Case Study #3: Cost of Obamacare could force retail operation out of business

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The last of three cases studies on how Obamacare will affect real Maine businesses shows that the staggering increase in health insurance costs could actually force a retail operation into bankruptcy.

(Download the case study here.)

Depending on how many employees become eligible for Obamacare, the company would be compelled to spend either 54% or 134% of its profit margin to pay for health insurance. In the first scenario, spending more than half of the company’s profit margin on Obamacare would result in layoffs and other drastic cost-cutting measures.

In the second scenario, if the company had to spend 34% over and above its entire profit to fund Obamacare, it simply could not stay in business.

In the third scenario, the company could drop health insurance all together and pay the Obamacare penalties. But that would still cost the company 90% of its profit margin.

The Maine company analyzed for this case study is a retail business with 78 locations in Maine, New Hampshire and Vermont. The company employs an average of 800 employees, including 650 full-time employees who are eligible for the company’s health insurance plan. Presently, 160 of full-time staffers now participate in the health insurance plan, costing about $800,000 annually.

The case study analyzes the effect of an additional 368 employees joining the plan under Obamacare. In the first scenario, health insurance costs would increase $1.85 million annually. In the second scenario, costs would increase $744,000 each year. By dropping health insurance coverage, the company would have to pay annual Obamacare penalties of $1.24 million.

“Regardless of the intentions of Obamacare, the end result is that these higher health insurance costs amount to a ‘success tax’ on the company,” said Joel Allumbaugh, author of the case study and director of the Center for Health Reform Initiatives at The Maine Heritage Policy Center. “Naturally, this company is in business today because it has successfully met the needs of the marketplace and has justifiably earned a small profit as a reward for taking a risk.”

But the best-case scenario would cut this company’s profit margin in half. “Without cost reductions, such as lay-offs, the company would eventually be forced into bankruptcy,” Allumbaugh said. “In the worst-case scenario, the company’s health insurance cost would consume all of its profit margin, and the company would have to borrow money just to stay afloat. Not only would the employees not have health insurance, but they wouldn’t have a job, either.”

For more information about this case study or Obamacare, contact Joel Allumbaugh at jallumbaugh@mainepolicy.org.