Obamacare a Factor in IHOP Owner’s Decision to Sell His 16 Restaurants

Four years ago, my reporting on Obamacare brought me to the city of Terre Haute, Ind. Located near the Illinois’ border, about an hour’s drive from Indianapolis, the city of 60,000 residents reminded me of the area where I grew up near Utica, N.Y.

“The Affordable Care Act must be repealed,” says @GovPenceIN

It was a brisk March morning, nearly a year after President Obama signed the Affordable Care Act, and I had trekked to the Midwest with a camera crew to meet Scott Womack, owner of about a dozen IHOP restaurants in Indiana and Ohio.

Womack’s testimony before Congress earlier in 2011 caught my attention and I wanted to visit him at one of his restaurants to see firsthand how Washington’s policymaking had impacted his work.

The IHOP in Terre Haute is located on South 3rd Street, just a few minutes from the Interstate 70 interchange and a short drive from the Holiday Inn where we had stayed the night before. As we sat in the back of the bustling restaurant waiting for Womack to arrive, we ordered french toast, omelettes and other IHOP specialities.

At the time, Womack employed about 1,000 people at his 12 restaurants. When the Affordable Care Act became law on March 23, 2010, he had big plans for his franchise. He had purchased a development agreement in 2006 that would expand the company to 14 new IHOP locations in Ohio.

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“You have to fund your development through your profits,” Womack said during my 2011 visit to Terre Haute. “And if you have no profits, you’re not building restaurants.”

During his testimony before the House Ways and Means Committee, Womack said those plans were now in jeopardy—and with it hundreds of jobs, not just at his restaurants but also in industries such as construction and manufacturing that would support his expansion.

“Let me state this bluntly,” Womack told lawmakers, “this law will cost my company more money than we make.”

The cost of Obamacare’s mandates—Womack estimated it would be $7,000 to provide health care coverage for each full-time employee—left him with few options: cut costs, eliminate staff, reduce hours or convert workers to part-time status.

Womack, a 30-year restaurant veteran, faced unique challenges in the industry, where profit margins ranged from 5 percent to 7 percent. Restaurants already produce the lowest revenue per employee, meaning there was a high labor cost associated with implementing the new law.

Four Years Later

Facing the prospect of Obamacare’s employer mandate on Jan. 1, 2015, Womack opted to sell his 16 IHOP restaurants last year to Romulus Restaurant Group. (The company, which operates 74 restaurants in nine states, didn’t get back to me but Womack believes everyone who worked at his restaurants remains employed.)

The restaurant industry has the lowest revenue per employee, making Obamacare’s employer mandate more challenging.

The restaurateur who got his start as a busboy and cook, then landed a job as an IHOP manager, decided the cost of running casual-dining restaurants under Obamacare wasn’t profitable.

“We had to keep evaluating the nature of the business and the impact of Obamacare along with all the other pressures on labor,” Womack told me. He cited actions by the National Labor Relations Board and the threat of a minimum-wage hike as other challenges.

Womack said he was able to weather the recession. He remained hopeful Congress would make changes to the law or the 2012 election would usher in a president who would repeal it.

When that didn’t happen, he simply wasn’t confident about the long-term prospects of running a casual-dining operation. IHOP, with servers and cooks, is a labor-intensive business. At the time he sold last year, Womack had 16 restaurants and more than 1,000 employees.

“We felt that environment was not the place to be for the next 10 to 20 years,” he said.

Many of Womack’s restaurants were in a district represented by Mike Pence, a Republican who served in Congress for 10 years before his current stint as Indiana’s governor.

Pence told The Daily Signal the only way to stop the law from negatively impacting business owners like Womack is to repeal it.

“The Affordable Care Act must be repealed and at the same time states should be given the ability to craft their own solutions to the health care challenges facing their citizens,” Pence said. “There are two futures in health care—government-directed or consumer-driven.”

The Cost of Obamacare

Today, Womack remains in the restaurant industry, albeit with fewer restaurants and significantly fewer employees. In 2014, Womack Restaurants purchased a group of Popeyes franchises in the Kansas City area.

Switching from casual dining to quick service has helped Womack better grapple with health care costs. He still faces challenges, however.

Womack’s Popeyes restaurants employ approximately 180 people, about 140 of whom are hourly workers. That puts him above the 50-worker cutoff under Obamacare, requiring him to offer health care coverage to everyone.

The Affordable Care Act created an employer mandate, which was supposed to go into effect Jan. 1, 2014, but was delayed for one year by the Obama administration. The mandate requires companies with more than 50 employees to offer “adequate” coverage or face a tax penalty.

Even though he reduced his labor costs by moving into quick-service dining, Womack still took a sizable hit on health insurance. His insurance provider boosted rates by 40 percent in one year, forcing him to cut back on coverage.

He offered the plan to all 180 employees. Only two of the 140 hourly workers signed up.

“For our industry, the employer mandate doesn’t work,” Womack told me. “You’re talking about a large percentage of people who are not inclined to buy the insurance coverage. They looked at how much it cost and they’re not buying it.”

Womack described these employees as “younger people who are looking for part-time work.” Yet as a result of offering everyone insurance, his previously insured managers found themselves paying more for worse coverage.

“We had very generous health insurance benefits for our managers and we covered a substantial amount for dependents,” he said. “That’s all going to have to change so we can offer the same thing to everyone. We can’t afford to offer dependent coverage to our entire workforce. So our managers will actually take a hit in terms of the coverage they get.”

Facing Reality

Four years after testifying before Congress and urging Obamacare’s repeal, Womack remains alarmed at the law’s impact on his industry. He foresaw the challenges of offering attractive coverage in 2011 and is now facing that reality.

“For our industry, the employer mandate doesn’t work,” says Scott Womack

“Insurance rates are through the roof. Every year we get handed a 30 percent to 40 percent increase,” he said. “The only way we have to offset that is cutting our coverage way back. That’s happened every year since the law passed.”

Womack isn’t facing these challenges alone.

The International Franchise Association, which advocates on behalf of franchises in Washington, D.C., has argued the law is negatively impacting economic growth across America.

“Rather than helping existing and aspiring franchise owners expand by adding jobs, locations and more hours for their employees who need them most,” said spokesman Matthew Haller, “the law’s arbitrary definition of ‘large employer’ and ‘full-time work week’ have contributed to the steady increase in part-time employment in America and have been a drag on new franchise business formation.”

So what does the future hold for Womack?

When I interviewed him four years ago, he spoke about living the American Dream and warned that everything would be “on the chopping block” if Obamacare wasn’t repealed. With that prospect unlikely to happen in the next two years, Womack remains frustrated with Washington’s failure to understand the implications.

It hasn’t dampened his spirit, however. After all, he remained a restaurateur after selling his IHOP restaurants.

“We’re going to continue to grow in quick-service dining, but we always need to be evaluating as things change,” Womack told me. “It’s a tightrope walk that you do, balancing between the risks in the industry vs. the reward of growing your business.”

This story has been updated to include information about the company that purchased Womack’s restaurants.