The Brave New World of Obamacare

The 2.3 percent excise tax on U.S. sales of medical devices that took effect January 1, 2013 is already a $20 billion blow to the medical supply industry and its work force of 360,000 employees working in plants across the U.S. such as Stryker Corporation (Kalamazoo, MI), which blames the tax for 1,000 layoffs, or Zimmer Corporation (Warsaw, IN), which cites the tax in laying off 450 employess and taking a $50 million charge against earnings. Cook Medical Inc. (Bloomington, IN) scrubbed their plans to open a new U.S. factory each year, Boston Scientific Corporation (Natick, MA) opted to open plants in tax-friendlier China and Ireland to help offset a $100 million charge against earnings, and Medtronic Inc. (Birmingham, AL) expects an annual charge against earnings of $175 million.

WND reports that other arcane taxes which affect manufacturers include:

• A $24 billion tax on manufacturers in the paper industry to control a pollutant known as black liquor.
• A $2.3 billion-a-year tax on innovator drug manufacturers.
• An $87 billion hike in Medicare payroll taxes for employees, including the self-employed, a hike in the threshold for writing off medical expenses to 10 percent of adjusted gross income from 7.5 percent.
• A new cap on flexible spending accounts of $2,500 a year (took effect Jan. 1, 2013).
• Elimination of the tax deduction for employer-provided prescription drug coverage for Medicare recipients.
• A $60 billion tax on health insurers.
• A 40 percent excise tax on so-called Cadillac, or higher cost, health insurance plans (which goes into effect January 1, 2018).

And we’re only talking about a few of the taxes on manufacturers. There is another brave new world of taxes that engulf individuals, families and consumers. “As these higher healthcare costs translate into more expensive supply chains, U.S. manufacturers become increasingly less savory and customers begin looking abroad to increase gross margin and EBITDA,” warns Douglas Dzurko, the vice president of operations at Domestic Manufacturing Solutions (Monroeville, PA). “Uncertainty breeds hesitancy. Unstable labor costs and unpredictable risk could stymie business expansion and inhibit industrial growth.”

MANAGING THE EMPLOYER MANDATE
To summarize, the employer mandate basically applies to employers with at least 50 full-time employees or their equivalent. These employers are called Applicable Large Employers (ALEs) under this new law and must offer health insurance to full-time employees or risk paying a fine for failing to do so. “Savvy manufacturers should think of compliance under Obamacare in terms of distributing labor in the most efficient manner possible in light of these new employer mandate requirements,” suggests Mario K. Castillo, an associate at Monty & Ramirez LLP (Houston, TX).

“An ALE does not have to offer health insurance to a part-time employee, so manufacturers typically focus on shifting their employees around to maximize the amount of part-time labor needed and minimize the amount of full-time labor done by employees that must be offered health insurance if they are employed by an ALE,” says Castillo. “Most manufacturers today are preoccupied with either avoiding that ALE status or minimizing exposure to employer mandate penalties if that ALE status cannot be avoided.”

Since this law is not going away, Castillo suggests other methods by which higher efficiency through longer shifts can help an employer avoid that ALE status. “Under Obamacare, a full-time employee is anyone that performs at least 30 hours of service a week for a particular employer. Employers with full-time employees working hours in the low 30s might be unnecessarily placing themselves within the control of the new law.”

He continues, “For example, suppose a small shop needs 90 hours of labor per week on a particular machine tool to make its production quotas. If two employees operate that particular machine tool at a rate of 45 hours each, that is more efficient under Obamacare than if three employees operate it at a rate of 30 hours each because every employee that averages 30 hours of service a week or more is a full-time employee under the new law. Now suppose that shop has 20 of those machines on the plant floor. The difference in these staffing levels creates only 40 full-time employees under the first schedule, but 60 full-time employees under the second schedule. Assuming the shop employs no one else, the workers in that first schedule do not have to be offered health insurance under the new law. But the employees in the second schedule are entitled to offers of health insurance from the employer.”

Here we see how Obamacare requires competitive manufacturers to rethink the way they do business. The traditional incentive for cutting down a shift’s length was to minimize the accrual of overtime. But now, depending on the cost of overtime and the price of health insurance in a particular market, the price of paying those two employees a combined extra ten hours of overtime a week might be less than paying the shop’s portion of the health insurance premium. “If a shop decides, for whatever reason, to not offer healthcare benefits to full-time employees, the overtime cost of those ten hours will undoubtedly be less than paying for three sets of health insurance premiums,” adds Castillo. “When coupled with typical manufacturing efficiencies, the appropriate answer for some small to medium-sized shops may not be to cut down hours, but increase them.”

BITING THE BULLET
“In the end, our industry may find it prudent (and unavoidable) to bite a bullet and cover higher premiums in order to maintain a labor force that will eventually lead to expanding operations,” says Dzurko. “Then again, if shops have no choice but to pass along fees to a consumer who is unwilling or unable to pay them, the commitment to stateside manufacturing could become fiscally unviable altogether. The key to preserving the health of U.S. manufacturing lies in our industry’s ability to negotiate these new costs of health.”