Costcos Implementation of the Affordable Care Act

Costcos Implementation of the Affordable Care Act

Report collaborators:
Amanda McIntosh Ryan Davis Tiffany Ceragioli Aaron Broadworth

Submission Date:
November 17, 2013

Memorandum
To: All Costco employees From: Amanda McIntosh, Ryan Davis, Tiffany Ceragioli, Aaron Broadworth Date: October 27, 2013 Re: Employee Benefit Coverage (ACA changes as of 10/01/13)

Here is the report requested regarding companywide healthcare coverage changes effective October 1, 2013. Just as we anticipated, the newly implemented Affordable Care Act, or ACA (as per federal guidelines) has placed a growing need for Costco to improve its own employee benefits package. Keeping pace with the companys ideology that a happier employee leads to a better work environment we are pleased to announce that the modified benefits to our employee healthcare are now in place. We now offer an historical 100% coverage on all preventative care done in-network for employees and their covered dependents. This is means for all participants no out-of-pocket expenses on annual exams, several screenings, mammograms, Pap smears, colonoscopies, immunizations, counseling and many other procedures. This is an impressive benefit to our nearly 96,000 employees and their families! We continue to adapt to the ACA as well as keeping with our own commitment and loyalty to our employees. It is also our intention to continue hiring as the latest quarterly report indicates our revenue and income growth rates are increasing significantly, and have been since yearend 2009. We maintain with a consistently low margin by reducing prices and corralling positive publicity. As we all know, the majority of our profit is capped from membership fees and a meager 15% markup on goods sold, so it is our aim to avoid increasing the annual membership fees as a result of the ACA implementations. In order to fulfill our commitment to the Costco family of employees, customer retention needs to remain at or above 90% consecutively. This should be an easily obtainable goal for such an astounding benefit to our happy employees! Thanks for giving us the opportunity to take on this project. It has been absolutely optimistic and informative for our team to address the task. If you have any questions please give any one of us a call.

CONTENTS

Building and Empire The History of Costco 1 Investing in Employees.. 2 Healthcare Benefits as of 2011.. 3 The Affordable Care Act Changes to Health Care Benefits... 3 Comparison of Plans and Options... 4 Primary Sources of Revenue Membership Retention .. 5 Pleasing Consumers 6 Market Share Data Analysis of Current Market Share.. 7 Recommendations.. 8 List of Illustrations Costco Timeline Figure 1.1 . 2 Company Sponsored Healthcare Chart ... 3 Old Plan Deductible Comparison Chart... 4 Cash Flow Comparison Chart.. 7

Building an Empire History of Costco In the year 2012 Costco has risen to number 24 of the Fortune 500 companies competing with giants in the same market like Sams Club and WalMart. From a philosophical standpoint, a champion of workers rights created Price Club the model for Costco. Co-founder of Price Club and Fed Mart Sol Price was a Jewish lawyer from New York who was a major proponent of workers rights (Geier, 2013). Costco was originally opened in 1976 under the name Price Club and served small businesses with low cost bulk items.(Costsco) The growth of the warehouse club industry led them to allow the opportunity to everyday consumers to receive drastic discounts with the purchase of an annual membership. The founders, Jim Sinegal a former Price Club executive and Jeffrey Brotman an attorney, financed the opening of their first warehouse with savings and credit cards.(Costco) Price Club merged with Costco in 1993 to form the company PriceCostco. In 1997 the company resumed the name of Costco. The initial risk by Sinegal and Brotman paid off Costco hit $1 billion in the third year of operation and has remained a profitable company. Early projections of the business plan included 12 Costco warehouses in the Northwest United States and $80 Million in sales for each of the locations. (Costco)The state of the company has grown far beyond these modest plans. Currently Costco offers 457
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locations in 43 U.S. states and Puerto Rico and has locations in 7 other countries including Canada, United Kingdom, Taiwan, Korea, Japan, Australia and Mexico.(Costco)

Costco Timeline Figure 1.1

1st warehouse opened in 1976

The company resumed the name Costco in 1997

Costco offers 457 locations in 43 states and many across the globe as of 2011

2012 1976

Price Club and Costco Merged in 1993

Costco hit $1 billion in sales 2000

Costco is ranked 24 of Fortune 500 companies 2012

Investing in Employees Though the success of the company has been remarkable the foundation of Costco has propelled the business equally. The Costco business philosophy of bringing a great value to customers while providing an ethical wage and positive work environment for 185, 267 worldwide employees has been top priority since the beginning.(Costco) The company pays employees an average hourly wage of $20.89 without overtime. Another uniqueness that has given Costco a reputation of a good employer is their internal promotion rate 70% of the managers at Costco warehouses started as cashiers or floor employees in one of their warehouses.(Stone) Costco cultivates these employees to take over executive level positions by sponsoring them through graduate school. The company has a 5% turnover rate for employees who have been their over a year and less than 1% of its executive rank employees.(Stone) Costco philosophy is generated from the belief that a happier employee leads to a better work environment which is what makes their company more profitable. The current CEO of the company Craig Jelinek, who took over the position in place of Jim Sinegal January 1, 2012, has said the reason for the companys generous
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outlook is It also puts more money into the economy and creates a healthier country. Its really that simple.(Stone) This philosophy of giving more and taking less of the massive profits is one embraced up the corporate ladder even the company executives make drastically less than other comparable companies executives but the company is thriving and growing because as written by the hands of Jelinek in a letter to congress We know its a lot more profitable in the long term to minimize employee turnover and maximize employee productivity, commitment and loyalty.(Stone) The letter was composed in an effort to influence our government to raise the national minimum wage from $7.25. Healthcare Benefits In addition to higher wages as of 2011 an overwhelming 88% of employees have company-sponsored health care coverage and only pay premiums of less than 10% of the cost of their plans.(Stone) The upcoming legislation included with the Affordable Care Act has had some negative effects on similar companies choosing to reduce part time workers hours to less than 30 per week so that healthcare coverage will not be provided but Costco is optimistic about the future saying, As long as you continue to take care of the customer, take care of the employee, and keep your expenses in line, good things are going to happen to you.(Stone)

Company Sponsored Healthcare Chart Figure 1.2

Company Sponsored Health Care

12% Have coverage 88% Do not have coverage

The Affordable Care Act Changes in Coverage

Costco has taken the affordable care act in stride and, as of now shows no ill effects as the result of its enactment. The 2013 Costco employee benefits package does include some changes. The emphasis on preventative care that the Obama administration made integral to the Affordable Care Act is showing up in Costcos 2013 benefits package. As of 2013, for the first time in the companys history, all preventative care done in network will be 100% covered. This means Costco employees will have zero out-of-pocket expense, no deductible, and no copay. This includes all annual wellness exams, PSA testing, cholesterol screenings, obesity screenings, mammograms, Pap smear,blood pressure screenings, colonoscopies, immunizations,type 2 diabetes screenings, breastfeeding support and counseling including breast pumps,contraceptives and sterilization procedures such as tubal ligation and vasectomies, and even domestic and interpersonal violence screening and counseling. In addition to these changes Costco will now completely cover medications such as aspirin, folic acid, iron supplements, smoking cessation medication, fluoride, and contraceptives for women when prescribed by a doctor.

Comparison of Plans and Options First when examining the benefits Costco as a company offers there is an extensive listing available to all employees, salaried, part-time, and full-time. Once employed insurance benefits are offered to salaried employees 30 days from employment, full-time employees after 90 days of employment and part-time employees are offered insurance benefits after 180 days of employment. Employees are given a choice between two different types of insurance plans, both offered by AETNA in the U.S. and a private HMO provider in Hawaii. For the enrolment in 2013 all medical plans increase $5 in out of pocket cost, dental increased by $1. This increase still keeps employee benefits lower than cost put out for The Affordable Care Act. Old Plan Deductibles Comparison Figure 1.3

Freedom of Choice Freedom of Choice Choice Plus Family Choice Plus Individual $0 $1,000 Annual Deductible 2011 Annual Deductible 2012 $2,000

The benefits available to employees are not limited to title of job. All benefits are an
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option to all employees enrolled in health insurance offered by Costco through their providers. Beyond Dental Care and Health Care employees are offered various other plans for improved health and an improved financial future. Various additional insurance plans, stock purchase plans, and disability plans are just a few of the extra offered to all employees. The Affordable Care Act brings in to play free services that all insurance companies must offer free preventative care. This new government program offers five different levels of coverage. The level you choose will directly correlate with the cost of care price paid. When these plans are compared the potential out of pocket cost with Costco employees can be as low as $350 for an individual plan and up to $8,000 for the maximum family out of network cost. Compared to the care act where the minimum out of pocket cost for an individual is $6,350 and up to $12,700 for the family plan. With the cost of the Affordable Care Act the reason to encourage employees of Costco to enroll in this program does not seem to be a path Costco is willing to take. In the past Costco had an annual maximum benefit it was willing to pay. Through any of their health option plans employees had a maximum benefit the company would pay towards health care costs leaving the employee to make up any difference. The enactment of the Affordable Care Act prompted the elimination of this cap. Moving forward employees will be able to utilize their insurance without fear of reaching a benefit max. One detriment of the legislation has led to the increase of plan costs for employees dependents while the cost of coverage for employees themselves has stayed relatively unchanged. Increases of $20-$35 per covered family member, per pay period result in a change of $40-$70 per month, per covered spouse or child. 90% of costs are covered for hospital stays and emergency room visits with co-pays of $100-$150 respectively. (Costcobenefits, 2012). The added benefit coverage is indeed marked, and employees will see a great deal more from their already generous benefit packages. Costco does not anticipate slowing down any hiring either. With stock prices up 16.05% since January 1 (NASDAQ: COST) the company anticipates more growth in the future. So whats the secret? How does Costco manage to treat its workers so well while still being a profitable company? The answer is astoundingly simple. With their product mark-ups at a meager 14-15% Costco barely breaks even, but generates most of their profits from their membership fees and membership retention is near 90% (Stone, 2013). Costco has no PR department, no fancy packaging, and no shopping bags. Their CEO Craig Jelinek made $4.8 million in cash and stock options in 2012. In contrast Wal-Mart CEO Mike Duke brought home $19.3 million for his 2012 (Stone, 2013). This is where Costco finds the money. At the end of the day their determination to be fair to their employees has been the driver of their success and the implementation of the Affordable Care Act should not derail this commitment. Primary Sources of Revenue Membership Retention One of the primary contributors to Costcos increased sales growth, as of YTD fiscal 2013, has been its expanding customer base. While gaining over 1.6 million new members in the first half of fiscal 2013, membership renewal rates soared at an astounding 89.8% for
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the same fiscal quarters, in the North American market alone. What this means for Costco revenue figures is simple burgeoning membership levels equals continued profit margins. In order to achieve this Costco must maintain low markup on goods (about 15% currently) and an increase in presence of private-label goods (which accounts for about 20% of merchandise at the end of Quarter 2, fiscal 2013.) Despite a 10% increase in membership fees back in November 2011, the executive level membership continues to be the major source of revenue. Currently it accounts for one-third of all membership and two-thirds of all sales revenue. As a strategy for keeping customers happy at this status, Costco raised the annual limit on 2% rewards (up to $750/year). Additional benefits and greater discounts are the enticement to generate more executive members this level requires an annual fee twice the rate of both business and gold star memberships. Pleasing Consumers The private-label goods on Costcos shelves are substantially cheaper than national brands, and relatively comparable in quality a selling point to its members who chose renewal citing rising fuel prices and the payroll tax increase. An additional incentive for members is the online site which offers an entire catalog of products, which some 80%90% are uniquely different from in-store selections. Online sales growth in the U.S. is projected to reach $370 billion overall by 2017. This means Costcos online retail growth will likely continue the trend of success that Costco is actualizing currently. Market Share Data Analysis of Current Market Share Costco Wholesale Corporation (COST) NASDAQ Price to date $124.29 2013 Volume to date $1,784,164 52 Week High $124.74 52 Week Low $93.51

Cash Flow Comparison Chart Figure 1.4

In 2012 Costcos profits were reported as +6.55% over estimated reports. This gain in 2012 has allowed for the first three quarter profits to report an average gain of 3.00% , but the year may not come in positive above estimates because of the slow holiday season. Preliminary results show a negative gain of -4.02% below estimates. It is estimated that Costcos revenues for 2013 will be 105.2 billion, which will be 6.1% over 2012 revenue but still down by estimates.(Yahoofinance) The future markets for the first two quarters of 2014 show a less aggressive estimate of profits but still higher than the first three quarters of 2013. Annual revenues are also estimated to climb and increase over the previous years through 2015. Even the lowest estimates report increase sales over the previous year. Costcos cash flow per share is and stays low compared to book value per share. Keeping outflow low allows the company to share their profits with employees.(phx.corportate.com) This allows for many benefits to be offered and a fair pay rate above other companies in the same market. All this combined ensures Costco is able to keep with its original philosophy and the new challenges it faces ahead with keeping employees and members happy.

Recommendations The pressures of adhering to an adapting healthcare legislation can be challenging but Costco should remain united in its core values of making workers rights a priority in building their business and continue to build the reputation of being a good employer. The financial growth of Costco over the past two decades has shown their potential for greatness and pursuing the options technology has given them and listening to consumers demands will lead them down a lucrative path. The Costco story is not as well-known as it should be Costco has the potential to change the way many corporations view the potential for their own business if they can reach more people. Costco has a formula that has proven to be successful and can lead the United States economy into the thriving wealthy state it has experienced in the past. Costco is a model of good business practices and effective adaptation to an ever changing society and its needs.

REFERENCES: 2013 BENEFIT PLAN CHANGES Costco Employee Benefits Program (2012, October). In costcobenefits.com. Retrieved from http://www.costcobenefits.com/forms/2013%20Benefit%20Plan%20Changes%20FINAL %20101112.pdf Forbes.com. (2013, May 29). Great Speculations: Costco Earnings Swelling Membership will fuel its sales growth. Retrieved from http://www.forbes.com/sites/greatspeculations/2013/05/29/costco-earnings-swellingmembership-will-fuel-its-sales-growth/ Geier, K. (2013, June 9). The Secret to Costco's Success . In Washington Monthly. Retrieved from http://www.washingtonmonthly.com/political-animala/2013_06/the_secret_of_costcos_success045176.php Investor Relations Company Profile. (2010) Costco Wholesale. Retrieved from http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-homeprofile Song, K. M. (2011, January 26). Costco CEO makes pitch for Obama's health-reform law [Electronic version]. Seattle Times. Stone, B. (2013, June). VCostco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World. In Bloomberg Business Week. Retrieved from http://www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-thecheapest-happiest-company-in-the-world#p2 http://www.bloomberg.com/quote/COST:US HealthCare.gov Costcobenefits/forms.pdf Costco.com/benefits.tml