Thursday, September 30, 2010

There's No Such Thing As a Free Big Mac

Cross-posted from The Science Business on Forbes.com.


Yesterday, I wrote about the coming health-insurance disruption that would be precipitated by Obamacare’s new regulations of insurers’ “medical loss ratios.” Today, the internets are atwitter with commentary around a Wall Street Journal report describing a memorandum sent by McDonald’s to the Department of Health and Human Services, stating that, without a waiver from HHS, the company will be forced to drop coverage of 29,500 hourly-wage employees due to the new MLR regulations.

McDonald’s, fearing the P.R. blowback, put out a statement asserting that “media reports stating that we plan to drop health care coverage for our employees are completely false.” This is your classic non-denial denial: the Journal didn’t say that McDonald’s was “planning” to drop its health coverage, but rather that it would be forced to do so if it wasn’t granted a waiver from the new MLR restrictions.

HHS Secretary Kathleen Sebelius, for her part, pointed out that HHS “can’t waive a regulation that doesn’t even exist”: the final MLR regulations won’t be available until late October at the earliest.

The later that date drags out, the worse it is for employees, as insurers and employers are forced to make decisions about their 2011 plans.

The problem for McDonald’s is pretty basic: the federal policy requires all insurance plans from large employers to spend 85% of their premiums on medical claims. The problem with Washington’s one-size-fits-all mandate is that not all insurance plans are the same. In the case of McDonald’s plan, the high turnover of its workforce results in unusually high administrative costs.

The problems that McDonald’s face apply to every similar employer with a large low-wage workforce, affecting as many as one million Americans.

The Journal’s report touched off a firestorm of often-defensive reactions from advocates of the new health law. Unfortunately, their arguments don’t hold up to scrutiny. Let’s go through them.

Aaron Carroll of The Incidental Economist implies that we shouldn’t get exercised about the Journal article because it’s old news. “Read it if you like. I enjoyed the story. I also liked it the first time I read it. In Politico. In June.” This isn’t a strong argument: because a (not-McDonald’s-specific) story was published once, on a web site for Washington insiders and political junkies, the problem shouldn’t be discussed more widely, as the real-life consequences of the law come closer to reality?

Jonathan Cohn of The New Republic, riffing off of Aaron, argues that it’s a good thing that limited-benefit or “mini-med” plans like McDonald’s are going away. Mini-med plans may be inexpensive—costing between $14 and $32 a week—but they only provide between $2,000 and $10,000 in insurance per year. “To call that ‘insurance’ is to distort the definition, since those policies would do very little to help people with even moderately serious medical conditions.”

But Cohn doesn’t explain why it make sense to throw people off of insurance for three years while we wait for Obamacare’s mandates to kick in. And not everyone agrees that mini-med plans are so terrible. “For those who didn’t have health insurance through their spouse, it was a life saver,” Jerry Newman, author of “My Secret Life on the McJob,” told the Journal.

There is an alternative to mini-med plans, one that has proven wildly successful at other companies. We can call it the Whole Foods approach, after the gourmet grocery chain that made it famous. At Whole Foods, the company funds 100 percent of the insurance premiums for hourly employees who sign up for their combination of high-deductible health plans and health savings accounts. On top of paying for health insurance, the company puts up to $1,800 per year into employees’ tax-free Personal Wellness Accounts, to spend on health care expenses as they see fit. If they are healthy in one year, they can save that money towards next year’s health costs. This kind of arrangement addresses Cohn’s objection to mini-med plans—without onerous federal regulation—and helps to bring down the cost of health care for everyone by reducing wasteful overspending.

By contrast, the Obamacare approach—forcing employers to cover everyone with lavish insurance benefits like the kind Cohn prefers—will dramatically drive up the cost of labor. The economic consequences of that mandate will be harsh: companies will hire less workers (because workers will become more expensive, and there is only so much money to go around). This will lead to more unemployment. The unemployed will in turn live off of Medicaid and other state-subsidized insurance plans, which will consign them to substandard health care, and cost taxpayers billions of dollars.

Those companies that try to hold onto their hourly employees, or feel forced to by the law’s employer mandate, will have to pass these costs onto consumers, in the form of higher prices: a $2 Big Mac will cost $4.

It’s one thing for consumers to choose to pay more. (My Forbes colleague David Whelan thinks those offended by McDonalds’ health plans should vote with their wallet by shopping at Starbucks.) But it’s quite another for the government to force higher costs and higher unemployment upon an already fragile economy.

For there is no such thing as a free Big Mac.

4 comments:

  1. $700 a year for $2,000 in coverage. It wont cover much surgery. One MRI, plus some change. I'm thinking the rest of us make up the difference anyway.

    I have read a number of pieces by and about Mr. Mackey. He never says what they pay in insurance costs. Would be interested in that plus average age of employees. Maybe our local Whole Foods is the only one that has predominantly younger workers.

    Steve

    ReplyDelete
  2. Hi Steve,

    Most hourly-wage employees are young -- which is why it's wasteful to give them gold-plated health plans.

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