Questions abound in learning to adjust to health care overhaul

The company is one of thousands of small businesses that employ more than 50 full-time employees and thus will be required to offer health insurance to their workers — or pay into a government fund — beginning Jan. 1. Rachel Shein and Steve Pilarski, the married owners of the bakery, which employs 95 people, estimate this could cost their business up to $108,000, and they are weighing their options as the date approaches. “Our revenues are about $8 million, but the food business is a low-margin industry so cutting $108,000 out of our profits, which are just over $200,000, is a big deal,” said Ms. Shein, who is the chief executive. They are evaluating different ways to comply with the new law and finance the expense.

THE BACKGROUND Ms. Shein and Mr. Pilarski bought their first bakery, a maker of scones, 16 years ago. Their business grew along with the popularity of coffee shops, and they expanded their product line to include other pastries.

During the recession, the coffee shop business contracted, so they found new customers among hotels and hospitals, but the cost of servicing different types of businesses and developing new products to meet their needs eroded profits. At the same time, gasoline and ingredient prices went up and vendors tightened payment terms. Still, the couple persevered by providing an array of freshly baked goods and offering product variety and consolidated delivery, simplifying things for their customers.

With the recession behind them, Ms. Shein and Mr. Pilarski are trying to rebuild their profitability. Baked in the Sun produces nearly 200,000 items a day — almost 200 different products, including brownies, coffee cakes, muffins and cookies — in an 18,500-square-foot baking facility in San Marcos, Calif. The goods are delivered to coffee shops, schools, hotels and hospitals in the San Diego area.

THE OPTIONS Ms. Shein is contemplating several options to comply with the Affordable Care Act’s business mandate.

Option One is to provide the insurance. According to the law, Ms. Shein will have to offer health insurance or, most likely, pay a penalty, and she estimates the insurance will cost up to $108,000 a year for 90 employees (managers have insurance already).

This is just an estimate, she said, because the insurance companies have not yet created and set a price on plans that meet the law’s requirement for minimum care. She estimates a cost of $200 per employee a month, of which the bakery would pay half and the employee would pay half. Employees can choose not to participate in the plan if they are covered elsewhere or for other reasons, so it is unlikely they will all sign up.

Option Two is to not offer health insurance and let employees find coverage elsewhere, perhaps on one of the new government exchanges. Under this option, the company will probably have to pay the mandated “employer shared responsibility payment” to the government.

The cost to the business would be $2,000 per employee a year, but the law exempts the first 30 employees, so the total would be $130,000 per year for a 95-person company. One benefit of this option is that the company would not have to take on the burden or expense of managing the insurance plan, which Ms. Shein estimates would take $10,000 of staff time.

One way to cover the costs associated with the new law would be to raise the price of each item sold about 4 percent and pass the costs along to buyers. “It’s ironic that our success meant we could grow,” Ms. Shein said, “and now we will be competing against smaller companies, with 50 employees or fewer, who will be able to charge less per item because they don’t have the financial burden of health insurance.” Prices are currently similar among local competitors, Ms. Shein said, and she says she believes the increase in her prices could affect her sales, possibly significantly.

Ms. Shein is considering a third option: outsourcing certain jobs to reduce the staff, because businesses with 50 or fewer employees will be exempt from the penalty. “We can outsource the cleaning and make the drivers independent contractors,” she said, “and we can cut the least profitable delivery routes, least profitable accounts or reduce the variety of items we create.”

It is important for Ms. Shein to make a decision soon on staff levels because the number of full-time employees a business has in 2013 will determine its status in 2014. If the business has 50 or more full-time, or full-time equivalent, employees, it has to provide insurance to any staff members who work 30 hours or more a week. Companies can average their number of employees across the full 12 months in 2013 to see whether they meet the threshold, or they can instead calculate the number of full-time employees by using any six-consecutive-month period in 2013. Ms. Shein said she believed all workers should have health insurance, and she and her husband had wrestled with the problem for years. “We have offered health insurance to our employees in the past,” she said, “for preventive care, for financial protection, and because it doesn’t make sense for taxpayers when they end up in the emergency room.”

However, she has found many of her employees resistant to coverage that requires an employee contribution. “They are mostly young and healthy,” she said. “They don’t have a lot of extra money, and they would rather have a bit more in their paycheck than health insurance.” Also, she said, some of her Mexican employees prefer to go south of the border for inexpensive health care when they need it.

WHAT OTHERS SAY John G. Ebenger, an accountant with Berkowitz Pollack Brant Advisors and Accountants in Miami: “It is a challenging situation, especially since the details have not been fully worked out. The bakery could opt to bite the bullet and pay the penalty next year with plans to revisit the types of insurance that become available in 2014. With a year to plan, insurance companies will come up with more options for employers.”

Jonathan Gruber, an economics professor at M.I.T. who advised the Obama administration on health care reform: “Rachel and Steve face a difficult decision, but it seems that the third option, to reorganize production and outsource functions to end up with fewer than 50 workers, will be too expensive to make much sense. Offering insurance won’t cost much more than the penalty, and in an industry where many of their competitors don’t offer insurance, they could advertise themselves as a better place to work.”

Jody Hall, owner of Cupcake Royale, with 80 employees in Seattle, and a leader of the Main Street Alliance, a national network of small-business groups: “I’d recommend offering health care insurance for full-time employees, like we do at Cupcake Royale, as part of our responsibility to help strengthen the health of our employees, our community, and our business.

“Ms. Shein is probably overestimating her costs because not all employees will use the health insurance she offers. At our bakery only about half our employees use the health insurance we provide. Some are under 26 and covered by parents, others have spouses with coverage, and some just choose not to take it. Small businesses like mine who have been offering health care will be better off when all businesses are paying into the system because the cost increases will slow down.”