Health Scare

Just as the economy is starting to look up, building service contractors are being faced with a challenge just as frustrating as the recession. This, too, has the potential to impact profits — and with margins lower than ever for some janitorial companies, the timing couldn't be worse.

The anticipated increased costs attached to health care reform legislation, which was passed by Congress and President Barack Obama in March of 2010 and contains provisions that go into effect over the course of many years, are leaving shadows of trepidation over BSCs' budgets for this year and the indeterminable future.

The Patient Protection and Affordable Care Act (PPACA) is one of the more controversial laws passed in recent years. Its objectives include reforming the private health insurance market, improving coverage for those with pre-existing conditions and improving Medicare prescription drug coverage. But despite the public health benefits that may come out of the legislation, many in the business community are calling foul as they struggle to translate the hundreds of thousands of pages and ensure compliance with the law.

That leaves employers in a state of confusion, says Perry Heidecker, senior counsel at Milman Labuda Law Group in Lake Success, N.Y., "because although some facets of the law have gone into effect, there's no guarantee that this whole legislative scheme won't come crashing down."

A Change in Tide

With the November 2010 election clinching big wins for Republicans, political opposition to the law has swelled. Though the U.S. House of Representatives held a symbolic vote to repeal the bill in January, that initiative lost steam in the Senate, where Democrats hold majority power.

Still, efforts are underway to dismantle all or part of the legislation in other ways: attorneys general of 20 states have commenced lawsuits challenging all or part of the law; governors of 15 states have declared they will not implement PPACA's mandates; congressional committees are looking to cut off funding to portions of the law that fall within their jurisdiction; and a number of courts have declared the individual mandate unconstitutional.

"People are looking to kill it by taking bites out of it rather than cutting off the head," Heidecker says.

At the beginning of February, Florida stopped implementing the law altogether, citing a recent federal court ruling declaring the law unconstitutional.

Provisions of the law are slated to be phased in between 2010 and 2018. The provisions of PPACA that became effective last year include no lifetime limits on health insurance, no copays or deductibles for preventive services and extension of coverage for dependent children until age 26.

Despite the good intentions of the law, most people felt that the health care system wasn't broken in the first place, and now, employers are getting hurt, Heidecker says.

"What has happened, in anticipation of legislative healthcare becoming effective, is we've seen insurance premiums go up," Heidecker says. "Some policies have gone up as much as 20 percent. So employers are already seeing that instead of their bills going down, they're going up."

Those in the health insurance industry are seeing increases in health insurance rates, says Linda Gordon of Moody Insurance Worldwide, Clarksburg, Md.

"Insurance companies will have to justify rate increases starting in 2011," Gordon says.

Despite the perception that brokers make lots of money on accounts, they really make only three to five percent of the premium paid, Gordon says.

"When the carriers cut this commission down by 15 percent, it affects the bottom line. It will cause a lot of brokers to go out of business. There is talk in the industry that the insurance broker's commission may be cut out completely," Gordon says. "The only way they can continue to work with clients is to charge a fee to the insured on their own."

Clients may lose out on getting the best renewal options if they bypass brokers to work directly with insurance companies, she adds, as brokers do a lot of administration work and help solve problems with claims, billing and enrollment.

BSCs can attest to increases in insurance rates.

"Our renewal this year was not a good renewal," says Michael Putnam, CFO of IH Services in Greenville, S.C. "I was told that approximately 8 to 10 percent of the increased costs that we encountered this year was a result of PPACA."

The company couldn't eat the entire cost of that increase, Putnam says, so it split the cost of the increase with employees.

"In an environment where you're not giving substantial pay raises, it effectively decreases an employee's net take-home pay, for those that participate in our medical plan," Putnam says.

While most BSCs offer medical insurance to those with administrative or managerial positions, front-line workers aren't always offered insurance plans. IH Services has made a mini medical plan available for those workers. Many such "mini-med" plans carry annual caps on limited benefits that, under the health care reform law, stand to be eliminated in 2014 when the provision to require employers with 50 or more employees to offer insurance.

In an industry like janitorial, where insuring all workers is the exception rather than the rule, PPACA is causing a lot of stress, Putnam says.

"From a general standpoint, our industry does not provide a comprehensive medical program for hourly associates. So there is a lot of angst in our industry about what we're going to do with this because no one knows what the cost of the coverage that's going to be required is going to be," Putnam says.

What he does know is what the penalties for noncompliance will be: $2,000-$3,000 per employee. For IH Services, the total bill would be up to $6 million, which would effectively shut them down. Either way, the company can't eat the increased costs, and will have to pass them on to customers — sort of like when there was a minimum wage increase, Putnam says.

Come 2014, customers shouldn't be surprised at the increase since IH will spend the years that lead up to it spreading awareness about what kind of price changes will be coming down the pipeline.

"My biggest concern would be the inability to pass the price increases on to our customers," Putnam says. "It will probably cause some customers to re-bid contracts, to try to see if there is something better out there, but for all those people that legally conduct business, it's going to be a level playing field," Putnam says.

On one hand, BSCs see the leveling of the playing field as a silver lining to the situation, but on the other, there are worries that the legislation could create even more of a market for illegal subcontracting.

"One of our concerns is with illegal subcontracting, which is a significant problem in our industry, that it may drive more people to do illegal subcontracting in order to avoid the penalties and try to gain a price advantage on companies that are doing it legally," Putnam says.

Dealing with Unionized Accounts

BSCs that deal with accounts in unionized cities or areas say PPACA has added a new level of complexity to union contracts.

"I was doing a bid yesterday that starts in 2011 and runs for five years," says TJ Barnes, vice president of Manhattan Maintenance, Fairfield, N.J. "One of the challenges for that is that the union's collective bargaining agreement ends in December 2011, so that means for four years after that I have to guess what the union rates are going to be going forward. The wages aren't difficult to figure out, we'll probably do a 2-3 percent increase going forward, but the challenging part was the health care part."

Based on previous contracts' health care cost increases, Barnes could assume increases of at least 5 percent a year, and potentially double that.

"As a vendor, you can really get yourself hurt, because you want the business, but you're going to bid it one way, ABC Corp. is going to bid it another way, and at the end of the day, in trying to do the right thing and cover yourself and prepare yourself, you could lose a decent amount of business to someone who's going to get themselves cleaned out if their assumptions were inaccurate or too low," Barnes says.

For example, those companies working on a 3 or 4 percent margin could be devastatingly crippled by a 15 percent increase in health insurance.

So, in the long run, it's a competitive advantage to be crunching the numbers, and bidding on the conservative side, he says. One way to get around the uncertainty is for BSCs to sign short-term contracts, until PPACA's future is determined.

Unionized employers, especially, are paying attention to PPACA and the political drama surrounding it. Heidecker suggests prudent common sense steps for those BSCs, including negotiating shorter-term contracts that provide for renegotiation if the law changes or for reopeners in contracts. Try to get the union to agree to deal with any changes that could impact the cost of health coverage, or bargain with the union to gain control over health care coverage decision-making, he says.

Stifling Growth?

Though the recession is supposedly over, many BSCs are still feeling economic cramps that are resulting from years of reductions in clientele, frequencies and specifications. For those BSCs who are finally feeling optimistic about the future, PPACA is throwing a wrench in the works.

"We are at the stage where the industry is just beginning to recover and occupancy rates are going up, which means more work for contractors and potentially more hiring," Heidecker says. "What my clients are coming to me about is the question, ‘How much more is this going to cost me per employee?' And if the answer is uncertain, ‘Would I be better off trying to do more with the same number of people?'"

In other words: To hire, or not to hire?

The law certainly doesn't encourage small businesses to hire right now, Putnam says, because they don't know how much to budget for employee health care costs down the line.

"They've got a lot of motivation not to put people on their payrolls," he says. "There's also a lot of excess capacity right now. I think that's why a lot of people are saying that the unemployment rate is going to continue to be high for a number of years to come."

For Barnes, the janitorial business is all about striking while the iron is hot — and he's not going to hold off on hiring when employees are needed. The idea that companies are holding onto their money or holding off on hiring because they're not sure about the health care situation or their taxes just doesn't hold much water, he says.

"To me, that's so inaccurate because if you've got an opportunity to expand, you factor that cost into your performance to figure out what it's going to cost to do a job," Barnes says. "If you think it's going to be more expensive or less expensive you factor it in but to say that someone isn't going to hire someone because you're waiting to see what's going to happen is a total falsity."

BSCs should be smart about their assumptions as they factor in the costs of growth, but they're not going to turn down business, he adds.

Heidecker says the law is absolutely affecting hiring growth, because most business models have budgets that predict cost per employee.

"It's a business that usually does not operate on big profit margins and a miscalculation here could wipe all of the profit out of a job," he says.

While the uncertain future is already knocking on the door, BSCs are helpless to stop the larger bills coming in from insurance carriers. However, by staying updated of the situation, companies can at least remain educated and will be less likely to be taken by surprise in the months and years to come.

"This is a situation that is literally changing from day-to-day," Heidecker says.

In addition to getting updates from trade groups and associations, brokers and accountants are valuable sources of information, he adds.

"Insurance brokers have to keep abreast of the law and accountants have to be aware of the tax consequences of non-compliance. So those groups of professionals, in particular, seem to be tracking the law with almost an obsession," Heidecker says. "Lawyers, too, who specialize in labor and benefits law are also tracking this on a daily basis."

Whether it is a relief or not for BSCs, PPACA will likely undergo significant changes this year. The business community can only hope those changes will prevent their costs from increasing even more.