McDonald's May Drop Hourly Worker Coverage, Exposing a Healthcare Reform Gap [Updated]
McDonald's (MCD) reported threat to drop insurance coverage for nearly 30,000 restaurant workers highlights a major drawback in the timing of healthcare reform: Some provisions of the Affordable Care Act (ACA) that take effect now or in the near future create big problems for employers with low-wage workers that won't be resolved until other parts of the reform legislation become effective in 2014.
[Update: After this item was posted, McDonald's released a statement denying that it was considering dropping health coverage. Nevertheless, the challenges that McDonald's and other large restaurant and retail chains face in providing health insurance to their employees remain the same.]
McDonald's offers its employees "mini-med" plans that have yearly coverage limits ranging from $2,000 to $10,000. While this seems like an absurdly low limit --it wouldn't come close to covering a typical hospital stay, for instance -- McDonald's workers pay $14 to $32 a week for this insurance. For an employee earning minimum wage, that's a fair chunk of weekly pay.
The reform-law provision that has forced the fast-food giant to reconsider its health coverage is the one that that requires insurance companies, beginning Jan. 1, 2011, to spend 80 to 85 percent of their premium revenue on medical care. Insurers must devote at least 80 percent of revenues to healthcare in plans designed for small firms and individuals, and 85 percent for plans purchased by large companies.
McDonald's says there's no way that its insurance carrier can meet the 85 percent minimum in its mini-med plans. That's because the high turnover of McDonald's workforce, combined with the low dollar amount of most claims, creates high administrative costs in proportion to spending on medical care. So McDonald's has petitioned the U.S. Department of Health and Human Services (HHS) to grant it an exemption. Otherwise, the company says, its carrier, BCS Insurance Group of Oak Brook Terrace, Ill., will drop the mini-med plans.
The day after the original story about McDonald's memo to HHS was published in the Wall Street Journal, HHS officials said they were considering the company's request seriously. If McDonald's does end coverage for its hourly workers, they won't have any health insurance until 2014, when the government will begin providing massive subsidies to lower-income people so they can buy coverage through the state insurance exchanges.
Dozens of other large employers may find themselves in a similar situation, including Home Depot (HD), Disney (DIS), CVS Caremark (CVS), Staples (SPLS) and Blockbuster. Walmart (WMT), though, won't be affected, because it's self-insured -- meaning that it pays claims out of its own funds.
Some of these other companies will undoubtedly encounter difficulties with their mini-med plans. "There is not any issuer of limited benefit coverage that could meet the enhanced MLR standards," Neil Trautwein, president of the National Retail Federation, told the Wall Street Journal, using the industry acronym for "medical loss ratio" -- the sum insurers pay out in healthcare claims as a percentage of premium revenue.
Even if carriers don't drop mini-med plans now, the ACA will phase them out by 2014. Under the law, the minimum annual coverage limit for health plans is now $750,000 per person, rising to $2 million in September 2012. Ceilings on annual coverage are supposed to be eliminated entirely by 2014. But insurance companies can obtain waivers to keep their mini-med plans if they can show that switching to comprehensive coverage would lead to significant premium increases or force employers to drop insurance benefits.
The New York Times reported that McDonald's has won such a waiver. But recently, HHS said that these exemptions would no longer be available after the state insurance exchanges start up.
At that point, companies like McDonald's will either have to provide comprehensive coverage or pay penalties of $2,000 to $3,000 per employee, depending on whether the worker buys insurance on his own or gets it through a state insurance exchange with a government subsidy. While this is probably more than McDonald's is currently paying for its mini-plans, it will cut profits much less than providing full-scale policies to employees who earn barely more than the cost of insuring them.
Image supplied courtesy of Flickr.
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