Case Study: Bakery Owner Talks About Coping With Health Insurance Changes

Sandy Huffaker for The New York Times Rachel Shein, center, is trying to figure out how to comply with the new health insurance law.What would you do with this business?

Last week, we published a case study about Baked in the Sun, a wholesale bakery and distributor that is trying to decide how best to comply with the Affordable Care Act. Starting in January, the new law requires businesses with 50 or more full-time employees to offer health insurance or pay a penalty. Owned by Rachel Shein and Steve Pilarski, husband and wife, the company employs nearly 100 workers to bake and deliver freshly made pastries to coffee shops, hospitals and hotels in Southern California.

Baked in the Sun has offered health insurance to its employees in the past but many are young and healthy and have preferred to keep more money in their paycheck, rather than contribute to a health plan. Soon, though, almost all workers will have to carry health insurance — through their employer, a government exchange or other source — or pay a penalty. And, as the case study discussed, Ms. Shein and Mr. Pilaski are trying to decide whether they will offer health insurance, pay a penalty or outsource enough work that they can reduce their head count below 50 and be exempt from the law.

The article elicited lots of comments and strong opinions, as well as reports in other media outlets, including CNBC, which included Ms. Shein in a panel discussion about her company’s situation. Some readers argued that Baked in the Sun has a moral obligation to offer coverage. Others argued for a single-payer system that would allow owners to stop worrying about health insurance and focus on running their businesses.

Andrew Greenblatt, a senior vice president at Benestream, which helps low wage employees apply for government benefits, pointed out that under the Affordable Care Act, Medicaid has been expanded to cover families earning up to 138 percent of the poverty level, which means that workers who make minimum wage, especially single parents, may qualify.

And Alan Cohen, chief strategy officer for Liazon, a private insurance exchange for companies, suggested in a comment that many employees will be better off if the bakery chooses not to offer insurance and instead pays the government penalty. That’s because the employees would be likely to qualify for a subsidy at a government exchange that would allow them to insure their whole family — but only if their employer does not offer health insurance.

Of course, because neither the minimum level of coverage, nor the costs to all the insurance options have been finalized, lots of uncertainty remains. We contacted Ms. Shein for a follow-up conversation that has been condensed and edited.

A number of readers suspect that you are underestimating how much it would actually cost to insure your employees. Have you taken another look?

The insurance plans are still under development. My broker recently found one that was less than what I had found, but I’m not sure anyone knows what the final rules and prices will be.

Have you thought any further about how many of your employees will actually sign up for insurance if you offer it?

In the short run, when the individual penalty is low, there might not be much participation. We plan to have a meeting with our employees to see what kind of insurance they might want and which of them might be covered elsewhere.

Did this discussion have any impact on your thinking about whether you will pay the penalty or offer insurance?

The employees will all have access to health insurance whether we provide it, or we pay the penalty and they purchase it using a subsidy on the government exchange. We need to look at all the costs and tax implications and do whichever is least expensive for the business.

Are there any reader questions you want to answer?

Some readers claimed it was a moral imperative to provide insurance — but all employees will have insurance under the law.

Some readers thought your profit margin was too low and questioned how well your business was doing. What was your reaction?

Like many entrepreneurs we have great years where we can take vacations and put money into our kids’ college funds. Some years are leaner.

Do you think your customers would pay a few more cents for your baked goods — especially if it allows you to offer your employees health insurance?

Our products are unbranded and sold in hundreds of outlets so it would be hard to educate consumers about our employment practices. And the popularity of Wal-Mart shows that most consumers just want the best price.

You suggested in the article that you might have to raise your prices 4 percent to cover the cost of providing health insurance. But 4 percent of $8 million — your annual revenue — is $320,000. That’s a lot more than you estimated the cost of insurance. Couldn’t you just raise your prices 2 percent?

Yes, a 2- to 3-percent increase could cover the costs, but it’s a low margin business and pennies matter so we like to build in some buffer.

Would you favor a single-payer system?

I am in favor of a system that doesn’t penalize a business for being successful and able to hire more than 50 people and doesn’t deter us from wanting to grow. I am in favor of a system where everyone pays in, and everyone is covered. If that is a single-payer system, I’m for that.

You're the Boss Blog: S.B.A. Proposes Rule Changes to Lure Borrowers

How small-business issues are shaping politics and policy.

Concerned, apparently, that not enough businesses are taking advantage of government-guaranteed loans, the Small Business Administration recently proposed changing some of its lending rules. If adopted, the new rules could make the agency’s loan programs accessible and popular enough that they could reach their legal limits on lending — something the programs have seldom ever done. Oddly enough, this is happening at the same time the prospective “sequester” budget cuts may force the agency to make fewer loans.

The moves are the latest in a series of steps by taken by both Congress and the administration to expand the S.B.A.’s reach by making more existing businesses eligible for the agency’s programs. Many of these businesses would have been too large to get an S.B.A.-backed loan just three years ago.

In an interview, the outgoing S.B.A. administrator, Karen Mills, said, “you have to be inclusive when you look at our programs.” President Obama, she noted, vowed in his State of the Union address to make assisting domestic manufacturers a top priority for his second term, adding, “So without ever taking our eye off the ball on Main Street, we are now highly equipped to help our important manufacturing small businesses and job-creating supply chain members in-source more large-company manufacturing.”

In the changes announced this week, the S.B.A. would relax its affiliation rules, which are meant to ensure that a small-business loan applicant is not in fact controlled by a larger (and ineligible) company. Mainly, the agency would not look too deeply into the business connections of minority stakeholders. Ms. Mills said that stringent affiliation rules made sense for other S.B.A. programs, but not for getting a loan. “If you are a large company, there’s a benefit for you to pretending you’re small to get a government contract,” she said. But she said the agency was less concerned about infiltration in the lending program because a bigger borrower with good credit would find an S.B.A loan more expensive than a conventional loan. “Why should you pretend to be small?”

But in fact, S.B.A. loans have been available to larger businesses since 2010, when the Small Business Jobs Act increased both loan limits as well as the size of businesses eligible for loans to include those with net income of $5 million. Under those new size standards, which are ostensibly temporary, even a business with $100 million in revenue and a 5-percent profit margin could obtain a small-business loan. As a result, said Bob Coleman, who collects S.B.A. industry data for banks,  most of these larger companies can qualify for an S.B.A.-backed loan even after accounting for all of their affiliations. “That number-crunching, tree killing exercise” — establishing affiliates, that is — “is now moot,” he said.

Relaxing the rule, then, may entice some companies that were legally entitled to seek loans beginning in 2010 but found the affiliate issue too cumbersome to take another look. Indeed, Ms. Mills called the proposal her agency’s latest effort to streamline and simplify its programs. She described a situation where a gas station with three owners applied for a loan. “We had required 28 tax returns, because we said we wanted three years of tax returns of every individual who owns 20 percent or more, and then for each of those individuals, we wanted tax returns for other entities they owned.” Under the new rules, businesses with no clear majority owner would simply have to sign an affidavit identifying all of their affiliates. The owners would still have to supply their individual tax returns — but not documents for their affiliated businesses.

Ethan Smith, a lawyer in Fort Washington, Pa., who represents S.B.A. lenders, said the change would lead to more lending simply by making the application and approval processes less intimidating. “If it brings more clarity to lenders — if lenders don’t have to sit there and guess what’s an affiliate and what’s not — it’s going to make it easier for them to extend financing,” he said.

The second big change the S.B.A. is considering, eliminating the agency’s so-called “personal resources test” for borrowers, could have more profound effects. This rule essentially requires investors with at least a 20-percent stake in a loan applicant and a lot of cash on hand to inject some of that cash into the business before the company can get a loan. (How much cash is determined by the resources test.) For decades, borrowers have had to show they cannot obtain credit elsewhere before getting a government-backed loan, and the S.B.A. has presumed that an owner’s deep pockets served as credit available to the business.

Now, though, the S.B.A. is reconsidering that view. “S.B.A. has become concerned that even borrowers whose principals have significant personal resources may be unable” to find reasonably priced loans, the agency said in its explanation of the change, concluding that the rule “unnecessarily restricts the pool of potential investors for small businesses” seeking loans.

However, doing away with the personal resources test could have other consequences. “It was not an unreasonable position to take that if you’ve got a lot of money, you should put your money on the line before we risk government assets,” said Mr. Smith. For banks, the lawyer added, the change poses a more practical problem: the S.B.A. would still require lenders to show that borrowers could not get credit elsewhere, a task made more difficult — and subjective — when the investors have a lot of cash on hand. “They’re eliminating the rule, but saying you still need to follow it,” he said. When a loan defaults under these circumstances, “the S.B.A. is going to come in and second-guess the lender’s decision prior to paying that guarantee.”

In the interview, Ms. Mills said that even if the business owners’ money has not been invested in the business, it is still on the line, in the form of collateral. “We still require them to back all their loan with all of their personal assets,” she said. As for the banks’ concerns, Emily Cain, a spokeswoman for the agency, noted that this was only a first draft of the rule. “Comments about what we are proposing are welcome and we will take them into consideration as the final rule is written,” she said.

Ms. Cain said that the agency has estimated that with the rule changes it would make as many loans as allowed by law — $22 billion in 2013 — and more if Congress increased the agency’s lending authority. However, unless the sequester is addressed, the agency is unlikely to have the money to approve more loans this year — the agency has said that if the sequester takes full effect, the amount of lending it can guarantee could fall by about $900 million.

So if the new rules take effect, it seems likely the agency will turn some small-business borrowers away. The only question is, which borrowers will be shown the door?

Interested members of the citizenry can read the proposed rules and comment on them as well before the rules are finalized. Comments are due April 26th. Ms. Cain said the agency would have a better sense of when it will be able to issue a final rule once the comment period has closed.

Of course, You’re The Boss readers can also comment below.

This post has been revised to reflect the following correction:

Correction: March 11, 2013

A previous version of this post referred incorrectly to Ethan Smith's law practice. It is located in Fort Washington, Pa.