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Business Strategy Analysis: Obamacare Choices for Firms

Updated on April 28, 2013

One major concern for businesses in developing strategy is government regulation. One of the biggest regulations to ever be passed is the so called Obamacare. As a result, businesses are faced with having to make serious choices by 2014. This article examines those choices.

Obamacare Requirements

As it is currently written, the health insurance legislation contains what is commonly called the employer mandate. This mandate states that businesses having fifty or more full-time employees must offer those employees a government approved health care package. The employee does have to accept that package, but the offer must be made. If an employer does not offer insurance to its employees, then the firm must pay a tax of $2000 for every employee (excluding the first thirty) or $3000, whichever is smaller. Firms with less than fifty full-time employees are exempt from this mandate.

Part-time employees may also end up getting coverage. If a combination of part-time workers work over 120 hours in a month, that combination is the equivalent of one full-time employee. Once there is at least fifty equivalent full-time units (part-time and full-time combined), then health insurance is mandated.

Business Strategy Choices to Obamacare

This section examines the strategy choices available to businesses. In addition some additional ramifications are mentioned. These choices do not pertain currently to businesses with less than fifty equivalent full-time personnel.

  1. Strategy 1: Reduce the workforce through layoffs to less than fifty employees. Firms that are marginally profitable or losing money might lay off workers in order to get below the fifty employee level. Only firms that have about fifty to seventy-five workers could actually do this. One advantage to the firm is, not only would it not have to pay for health insurance or the tax, but it would also save the salaries and payroll taxes it was paying for the workers who would be laid off. A disadvantage would be the firm may not have the ability to grow and may even need to shrink its market share. This could create an opportunity for a larger firm to take the market share the smaller firm vacated. Thus, larger firms could even get larger. Another disadvantage is the U.S. economy might need to bear more displaced workers.
  2. Strategy 2: Reduce the workforce by outsourcing functions currently done in- house. Firms not wishing to pay for employee health insurance might identify the less than fifty core positions in the firm and reduce the firm's workforce to those core positions. All other positions could be performed by independent contractors or other firms. Again, this could only be accomplished by smaller firms as in Strategy 1. An advantage here is that the firm does not have to pay health insurance but may also be able grow and increase market share because the size of its workforce remains unchanged. Disadvantages include giving up some control to the outsourcers as well as independent contractor problems with the IRS. Whether there are cost savings or not depends upon how the outsourcing is structured.
  3. Strategy 3: Maintain the size of the workforce, do not offer health insurance, and pay the $2000 tax per employee. Advantages here include not having to find a government approved health insurance plan and keeps life simple. The major disadvantage is the firm now has an extra expense that will need to be accounted for. Firms that are marginally profitable or losing money already will be forced to raise selling prices to cover the additional expense or face going out of business. Depending on the industry, this could create a huge competitive disadvantage to some of these firms.
  4. Strategy 4: Maintain the size of the workforce and offer health insurance for all employees. One advantage here is that a firm can take better care of a specialized or well-trained workforce that may not be replaceable. Another advantage is that these firms might be able to use the choice of Strategy 3 by a competitor to the competitor's disadvantage. One disadvantage is the the heath insurance must be approved by the government.

Strategies 3 and 4 are really the only options for large firms. So large firms might have an opportunity to pick up market share from the smaller firms that choose Strategy 1 and downsize. The last two strategies also potentially allow larger firms to acquire the outsourced positions from the firms that choose Strategy 2. What should be becoming clear, is Obamacare is legislation that allows large firms to become even larger while potentially pushing smaller firms out of the market place. As a result of this, competition in markets may decrease and when competition decreases, consumers lose.

The choice between Strategies 3 and 4 may come down to several factors. One factor will be whether it is cheaper to pay $2000 per employee over 30 employees than it is to provide health insurance to all employees. This factor is determined by solving an algebraic equation. For example, suppose a firm finds that it can obtain an approved insurance plan for $1500 per person. If the firm has 50 employees, the insurance plan would cost the firm $75,000. If the company does not offer insurance, than it would pay $2000 per person over 30 employees, or $40,000. So it would be cheaper to pay the tax and not offer the insurance. However, if the firm has more than 120 employees, the insurance plan would be cheaper.

Another factor could be if a firm wishes to use its health insurance plan as a benefit to retain its employees. Firms having highly skilled or educated workers not easily replaced might wish to offer health insurance plans that retain those workers. On the other side, firms currently offering health insurance and have easily replaceable workers might stop offering the health insurance and instead pay the $2000 tax.

Summary

The Obama health care plan will require firms with over fifty employers to make a major strategic choice by 2014. The strategies available are outlined above along with some of the ramifications. Unfortunately, many politicians among others do not understand that when businesses have to make choices like this, employees or customers pay the price. When firms are mandated to incur an additional expense, regardless of what it is, the firm will usually either cut back its labor force or raise selling prices to absorb the expense. This is Business 101.

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