Can Business Afford The Affordable Care Act?
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There has been a lot of commentary on TV and in the newspapers about how good or bad the Patient Protection and Affordable Care Act of 2010 (or ObamaCare as it is widely known as) will be for the nation.
Based upon past government forays into the private sector and what I know about the law, I am leaning towards a bad outcome. The law will most likely result in increased uncertainty and budget deficits and reduced economic activity; things that we don't need at this time of record debt and tepid growth.
There has also been a lot of talk on the potential impact to certain businesses and industries.
National Restaurant Association CEO Dawn Sweeney said: “This unworkable law cannot stand as is. We need reform that addresses the increasing costs our members are faced with each year. Restaurant owners are looking for solutions that will allow them to provide better health care coverage options for their team members, but they cannot be saddled with excessive costs and regulatory burdens that threaten their very business. We ask members of Congress to take action that helps the restaurant industry continue to help create jobs and grow the national economy."
The National Retail Federation also expects a negative impact overall on the industry they represent.
The law is of particular concern to the chain restaurants and larger retail outlets that are heavily dependent on part-time workers. Their employees generally do not have coverage today. Businesses with more than 50 employees will be required by 2014 to provide health insurance, so the small “mom and pop” places will not be affected unless they plan to expand over the magic number. That could lead to a growth problem down the road.
John Schnatter, CEO and founder of Papa John’s International (NASDAQ: PZZA) said during a recent conference call with shareholders that if ObamaCare is not repealed there will be price increases. For example, a large pizza would cost up to 14 cents more. While this probably will not cause a lot of heartburn (pun intended), nevertheless it is not a positive. Mr. Schnatter has gone on record as saying that he is against the law.
McDonald’s (NYSE: MCD) has stated that the planned reform will probably cost each restaurant $10,000 to $30,000 per year or up to $420M across the enterprise. The corporation stated it will handle this like any other business expense and it is “hopeful that it can manage the cost increase in the future”. Is that putting a happy face on a potential problem? Does this mean price increases down the road? It is probably not a positive. McDonald's has been reporting a slowdown in revenue and earnings and the stock has declined about 10% so far this year.
Dunkin’ Brands (NASDAQ: DNKN) has stated that the law will impact its business although it has not provided firm numbers yet. The company, like most in the U.S., is dealing with a lot of uncertainty about how the law’s underlying regulations will be written and implemented. So far this hasn’t affected things yet. The consensus earnings estimate for fiscal 2013 calls for an increase of 18% over fiscal 2012. We might have to wait to see what is brewing in 2014 when the law fully takes effect.
At first glance it appears that the law will provide a benefit to health insurance providers like Aetna (NYSE: AET). The industry may see an increase in customers and revenue because of the individual mandate requiring coverage and somewhat of a decrease in other customers and revenue due to cuts in Medicare programs that are allowed to be serviced by private insurers. The stock has outperformed the market since the law was passed.
Aetna just announced a plan to buy Coventry Health Care Inc. (NYSE: CVH) for $5.7B. Coventry is a big player in certain Medicare programs.
Blue = AET
Red = S&P 500
I believe that the law will add costs to business and hurt some more than others. For now we may have to keep wading through all the rhetoric, including mine, and take a wait and see approach. The uncertainty is not a good thing.
Mark Morelli owns shares of McDonald's. The Motley Fool owns shares of McDonald's and Papa John’s International. Motley Fool newsletter services recommend Coventry Health Care and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
