Like most small businesses, the majority of travel agencies will feel little direct impact from the implementation of so-called Obamacare.
That’s the view of several travel industry veterans contacted by Travel Market Report in the wake of the June 28 Supreme Court ruling on the Affordable Care Act’s health insurance mandate.
Travel agencies with fewer than 50 employees are likely to notice little change under the new health care law – and some may even save money in the long term, they said.
Affects larger employers
The Affordable Care Act (ACA) stipulates that employers with 50 or more fulltime employees will have to provide “qualified” health insurance coverage, beginning in 2014. A qualified plan pays at least 60% of health care expenses and costs less than 9.5% of an employee's household income.
Because of their size, many travel agencies will find themselves unaffected by the requirement to provide health insurance for employees.
“Most travel agencies don't offer health insurance, and they're so small they won't be required to,” said travel industry attorney Mark Pestronk. “The typical median travel agency is about six employees and six independent contractors, who don't enter into the picture.”
According to Pestronk, an agency doing about $4 million in sales volume would be both “too small to have to get health insurance and probably too small to afford health insurance.”
Incentives for small businesses
The Affordable Care Act does provide an incentive for small businesses with fewer than 25 employees to offer health coverage to employees insurance, in the form of a federal income tax credit. This will have a “minor effect” on agencies, Pestronk said.
“Every travel agency owner needs to decide whether to use the government's incentive programs to get insurance for employees, or have employees endure a loss of their standard of living when they have to pay individually.”
Industry consultant Robert Joselyn, CTC, noted that the health insurance exchanges that states are required to establish by 2014 could benefit smaller agencies and their employees.
“This may actually encourage them to offer insurance because they can now get into an exchange to buy at a better rate,” said Joselyn, CTC, president and CEO of Joselyn, Tepper & Associates, Inc.
But it is the mandate requiring individuals to have health insurance or pay a fine that may be felt most widely in the travel agency industry, given the growing number of independent contractors.
“Some contractors can expect some change in the status quo, because they make enough that they'll have to pay the penalty if they don't have health insurance,” said Pestronk. “The individual provisions will affect them.”
Under the law, beginning in 2014, individuals who purchase their own health insurance through newly created health insurance exchanges will be eligible for income-based tax credits. But those who do not have health insurance could be subject to penalties starting at $95 per person and rising to $659 in 2016.
Penalties for larger employers
Travel agencies with 50 or more employees that fail to comply with the new health care laws will be penalized, or taxed, up to $2,000 per fulltime employee, after the first 30 employees.
For larger employers, “that's not actually that much,” said Joselyn. “You may see some of the larger agencies opting out and paying the penalty,” which could be cheaper than providing health coverage, he said.
“This shifts the burden (for purchasing health coverage) to employees themselves,” he said.
“The kicker in here is that if an employer decides to not have a health plan, there's going to be pressure to increase the base compensation of employees so they can afford health care on their own,” said Joselyn.
“If they have to raise the salary of their employees, that may actually wind up costing large agencies more.”
Caught in the middle?
For midscale agencies, the added costs of either providing health coverage or paying penalties are likely to erode profitability.
“One of the problems in the travel agency business is the razor-thin margins,” said Jack Mannix, principal of Jack E. Mannix & Associates. “When you add an expense, it has a percentage impact on the bottom line.
“Conceivably these kinds of moves could impact an agency, moving them from a small profit to losing money. It may be onerous for some agents, depending on the economy of their business.”
With employers paying more, and earning less profit, the cost of goods and services to American consumers could rise as well, making sales more difficult. “There will be costs associated with [the new provisions] that may translate into higher prices for the consumer,” said Mannix. “The ramifications have yet to be seen.”
Coping with increased healthcare costs could drive some travel sellers to experiment with how they structure their businesses, Mannix suggested.
For instance, more agencies may move away from paying for office or retail space in an effort to save money.
“I do think people will change their business model,” said Mannix.
What to do right now
Since the bulk of new provisions don't become active until 2014, agents have plenty of time to plan for the future and attempt to rein in expenses.
“First, people need to do their homework to find out how and if it will impact them,” said Mannix.
“Second, it comes down to what are you going to do about the fees and how that may impact your business.
“Finally, I would focus in a more proactive sense on how I can double my business in 24 months and sell more lucrative products to address the income side of the business.”
Next time: Travel agents weigh in on Obamacare.