you for coming here and for your testimony, Mr.
Tynan.
STATEMENT OF MATT TYNAN
Mr. Tynan. Thank you, Chairman Coffman, for holding this
important hearing.
Again, I am Matt Tynan, secretary and treasurer of Tynan's
Volkswagen and Tynan's Nissan in Aurora, Colorado, and Fort
Collins Nissan, Kia in Fort Collins, Colorado.
I am here testifying on behalf of the Nation's 16,000
franchised automobile dealerships, and the almost 1 million
people they employ who are represented by the National
Automobile Dealers Association.
In 1963, my father, Edward Tynan, began Tynan's as a family
business, and we are very proud to still be a family business.
While we have remained in business for nearly 50 years, the
last 10 or so have been extremely challenging. As reported by
Tim Jackson in the Colorado Automobile Dealers Association, new
car sales in Colorado reached 208,000 units in the year 2000.
In 2009, new car sales in the State of Colorado had dropped
104,000 units. Obviously, this 50 percent reduction in new car
sales negatively impacted our business and nearly every other
new car dealer in the State.
Over that same period of time, to put this in perspective,
sales at our Volkswagen dealership, a dealership that began
operating in 1968, went from approximately 100 new units a
month to 30 units per month.
Over these years, we took steps to reduce our expenses by
eliminating certain positions, changing pay plans, and reducing
benefits. Our most expensive line item is our people. Our
people are also our most valuable asset.
The people we employ are some of the best and brightest in
the industry. The calculation is simple: The greater their
success, the greater the success for our dealership.
We make a real investment in our employees. We have to. To
avoid regulatory entanglement, our sales and finance operations
staff must be kept up-to-date on changes in the law, both at
the State and Federal level. But it doesn't stop at that front
office.
With the complexity of today's vehicles, servicing vehicles
requires strong computer skills. We must invest in our
technicians, provide them with training, special tools and
equipment necessary to fix and maintain today's cars and
trucks.
One way we attract and keep our staff is by providing
competitive benefit packages, and this includes a rather costly
health plan. Health care is a very personal issue for all of my
employees and for me and my family. I see and talk to virtually
every one of our employees in the Metro Denver stores on a
daily basis, so I know how important this is.
I am not a large corporation. I do not work out of a
penthouse office or behind a big mahogany desk. I get the same
health coverage for my wife and five kids as we provide for our
employees. These people are part of my family, and we want to
do right by them. I might add that the same is true for
thousands of other dealerships across the country.
Our H.R. people work each year to find the most affordable
plans with the best coverage. Each year, that becomes
increasingly challenging, and each year it becomes more
difficult to build a business and hire additional staff.
Over the last 9 years, our health insurance premiums have
remained relatively flat. We have accomplished this by
increasing deductibles and co-pays, changing coverages, and
aggressively shopping our health insurance plans. We have had
to change carriers.
We are not alone. Every small business across Colorado that
is trying to do the right thing faces exactly the same burden.
In just 2 years, providing health coverage for the men and
women who work for me and their families will be turned on its
head and not for the better.
The implementation of the Patient Protection and Affordable
Care Act, a centerpiece of this Administration's domestic
agenda, will drive costs higher, not lower.
Since we employ more than 200 people, we would be required
by law to offer our full-time employees health benefits with
specified affordability and minimum value requirements. If the
coverage does not satisfy these requirements, we pay a fine.
Even if one full-time employee went to a new health exchange
and purchased a government-subsidized plan, we pay a fine. If
we choose not to offer health coverage, we pay a fine.
Instead of trying to do the best by our employees, it will
become a simple math calculation: Is the fine less than
providing coverage for our people?
The same law that mandates that we provide this coverage
provides a loophole so we don't have to. How does this make
sense?
Within a relatively short amount of time, the health-care
delivery system will be less accessible and far more expensive
than today. Supply and demand dictate what we can get for a new
or used vehicle. With the economy suffering the past several
years, the value of used cars is significantly higher, because
demand for them is high. The same is true for health care.
With mandatory coverage, the demand for health care will
sky rocket. With a limited supply of hospitals, doctors, and
nurses, the price of care will go up and the cost to cover our
employees will rise and continue to do so.
Eventually, health-care costs will escalate so high it will
be impossible to offer an in-house plan, so our only option
will be to pay the fine and to have our employees fend for
themselves in the state-regulated, government-subsidized
program.
Many other businesses will do the same calculation and see
the State exchanges as a viable option. As the Government
program becomes overwhelmed by people forced into the State
exchanges, our Federal penalties and our State taxes will have
to increase to cover the influx of people.
So how do we fix this problem? A simple solution is a
complete repeal of the entire health-care reform bill,
replacing it with an affordable system that preserves consumer
choice while not sacrificing quality care. I am sure that is
easier said than done.
Small steps have been made to reduce the burdens of health-
care law. I applaud Congress for successfully repealing the
1099 tax-reporting requirement for any expenditure over $600.
That provision alone would have been death by a thousand paper
cuts. It would've cost our staff hours and hours of paperwork.
I want to thank Chairman Coffman for his efforts to
eliminate that burden. It is a good first step, but it is far
from enough.
Another important step would be to eliminate the so-called
employer mandate to require employers to offer plans with
certain coverage requirements. The mandate changes the meaning
of full-time and leaves the unelected bureaucrats to define
minimum health coverage, leaving small-business owners
uncertain about the future.
I mentioned this earlier in my testimony, fortunately the
American Job Protection Act, H.R. 1477, would repeal this
mandate.
Chairman Coffman, I saw that you were an early cosponsor of
that legislation, and I commend you for doing so.
H.R. 1477 removes any requirement that employers with over
50 or so employees provide insurance coverage or pay fines.
Repealing this provision is absolutely critical to keeping this
program from harming my dealership and small businesses
throughout Colorado.
In closing, I want to thank Chairman Coffman for the
opportunity to testify today. Our goal, as every other
entrepreneur in Colorado, is to build a thriving, self-
sustaining business to support our family and the families of
the men and women who work for us.
I urge you to continue your work to fix the problems
associated with the new health-care law, to do what you can to
implement real, market-driven reforms that increase competition
and make health insurance more affordable.
Thank you.
Chairman Coffman. Thank you, Mr. Tynan, for your testimony.
Our next witness is Mr. John Leevers, president of Leevers
Supermarkets Inc. in Franktown. He is actively involved in the
daily operations of LSI and has 22 years of experience in
retail operations, human resources, and finance. Mr. Leevers is
also responsible for long-range planning, evaluating
acquisitions, establishing strategic direction, and initiating
store expansions and capital investment.
He is a 1993 graduate of the University of Denver, with a
degree specializing in finance and management.
I appreciate your participation, Mr. Leevers.
STATEMENT OF JOHN W. LEEVERS
Mr. Leevers. Thank you. Good morning, Mr. Chairman, and
thank you for the opportunity to testify on behalf of the
National Grocers Association on an issue that will undoubtedly
affect the way in which all small businesses operate.
The NGA is a national trade association representing and
servicing the retail grocery and food companies and wholesale
distributors that comprise the independent sector of the food
distribution industry. An independent retailer is a privately
owned or controlled food company operating in a variety of
formats.
NGA members also include retail grocery or food companies,
and wholesale distributors, affiliated associations, as well as
manufacturers, service suppliers, and other entrepreneurial
companies that support NGA's mission and philosophy.
My name is John Leevers, and I am the president of Leevers
Supermarkets Inc. We were founded in 1938 by my grandfather. My
brother and I are third-generation grocers, celebrating 75
years next year. I'm excited about that.
Like many small employers around the country, we have tried
to make the best of difficult times and hope the worst is
behind us. We have been fortunate in that we have recently been
able to open three new stores here in Colorado.
But we fear our future growth will be stifled by the
effects of Affordable Care Act. The Affordable Care Act has
changed the way in which small businesses think about benefits.
And in this new era, the decisions companies make with regard
to benefit administration will affect their ability to compete.
As a result, we have spent a considerable amount of time
and resources analyzing how to proceed in 2014, when what are
key provisions for us are implemented--the most significant,
the employer mandate. We welcome the opportunity to share these
experiences with the committee.
Leevers Supermarkets today operates 13 stores and employs
around 300 people here in Colorado. Eleven of our Leevers
stores operate under the Save-a-lot banner, and as such utilize
a price-driven format. The focus of this price-driven format is
on efficiencies. We differ from traditional grocery stores in
that we sell only a limited assortment of product, and our
operations are extremely streamlined to keep costs low.
In 2014, we are faced with the decision to either continue
to offer coverage as we have it today and absorb additional
costs of administration burdens associated with the Affordable
Care Act, or, alternatively, to drop coverage, as some of the
others have suggested, leaving our employees to fend for
themselves, despite our years of corporate support of our
employees' benefits.
Simply put, neither decision is attractive to us, and both
decisions could have significant repercussions on our business.
Over the years, as health-care costs have increased, we
have seen erosion in the benefits we have been able to offer.
In the not-so-distant past, we offered benefits to all
employees and health-care coverage was free. More recently, in
light of the cost of care, we have been forced to limit
eligibility in our plans to full-time employees and individuals
who hold certain jobs.
If the Affordable Care Act is maintained as written, we
will have a very difficult decision in front of us beginning in
2014. It is likely that we will not be able to be in a position
to afford health-care benefits of any kind.
For us, like most small employers, discontinuing coverage
makes sense from an economic standpoint. As I stated earlier,
our stores employ between 20 and 40 employees at each location,
and we have roughly 300 employees.
Because of costs, we have had to restrict employee
eligibility in our plan, and we currently have 65 individuals
participating. We self-insure our health coverage and our costs
are roughly $10,000 per covered life. Thus, the total cost of
our health benefits for our company today is roughly $600,000.
And we pay about 80 percent of such costs, or about $480,000.
The Affordable Care Act greatly expands the number of
employees who would need to be covered on our plan by defining
a full-time employee as an employee who has averaged at least
30 hours of service per week over the course of a month.
According to the shared responsibility provisions of the
Affordable Care Act, we must either provide such individuals
with coverage or pay a penalty of $2,000 per full-time
employee.
Prior to the Affordable Care Act, we would not have
considered employees who worked 30 hours per week full-time and
consequently would not have offered them the opportunity to
enroll in the plan. This provision alone increases the number
of eligible employees in our plan from 65 to around 250. If we
were to continue coverage, even if our medical trend costs were
to stay stable, which is not likely to be the case, the cost of
our plan beginning in 2014 would skyrocket to around $2
million.
Again, the Affordable Care Act penalty for discontinuing
coverage is $2,000 per full-time employee, disregarding the
first 30 full-time employees. If the 30-hour workweek
definition stands, our total number of employees defined as
full-time for health-care benefits would rise to roughly 250.
Thus, our liability under the shared responsibility provision
would equal about $440,000.
As you can see, purely from a financial standpoint, the
decision to drop coverage makes sense for us. This is
especially true considering the fact that because of our size,
there's very little we could do to bend the cost curve on the
cost of benefits in the coming years. As you know, the cost of
health-care coverage is heavily dependent on the size of your
pool. In general terms, if you have a large pool, the impact of
a catastrophic event will be spread over a large number of
people and the per capita cost will be less. This is as true
for self-insurance as it is for insurance. Thus, one strategy
for lowering costs is becoming included in a larger pool. The
Affordable Care Act, however, prohibits small businesses with
more than 100 employees from purchasing coverage through an
exchange. Thus, while other small employers may benefit from
the aggregation possible through an exchange, we are,
unfortunately, precluded from exploring this option.
However, if we must make the decision to discontinue
coverage, we are cognizant that certain noneconomic factors can
come into play. Like any business, our employees are our
greatest asset. We understand that dropping coverage is likely
to have a profound effect on employee relations.
Members of the committee, the Affordable Care Act has
placed our business between a rock and a hard place. The shared
responsibility provision forces us to try to decide between two
bad decisions. We can choose to continue the provision of
health benefits and be saddled by unsustainable costs,
resulting from mandated increases not only on the number of
beneficiaries we must cover under our plans, but also the
richness of the benefits we must offer.
The alternative, discontinuing coverage, is equally
problematic and forces us to ignore time-tested justifications
for providing benefits that will result in severe employee-
relations issues.
Thus, unless significant changes are made to the Affordable
Care Act, it stands to do irreparable damage to many small
businesses. Specifically, we recommend the definition of full-
time employee be amended to reflect the way in which employers
generally categorize employees as full-time or part-time.
I look forward to working with you on these changes and
answering any questions you may have.
Chairman Coffman. Thank you, Mr. Leevers.
Our final witness is Mr. Mark Rogers, president and chief
operating officer for Roaring Fork Restaurants. Mr. Rogers
leads over 250 employees in several locations throughout
Colorado. He also serves as the secretary and treasurer of the
Colorado Restaurant Association. He received a bachelor of arts
degree from Baylor University, and his masters in business
administration from the University of Colorado.
Welcome to the committee, Mr. Rogers.
STATEMENT OF MARK ROGERS
Mr. Rogers. Thank you very much. Good morning, Mr.
Chairman.
My name is Mark Rogers, and I'm grateful for the
opportunity to address some of the ramifications the new
health-care law will have on employers and the workforce,
particularly the impacts the new law will have on small
businesses and job creation.
While this law includes some important insurance reforms
and increased access to coverage for many people, taken as a
whole, the law is biased toward mandating coverage rather than
providing meaningful cost control.
This legislation will create increased uncertainty in our
long-term business planning and force employers to choose
between absorbing rising premiums or paying mandated penalties,
slowing the growth of small and midsized businesses as we
struggle with the costly new requirements during a time of
economic recovery.
I am a small-business owner and franchise partner for
Cheddar's Casual Cafe, a company my father originally cofounded
in 1978. Now, along with my father and sister, I have started a
pair of companies called Roaring Fork Restaurants, Inc., to
expand Cheddar's franchises across the State of Colorado, as
well as Riverside Restaurant Group, LLC, which facilitates the
purchase and construction of restaurant properties.
Our first Cheddar's franchise restaurant is Aurora; our
second house in Colorado Springs. We truly are building this
business from the ground up. My father made sure of such, as I
have worked as a server, bartender, dishwasher, assistant
manager, and manager, obviously, teaching me a great deal about
the restaurant business.
As we continue our franchise expansion, I am particularly
concerned about the health care employer mandate, which will
prohibit and hamper our growth.
I am here today on behalf of the International Franchise
Association, or IFA. The IFA's mission is to safeguard the
business environment for franchising worldwide. IFA represents
more than 90 franchised industries, including more than 11,000
franchisees, 1,100 franchisors, and 500 supplier members
nationwide. There are more than 800,000 franchised
establishments in the United States, creating 18 million
American jobs and generating $2.1 trillion in economic output
each year.
According to a study prepared for the IFA by the Hudson
Institute, the franchise industry will be particularly hard hit
by the employer mandate provision of the new health-care law.
The new law will affect tens of thousands of franchise
businesses like mine, putting more than 3.2 million full-time
employees earning their living in franchise business at risk of
losing their jobs, and adding costs of more than $64 billion in
employer mandate penalties, not including the additional costs
in time for regulatory compliance.
The report also shows that the new law will make it harder
for small businesses with 50 or more employees to compete with
those that have fewer than 50 employees. Therefore, the effects
of the new law are anti-small business growth by inadvertently
discouraging many franchisees from owning and operating
multiple locations, creating a competitive disadvantage for
franchisees who do own more than one or two locations.
The study also demonstrates that the employer mandate
provides an incentive for franchisors and franchisees to
replace current full-time workers with part-time and temporary
workers. This is the wrong direction for both our economy and
millions of unemployed Americans.
The real irony here is that in the name of expanding health
coverage, health-care coverage, Congress and the Administration
are making it more difficult for workers to enter and
eventually be promoted in the workforce at a time when we
desperately need growth.
I will go off script here for a moment and say that this
will change not only the restaurant industry in Aurora and
Colorado, but across the entire country. It will either force
restaurants to cut their staffs significantly, or it will
create two kinds of employees, almost a class system of
employees, those that are full-time, those that are part-time.
Restaurants will absolutely have to cut those that are full-
time, those that are working more than 30 hours a week, or else
have to provide insurance coverage.
And in our case, and in many restaurants across the
country, it is much more expensive to pay for that insurance
coverage than pay for the penalty. So therefore, they will cut
their staffs to almost strictly part-time employees.
I think that that class system within restaurants, at
least, would be terrible for the entire industry, as well as
the country.
I think it will also force people to get multiple jobs, and
what you are going to see is there are servers and bartenders
and cooks who work 40 to 42 hours a week, supplying their
families with everything that they need. Well, with restaurants
having to cut their staffs and cutting those folks to now less
than 30 hours, or 29 and half hours per week, they will be
forced to get a second job. So now you're going to be forcing
many folks in the entire restaurant industry to now go get
multiple jobs, which will make it more difficult for them,
driving to multiple jobs. This is tax season--having to file
multiple returns. It'll make it much were difficult.
It'll force restaurants to pass the costs as well on to the
consumer. Our restaurant, and I look at our corporate entity as
a whole, established that it will force us to raise our costs,
our menu prices, 3 to 4 percent at minimum in order to deal
with paying the penalty. And I would say that based on what we
have established, we will pay the penalty, because it will be
much more expensive to pay the coverage.
We assume that, as you said, with 250 employees, you're
talking about more than $400,000 a year that it will cost our
businesses just to pay those penalties at $2,000 per employee.
This new health-care law imposes yet another unnecessary
layer of regulatory burden on business owners as we attempt to
understand and comply with these new provisions and face the
increasing costs of doing business. Because of the employer
mandate, it will be more difficult for businesses to estimate
the cost to expand and hire new workers for tens of thousands
of business owners already struggling to recover from the
deepest recession we have had since the Great Depression.
Franchise small-business owners should not be forced to
choose between absorbing rising insurance premiums and paying
tax penalties for noncompliance. The framework of the current
law threatens the economic viability and job creation potential
of franchised businesses vying to recover from the economic
downturn by imposing excessive cost burdens on the backs of
small businesses.
As one of those small-business owners, I urge Congress to
further review the impacts and consequences of the health-care
reform law as a whole and repeal this onerous employer-mandate
provision.
I would also say, with regard to our business of over 200
employees, 200 to 250 employees, it will cost us $400,000 a
year. I will say that even my father yesterday talked about
changing our management structure, so you're not only talking
about the hourly employees, you're talking about changing our
management structure. We have four to five managers per
restaurant. And you think, well, perhaps we have to change
those from working 40 to 50 hours a week down to 30 hours a
week, in order to just pay the penalties. Now you're talking
about affecting the lives of all those managers.
And the last thing I wanted to say, and it struck me what
these gentlemen said. I always tell people I'm in the people
business. I am not in the restaurant business; I'm in the
people business, whether that is our employees or our
customers.
With our employees, I've paid for hotels, traveling, I've
given advances, I've given loans, I've done everything I can to
take care of our employees. Now I think of the fact that I'm
going to be the one that is going to be cutting back on their
benefits, and I'm to be the one making life harder for them
just in order to survive, in order to be able to actually have
employees and take care of customers, we will have to face
paying the penalty instead of the costs of providing coverage
to all those employees.
Thank you very much for the time.
Chairman Coffman. Mr. Rogers, thank you for your testimony.
I think all of you have well-expressed the unintended
consequences of this legislation.
Let me ask some questions to all of you.
And the first one is, I think employers want to offer
health insurance to their workers, both to do the right thing
and to stay competitive. But thin margins leave employers
unable to absorb these continuing cost increases.
First of all, do you think most small firms want to offer
health insurance but simply can't in this economy?
Why don't we start with you, Mr. Small, and then we will go
down.
Dr. Small. Yes, absolutely. It just becomes cost-
prohibitive to be able to do this.
I moved to Denver in 1967. For the first 15, 18 years, we
did pay all of the medical insurance costs for our employees.
And then it got to the point, as costs were increasing, when I
first got here, it was like $5,000, $6,000 to cover everybody
on my 25-, 30-member staff. As we got larger, but particularly
as the premiums skyrocketed, it got up to the point where we
were up in the $50,000, $60,000 range. And the consultants told
us that within 3 years, their estimate was that we would be
between $104,000 and $120,000 in premiums. At that point, for
the next 3 years, we froze what our participation was and had
the employees pay that differential as that price went up.
In 3 years, we had exceeded the $120,000 limit for our
staff premiums by about $20,000. And so at that point then, we
stopped doing that. We had some other group plans, but those
have faded also.
So there is no question, the desire would be to provide
that kind of coverage for your staff. And they really are like
family. I have four people I've worked with who have been on my
staff, on our staff, for over 40 years.
Chairman Coffman. Thank you, Dr. Small.
Mr. Tynan, do you think that most small firms want to offer
health insurance, but simply can't in this economy?
Mr. Tynan. Yes, Mr. Chairman.
The car dealers that I am familiar with would like to offer
those benefits to their employees, and the comments that you
made in your opening statement about ways to address the
increasing costs, I believe that our associations would be in
concurrence with those comments about addressing tort reform,
going across State lines, and the other comments that you made
in terms of addressing health insurance.
Chairman Coffman. Okay, and just let me mention that we
will have tort reform--there will be tort reform legislation on
the floor of the House in April, next month.
Mr. Leevers, go beyond your firm. Do you think most small-
business employers want to offer health insurance but simply
can't do to the economic situation that we are all in right
now?
Mr. Leevers. Certainly, every small-business person that I
know, and entrepreneur that I know, would prefer to offer
benefits. It is not only the right thing to do and people feel
like it is the right thing to do, but it is what we need to do
to be competitive with big firms and what is going on out there
in the market. So the simple answer is, absolutely everyone
would prefer to offer those benefits if they could afford to.
We used to offer them to everybody at no cost, and over the
years, we have had to just maintain coverage, the best coverage
we could, for the people that we could, we have had to cut back
on who is eligible. And then we had to begin, since we are
self-insured, we pay up to the first $40,000 of any individual
claim. So I, effectively, have a $40,000 deductible with all my
employees.
We have had to continue--we started out at $5,000. In order
to make sure that our coverage stays as good as it can be, it
went to $10,000, and to $20,000, and to $30,000, and to $40,000
over the years, just to maintain somewhere in the neighborhood
of 8 to 10 percent increases on an annual basis.
So we certainly realize, I think, something needs to be
done about the cost of the health care in this country,
especially for small- and medium-size businesses. And everybody
would certainly prefer to offer if they can, but we don't think
this is the way to do it.
Chairman Coffman. Mr. Rogers.
Mr. Rogers. I would say, of course, my business is a little
different in the restaurant business, because it is such a
transient workforce, it is difficult to think of providing
health-care coverage for someone that might work for you for 3
weeks.
But I would say, as an entrepreneur, looking at the big
picture, of course.
We have a young woman that is a cook for us. She started as
a culinary assistant making $7.50 an hour in Aurora when we
opened the restaurant 2 years ago. She has worked up now to
make about $12.50 an hour. She doesn't have any health
insurance.
And about 3 weeks ago, she was hobbling around. And she had
ingrown toenail, but should have any health insurance, so she
didn't want to have to go spend a bunch of money to get ingrown
toenail fixed. She has a child home, and that was just too
expensive.
Well, without insurance, it costs about $850 to have her
ingrown toenail fixed, and you know, my father and I paid for
her--I paid for her to go to the doctor and get it taken care
of, because it was the right thing to do to help her.
In the greater scheme of things, I think that is what
you're asking, of course, we want to take care of our employees
and, of course, we want to provide insurance or health care for
any and all of them.
If the restaurant business wasn't such a transient
workforce, I would say, absolutely, we would want to provide
for each and all of them. And you know, I think the case with
that young worker, Justine, shows that we absolutely want to
take care of any and all of our employees.
Chairman Coffman. Thank you.
And the next question I think some of you have certainly
touched on this, but for the record, if you could just
reiterate your position. One of the main things I wanted to
highlight in this hearing is to show this law will impact job
creation and business expansion.
As I mentioned in my opening statement, beginning in 2014,
employers with 50 or more employees will have to provide
insurance coverage to their employees or face financial
penalties. My question to all of you, do you think a company
that is just below the 50-employee threshold will be likely to
hire more workers if they are unable to provide health
insurance? Is a company that has 52 employees going to maintain
or contract in the face of these penalties?
Any insights from your current employment levels could help
as well.
And we will start with Dr. Small again.
Dr. Small. I don't think there's any question that if
you're close to that 50 level, you are going to make sure you
don't go above it or you don't go below it.
With 62 on our staff, we have looked at that and said, is
there any way that we can get down below that 50 level. That is
impossible for us. We are close, but not close enough.
We have, because of a dentist who just recently retired and
moved to Florida, we have capacity to take two additional
practices into our facility right now, but we're holding off
because we are trying to find out some answers on subjects that
we are talking about today before we do any kind of expansion.
That kind of expansion would add at least six and maybe eight
additional employees.
Chairman Coffman. Okay.
Mr. Tynan.
Mr. Tynan. Mr. Chairman, I think any company would look at
the situation if they were at that threshold level to see if
pulling back to below 50 employees, if they could make their
business operate and reduce their exposure to the mandates
within the health-care reform.
We have three separate corporations, and we group those
three separate corporations together for the purposes of
expanded our insured pool. And I would think we would have to
look at breaking those three individually up, and perhaps even
making one of our corporations, splitting it into two, to get
below the 50-person threshold, if we thought that we could get
adequate health insurance coverage at an affordable price with
that smaller pool, vs. staying grouped together with all of our
corporations.
I'm certain any company that was on the threshold at 50--
our smallest corporation has 60 employees. Could we cut back to
49 people?
Chairman Coffman. Now, would that inherently cause an
increase in premiums, because you're dealing with a smaller
group? So you're fragmenting into smaller groups.
Mr. Tynan. Right.
Chairman Coffman. So would the aggregate amount be more
than you would have otherwise purchased for those groups?
Mr. Tynan. Exactly. And that is why you have an insurance
broker who is going to run the numbers for you and can say, if
we break it up this way, it will be less expensive and you will
have less exposure, or you will be better off paying the fine,
going to the exchange, or you should continue your health
insurance plan.
Chairman Coffman. Mr. Leevers.
Mr. Leevers. I would echo those sentiments. We're in an
industry where the national average for grocery stores net
profit is between 1 and 2 percent. That is published numbers.
When you have something that is such a significant cost as
health care and other benefits are with employees, people are
going to do whatever they need to do to figure out how to work
with that, because the numbers I proposed earlier are just
simply untenable.
As you proposed, would you look at separating, and other
companies already do this for other reasons, but separating
grocery stores into individual companies? Would you look at
cutting back in certain areas? Changing the number of employees
who are considered part-time or full-time, reducing hours under
30 to keep people outside of those?
Yes, there is no question that small businesses and
individual stores, in particular, are going to have to look at
changing the way they do business based on that law.
Chairman Coffman. Mr. Rogers.
Mr. Rogers. So insurance for us costs well over $2,000 per
employee.
Chairman Coffman. Today it does, okay.
Mr. Rogers. Yes. I was thinking about the threshold that
you said. If you're at 49 employees and you thought about going
to 50, and let's say that it costs half of $2,000 just for
coverage, you immediately are going to cost that company
$50,000 if it costs $1,000 per person. If you add and hit the
50 threshold, you will immediately overnight cost the company
$50,000.
So I don't think there's any question that none of those
businesses at the threshold of 48, 49 people are ever going to
want to go above at what it is going to cost them.
And in terms of growth, there are a few public restaurant
companies today that look at their business as profit per
employee. And I know one of them is Outback Steakhouse. And
they figure their profit per employee is right at $2,000. And
therefore, they figure for each person they are hiring, and
they realize that they have to pay the penalty instead of
covering folks, then in essence, take away all the other costs,
at essence, they're getting zero profit by hiring one more
person.
So the thought would be, let's keep the same workforce and
try to get more out of that workforce. That is our only shot at
trying to better our numbers.
It is a terrible way to look at business. I mean, it is
awful. For the last several decades, you always, when you were
doing well, you looked at growing, you looked at adding people
to increase sales. And I think that people don't look at their
business that way anymore, based on this new law.
Chairman Coffman. I'm going to start the reverse, with you,
Mr. Rogers, this time.
Instead of mandates and penalties, that I believe will do
little to actually lower health insurance and delivery costs,
what other steps could be taken to reduce costs? Do you think
being able to purchase health insurance across State lines or
medical malpractice reform might help to reduce costs, or other
ideas that you might have?
Mr. Rogers. I think that being able to buy insurance across
State lines would absolutely help. I think it would make it
more competitive.
As it is today, our insurance continues to go up,
regardless. So I think making it more competitive in any
possible way would help.
And, yes, I think that tort reform there would help
greatly, too. I think that helped where I'm from, the State of
Texas, helped greatly. And I believe, if you could have Federal
tort reform, of course that would help.
So anyway to make it more competitive would help all
industries.
Chairman Coffman. Right. Thank you.
Mr. Leevers.
Mr. Leevers. I would agree that the tort reform, in our
opinion, would be a significant step in the right direction.
Being able to pool and buy across State lines is
significantly impactful to us, because we're big enough to be
out of the small, but we are not big enough to get into any
large pools. So that really has significant impact for us,
being able to pool up with others.
In addition to that, again, the nature of our business is
very part-time. We have a lot of people who don't look at our
business as their primary. It might be a second job. It might
be a high school job. It might be an evenings and weekends job
for a housewife.
So that coupled with the fact that our business fluctuates
fairly dramatically from the first of the month to the end of
the month, and seasonally, makes these things very, very
challenging.
So reforming the definition of a full-time employee on a
per month basis is absolutely critical for us.
Chairman Coffman. Mr. Tynan.
Mr. Tynan. Mr. Chairman, tort reform seems to me to be the
single biggest issue that needs to be addressed.
Chairman Coffman. Dr. Small.
Dr. Small. I would second that comment.
Chairman Coffman. Thank you.
Let me ask a question for Mr. Rogers and then anybody else
can respond to it.
You mentioned in your testimony that you essentially
learned the restaurant business from the bottom up. In light of
this law and the coming regulations, along with other
regulations coming out of this Administration, I'm wondering if
the Federal Government might be dampening the entrepreneurial
spirit. Are these actions slowly but surely killing an entire
generation of potential entrepreneurs? What do you think, Mr.
Rogers?
Mr. Rogers. Yes, I think without a doubt. I look at our
parent company, when we purchased the rights to Colorado as a
franchise territory, we became a franchisee instead of a
franchisor. I saw my father was an entrepreneur for 34 years
with this business, and I wanted to follow in his footsteps.
I look at it today, knowing that our corporate group has
the opportunity to buy us out again, similar to the way we did
when we sold out to them a few years ago. So I look at this
opportunity and think, when I sell out, do I want to be an
entrepreneur again and go start another restaurant company? I
think, do I want to go out and purchase a small restaurant
chain and grow it?
And just last night I told my wife I might not. I said it
is so difficult today as an entrepreneur, especially in the
restaurant business, and thinking about this health-care
mandate, that it would be better, in my opinion, to go more of
a corporate route. So I think there's no question it's killing
the entrepreneur spirit of wanting to go in and start something
and create something and grow something, because it is hard on
the little guy.
And I see how easy it was, or, it was much easier to start
businesses when my father created this company in 1978. And how
much more difficult it is today, with all the regulation, and
this, in a way, I agree with you, is absolutely killing the
entrepreneur spirit.
Chairman Coffman. Mr. Leevers.
Mr. Leevers. My father's favorite saying is all I ever
wanted to do is sell groceries for just a little bit more than
I pay for them.
And somehow we've created so much regulation in general
around business today that we have to do a whole lot more than
sell groceries for a little bit more than we paid for them.
And I think it absolutely is dampening the spirits of
entrepreneurs and their willingness to take the risks and incur
the expenses and the risks involved with those, to comply with
all kinds of regulations. This just layers on another huge
chunk on top of what is already I think drowning small business
in America.
Mr. Tynan. Mr. Chairman, recently a customer who is
purchasing a car on our Nissan showroom floor told me that
there was more paperwork in buying a car than there was in
buying their last home. And we are in a highly regulated
industry, both at the State and Federal level, and we have
revenue earners and revenue burners.
We need far more revenue earners in our business than
burners. But regulations like this health-care mandate require
so much time and energy to try to understand how to comply,
what your potential costs are and the fines that you're going
to face, that we're burning more revenue just trying to
understand it. It is certainly stifling entrepreneurial spirit
in our businesses.
Chairman Coffman. Dr. Small.
Dr. Small. I think there is no question that it stifles
that spirit. In the dental field, we run a much smaller cottage
industry. We don't have those kind of issues that these other
three gentlemen have. But no question, it is a dampening
effect.
Chairman Coffman. Well, let me tell you, I thank you so
much for your testimony today. And if you have any additional
comments, certainly you can submit them for the record. But I
will also defer to you in a minute if you have something.
I just want to say that I think that there are tremendous
unintended consequences with this legislation. And I'm
concerned about it in terms of job creation. It seems to me
that, from the testimony today, that certainly the cost, the
increasing cost, is an unintended consequence, but also that
for businesses to survive, for small businesses to survive, a
push from full-time to part-time employees, to come under that
threshold established in the law, and also for firms to say,
you know, I'm not going to add that 50th employee. And so, I
mean, this legislation is clearly, I think, as described today,
is going to have a chilling effect on small businesses.
And of course, it's interesting to see in Washington, D.C.,
that some of the very large and politically connected employers
are getting the kind of waivers that are not available to small
businesses.
So are there any additional comments you would like to make
today, anybody would like to make today?
Thank you so much for your testimony. It has been very
instructive.
Okay, we'll close here. With that, as we conclude, I would
like to mention for the record that members of the committee
will have 5 legislative days to submit statements and
supporting materials for the record.
[The information follows:]
Chairman Coffman. With that, the hearing is now adjourned.
[Whereupon, at 11:04 a.m., the subcommittee was adjourned.]
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