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Mixed Impact for Health Reform

NEW YORK Supermarkets with heavily unionized workforces may face tougher contract talks over the next few years as health care reforms are implemented, according to a report issued last week by Morgan Stanley here. The Patient Protection and Affordable Care Act, signed into law March 23, calls for a 40% tax on so-called health care plans, which offer higher-value benefits, the report said. While some

NEW YORK — Supermarkets with heavily unionized workforces may face tougher contract talks over the next few years as health care reforms are implemented, according to a report issued last week by Morgan Stanley here.

The Patient Protection and Affordable Care Act, signed into law March 23, calls for a 40% tax on so-called “Cadillac” health care plans, which offer higher-value benefits, the report said. While some companies may spend the next few years attempting to rein in the benefits of such plans, it's likely the unions will push for something in return, such as wage concessions or other benefit changes, Morgan Stanley noted.

However, since the bulk of coverage requirements under the new legislation do not kick in until 2014 — and since the penalties for non-compliance do not kick in until 2018 — most retailers will have at least four years to figure out how to deal with the implications and costs of health care reform, the report pointed out.

The investment banking firm expects industry costs ultimately to increase, “[though] the degree and timing remains unclear, given that the bulk of the coverage requirements do not kick in until 2014,” the report said.

Last week Kroger Co., Cincinnati, said its tax expense for this year would be $1.5 million to $2 million higher than a year ago because it will no longer deduct expenses for providing certain prescription drug coverage for its retirees. The change will be reflected primarily in the company's first quarter, the company said in a filing with the Securities and Exchange Commission.

Most of Kroger's retired employees do not receive a prescription drug benefit from the company, Kroger said in the filing. The new law, as it pertains to prescription-drug benefits, will not affect Kroger's tax deduction for the contributions it makes to multi-employer insurance plans.

Among food-oriented retailers — supermarkets, drug stores and restaurants — drug stores are likely to gain the most from the reforms, Morgan Stanley noted.

“Drug retailers will likely be the group most affected by health care reform,” it said. “With 32 million Americans adding health care insurance coverage, that could add 2% to 4% to industry pharmacy sales.”

For retailers as a group, the impact of the reforms are likely to be mixed, the company said. Among the positives, according to Morgan Stanley:

  • Because most of the industry's workforce is part-time and because employers can “carve out” part-timers (those who work a maximum of 30 hours a week), provisions in the legislation should minimize the cost impact.

  • The bill codifies provisions that allow employers to offer discounts up to 30% off health insurance premiums for employees that make healthy lifestyle decisions — provisions that were referred to by Washington lawmakers as “the Safeway amendment,” Mark Wiltamuth, executive director of Morgan Stanley, told SN. Pleasanton, Calif.-based Safeway has been offering such discounts to employees who maintain healthier lifestyles.

On the negative side, there are concerns the new law does not do enough to reduce systemic costs, Morgan Stanley said. Among the negatives:

  • The bill will likely constrict how employers design plans since it eliminates “catastrophic” coverage plans that are popular among younger, healthier workers who dominate the retail workforce.