Faced With Health-Care Mandate, Some Employers May Cut Payroll

ONE-THIRD of every dollar spent by Lettuce Entertain You, a Chicago-based restaurant chain, goes to payroll. Joseph Lanuti, vice president for finance at the company, says he trembles at the prospect that health-care reform could require him to pay a large percentage of the health-care costs for the company's 3,500 employees.

``If prices can't go up, and costs have to come down, you tell me where I'm going to cut my budget,'' Mr. Lanuti says. His answer, and the answer for many businesses, is payroll.

The health-care debate in Washington, which began formally in the Senate on Tuesday, centers largely on the issue of employer mandates. Senate Majority Leader George Mitchell (D) of Maine has tried to clear away a major political hurdle to passage of health-care reform by postponing the prospect of employer mandates until 2002. But outside the Beltway, many businesspeople worry about what mandates might cost them.

``It doesn't matter whether you kill me now or you phase in death over a period of time,'' said Herman Cain, chief executive officer of Godfather's Pizza, in a recent US Chamber of Commerce forum in Washington. ``Philosophically, the mandate is wrong because it imposes a cost on small businesses that they can't absorb over time.''

Though economists on both sides of the debate have studied the effect of mandates on jobs, their reports show little consensus. Results range from a net job loss of 3.8 million to a net job gain of 660,000.

The discrepancy comes from what choices economists assume employers and consumers will make. Those who oppose mandates say employers, unable to raise prices and remain competitive, would pay for mandates by cutting payroll costs. Many low-wage, labor-intensive fields such as food services would therefore face layoffs. Mandate supporters say health-care costs can be passed on to consumers without hurting competitiveness, thus avoiding layoffs and wage cuts.

Economists' studies are based on the definition of mandates in the Clinton-style plan introduced by House Majority Leader Richard Gephardt (D) of Missouri, which the House will begin debating Monday. Representative Gephardt's plan would have employers pay 80 percent of employee insurance costs effective immediately. Because economists have not had time to analyze the Mitchell bill, its effects are less certain. Senator Mitchell would require businesses to pay 50 percent of insurance costs in 2002, only if less than 95 percent of Americans had coverage.

MANY businesses agree on how they will respond to increased health-care costs.

The Superior Technical Ceramics Corporation of St. Albans, Vt., a small manufacturing firm with 100 employees, will likely cut wages. Though the company already pays for full health-care coverage, ``we are currently paying $1,000 less than any estimates we've seen on national care,'' says Earlyn Church, co-owner of the business. When health-care costs rise, ``this is $1,000 our employees are not going to see next year.''

``In the fast-food industry the rule of the game is you can't raise prices,'' says Gary Gerdemann of Chicago-based Boston Chicken. ``Consumers just won't pay more.'' The food chain will hire fewer people per store, he says.

Companies' rates of expansion may be affected. ``It now takes us four years to open four stores,'' says Lanuti of Lettuce Entertain You. Under mandates, with higher costs per employee and therefore a longer wait until a store is profitable, ``it may take us five or six years to open the same number,'' he says.

Many analysts are frustrated by the differences in the timing of mandates in the Mitchell and Gephardt bills. Those who oppose mandates argue that the fundamental difference between the plans is ``mandates now or mandates later.''

``It perplexes me why, after 18 months of debate, these bills are still the same,'' says Paul Merski of Citizens for a Sound Economy. He calls mandates ``a back-door way of imposing a $200 billion tax on US businesses.''

Economists who support mandates say they are angry with Mitchell's postponement, arguing that mandates will create jobs and increase trade. Delaying implementation ``makes no economic sense,'' says Lawrence Mishel, research director of the labor-backed Economic Policy Institute in Washington.

Lanuti concedes that whatever the outcome, ``businesses will adapt,'' but he wonders at what cost. ``Congress doesn't feel the cost will be a whole lot. I'm not so sure,'' he says.

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