Health reform uncertainty stalls businesses' plans

Two growing Hampton Roads business owners believe health-care reform may give them more work if companies decide to cut employees and hire outside contractors for janitorial services.

And they worry that those same Affordable Care Act requirements could be what keeps them from expanding.

Peninsula Cleaning Service in Newport News has more than 50 full-time equivalent workers and must provide health insurance by 2015 or pay penalties. Davis Professional Services in Chesapeake falls below that number, but is afraid to hire more because of the mandate, the owner said.

They, like other business owners in Hampton Roads, are attending seminars and working with insurance brokers to calculate their full-time equivalent employment numbers, decide if they'll provide health insurance and estimate how much of the cost they can afford to bear. Large companies that offer insurance can still face penalties if employees can't afford the plans. And it is hard for employers to know what to do when they don't know the exact cost of insurance plans, how many employees will participate and what employees can truly afford.

While businesses with more than 50 full-time employees won't be required to offer health insurance until 2015, their employees will be required to get coverage next year or pay fines. Virginia's delay in planning for a state health exchange -- which the federal government will run -- and its inaction on expanding the Medicaid program only helped fuel uncertainty. The intention of the Affordable Care Act is for Medicaid to cover those eligible low-income individuals who can't afford insurance at work or with the exchange plans.

Not all regional employers fear future insurance costs will change the way they do business, but those interviewed agree that no one knows how the new health insurance system will pan out.

"It could make us or break us," said owner and President Kelvin Copeland of Peninsula Cleaning Service. The company was listed for the second time as an Inc. 5000 fastest-growing private business after adding 222 mostly part-time employees over the past three years. The firm, which specializes in cleaning health-care facilities, plans to expand to Richmond by January and is in the process of building a distribution center in York County to house its cleaning equipment.

Copeland wanted the one-year delay in the mandate that employers provide health insurance, which Congress passed earlier this year. Now, Copeland is waiting to see if other changes will pass before he develops a health insurance plan for his company.

Because many of his employees work for him as a second job to supplement their incomes, he would like the law to exclude in his count those employees who have access to insurance through their primary employers. He'd also like the definition of full-time to change from 30 to 40 hours a week to be in line with other regulations.

While paying the penalties would be less expensive, Copeland understands that to stay competitive and keep quality employees, he'll have to offer insurance. He already tells his customers that he'll have to raise the price of his cleaning services to compensate.

Profit margins in the janitorial field have already dropped from the 2010 margin of 16-20 percent to only 6-9 percent today, said Jerry Flug Jr., owner and CEO of Davis Professional Services. Flug bought the business in 2007 and grew it from 26 employees to 91 mostly part-time employees or 42 full-time equivalents today. The business provides cleaning services for commercial and industrial buildings across Hampton Roads.

"It scares me. We really worked hard to make it a successful business," Flug said. "If we can't afford to hire people, we're not going to hire them."

If Davis Professional grows to 51 full-time equivalent employees, Flug estimates that offering insurance will cost him three times as much as paying the penalties for not offering it. If he doesn't offer insurance, he'll have to carefully manage employees' hours and may turn down work to concentrate on the most efficient jobs. If he does offer insurance, he'll have to find a way to eat those costs without raising prices and alienating his customer base.

On the flip side of the health reform coin, the need for employers to keep their employee count below 50 could also mean more outsourcing of services like cleaning. Both Peninsula Cleaning Service and Davis Professional owners said they anticipate more demand because of the Affordable Care Act.

"That's the good part. But the problem is we're in the same boat they're in," Flug said. "It's hard for us to figure out how to move forward."

Preparing for more employee participation

Chef David Everett, who is the principal owner of Blue Talon Bistro, The Trellis and Dog Street Pub in Williamsburg, wants employees to have insurance so they don't risk being financially devastated by high health-care costs. Taking that worry away also keeps workers productive, he said. He's offered insurance since opening Blue Talon Bistro nine years ago, but not many employees enroll.

Now, the three restaurants employ more than 250 employees, who are primarily full-time. Costs would have to get "pretty outrageous" for Everett to stop offering health insurance, and he doesn't plan to cut jobs or hours.

"We're too much of a machine that has to be fed a certain way," Everett explained. "We can't operate without this many people."

Earlier this year, the restaurants switched to pooling employees' tips and dispensing them as part of their paychecks so that employees can pay pre-taxed health insurance premiums when the time comes. The move resulted in some employees leaving, but Everett wants to introduce change to workers gradually and get in front of requirements.