Papa Johns and the Insurance Dilemma

(EDIT RIGHT UP FRONT: Within minutes of posting this, Andrew Ducker pointed out that what John said was actually riotously misquoted by the media in a ridiculous game of telephone.  His actual statements are much more defensible, as he’s not enacting the consequences, but rather pointing out what his franchisees – who he has limited control over – are likely to do.  It’s still an attempt to interject himself into the political scene, but he’s not the one threatening to swing the hammer.  That said, I wrote a whole essay here and I’m not going to delete it, in the hopes that other people might be enlightened instead of passing along misinformation as I did.

(…but I had a link and everything!  Bleah.)

So the CEO and founder of Papa Johns has said that he’s going to have to cut people’s hours to account for the rise of costs in the wake of Obamacare. And I’m of several minds about this.

You’ve got a lot of people saying, “Oh, you say you’d have to raise costs by fifteen cents a pizza to keep your employees insurance?  Shut up and take my quarter.”  But having to raise prices on pizza, which seems to me to be a pretty interchangeable thing, probably is damaging to their business.  And the new laws of having to provide insurance to employees at locations with fifty or more employees probably hits their bottom line more than they’d like.  Unlike many liberals, who view the costs as trivial, I see it as a significant expense in a business that probably doesn’t have a ton of margin.

I’m actually sympathetic.  You’re in a tough market, here’s some added expenses that’s going to make it harder for you to stay afloat.  One of the problems that liberals have is that they often think that businesses are magic money-making machines: shut up and suck up the taxes and the extra costs and the expenses of paying the regulations, you whiner.  You’ll be all right.  Because if you own a business, then you just have the money automagically. It’s not like people ever go out of business because they can’t afford to keep up with expenses.

Even if it’s a multi-million dollar corporation, you can still go under.  And you still have to answer to stockholders, who are effectively psychotic robbers who only care if you made more money this quarter.  You’re kind of held hostage by Wall Street.

Still.  I’m sure other expenses have created places where Papa Johns would lose money, and John Schnatter didn’t make public speeches about them.  So what’s he doing?  Basically, campaigning against Obamacare.  He says it’s not political; bullshit.  He’s calling out Obamacare to say, “If we lay you off, blame Obama.”

Which is fine.  It’s his business.  If he wants to go that route to save on expenses, so he shall.  But in doing so, what he’s telling the entire world is, “I would rather these people suffer than we lose fifteen cents on a pizza.  Or, you know, we come in a little lower on profits for the quarter.”  And that’s the cold businessman speaking, the kind of guy who says, “Okay, well, your kids’ teeth are rotting because all you can afford is Ramen, but I couldn’t let my profit margin dip a tenth of a point!”

And at that point, it becomes battling PR.  Yeah, you’ve got a right to complain.  You’ve got a right to reallocate resources as you see fit to keep your business alive.  But you’ve also got a right for people to look at you as some serpentine-blooded sonuvabitch, the kind of guy who actually goes, “Can you believe that you’d have to pay fifteen cents extra to keep a guy’s family insured?  Christ, what a pain.”

So yeah.  You can do it, buddy.  But it makes you look like a callous douche.  Which a lot of businessmen are, but don’t be surprised when there’s pushback on that logic.

5 Comments

  1. Mary Turzillo
    Nov 12, 2012

    Universities and colleges have been doing this for about twenty years, and I don’t hear any rumblings about boycott. They hire people who are ABD and then don’t give tenure to Instructors or Assistant Profs who are eligible, because they can pay the part-timers scandalously poor wages, plus NO benefits. The extended learning centers are the worst for this. I talked to one part-timer who said if you counted the amount of time he spent grading papers, he was making less than minimum wage. It’s cold, and it’s not helping any part of the economy, but it’s SOP in many businesses. The only solution is universal health care not linked to employment. This would mean small businesses wouldn’t be outcompeted by the big guys, and it would mean being fired wasn’t a potential death sentence.

  2. alexander hollins
    Nov 12, 2012

    I still don’t get how that saves them money. Less workers equals less work, equals less pizzas made and delivered, equals less profit.

  3. John Arkwright
    Nov 12, 2012

    I agree with most of the pieces you have set out, including the fact that he was really campaigning. Here is my contribution. Given that pizza is a competitive business, as is the larger fast food industry, there is pressure to operate efficiently and, as you so ably state, something may have to give.

    Also, some of the costs of providing health care to employees will be absorbed and some will be passed on. There are always businesses whose head is just above water, and they may go under. The key point is this: the amount that is passed on, the amount that is absorbed, and the number who go under is really a highly complex market outcome and it is likely that no one can predict the exact eventual outcome.

    But since we are talking huge expenses being added onto the business, we can see that the general size of the eventual effects on business will be large and negative.

    We may be talking about increasing the cost of employing a worker making $20,000/year by $10,000/year (not an expensive policy).

    As I understand it, though, the company can avoid providing the policy by cutting their workers back to part-time, which sends them either to the expanded medicaid system or to the state exchange (but with less income).*footnote 1* This likely decreases the company’s profitability because if using part-timers would lower their cost, they’d have already been doing it.

    If the company does not buy insurance for a full time employee the worker goes onto the state exchange or, if there is no state exchange, the federal exchange. If they go on the state exchange the company is fined $2,500. But that’s probably much less than the cost of providing a policy, which is why the CBO estimates that lots of companies will dump their employees and pay the fine. For example, my employer might save $12,000 for every employee he dumps. Multiply that by the number of employees and we’re talking about humongous profits to be made or lost.

    Here is where it really gets good, though. If the state refuses to set up an exchange–some have stated that they won’t and others have made no move to set one up, with only a year to go–then the employee goes onto the federal exchange. However, then there is no subsidy for the employee and, since the federal subsidy triggers the employer fine, the employer has no fine. So states can exempt their employees by refusing to set up the exchanges and opt out of Obamacare.*footnote 2*

    *footnote 1*There, they buy a policy, subsidized by taxpayers (many of them workers, too). If they find the subsidy is not enough, they can refuse to buy a policy and be fined about $700. Then, if they get the big disease they can buy a policy with a pre-existing condition. The last sentence is like gambling where if you lose big, the house picks up the tab.

    *footnote 2* The employee who has enough income so that he is not dumped onto medicaid and actually ends up on a state exchange is handed a subsidy which is larger for lower paid employees. That is, if an employee’s income rises by $1 the subsidy falls by about 30 cents. This looks exactly like a 30 percent tax on wages to an employee–if you make another $1, your added income is eaten away by the federal income tax, the state income tax, and the social security tax, and now if you make that $1 the federal government reduces the amount it previously gave you by 30 cents. The labor supply effects should be huge.

  4. starskeptic
    Nov 13, 2012

    He could have chosen to say nothing at all; a thinly veiled message to his franchisees about what they might do still sounds like a threat to me.

  5. Isaac
    Nov 14, 2012

    A comment that could be made about the aspect of “razor thin” profit margins with respect to papa John’s…. As many have pointed out in other places, John Schnatter is rich, very very rich (to the tune of 240 million dollars rich.) If franchises are are hurting I can only surmise that it is because of extremely high franchise fees that allow this man to swim in money McDuck-style. Blaming the ACA for hurting business for a man that is worth 240 million dollars is laughable. Lower franchising fees, take an honest hit to provide for your employees and have a little damn ethics (which might be a marketable strategy actually,) charge $0.15 more per pizza and maybe sell the occasional pizza or two less, OR the option he’s picking: be a massive massive pile of douche.

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