McDonald's plan to drop health coverage

I stopped patronizing McDonald's when I was about eight years old--just around the time I discovered its most compelling flavor came from dipping its French fries into a vanilla milkshake.

I've paid little attention to the franchise in the intervening decades until last week. That's when McDonald's produced a threat nearly as ludicrous as my gustatory preferences: it might drop insurance coverage for 29,500 hourly workers if it wasn't permitted a special waiver to keep its medical loss ratios (MLRs) under 80 percent. This is for the fast food giant's self-insured "mini-med" plan that offers $2,000 in annual coverage--not even enough for a single day in an intensive care unit--for a $728 annual premium paid by the employee. McDonald's hasn't disclosed what the MLR for this policy is, likely because it is embarrassingly low.

McDonald's is claiming that it can't meet the 80 percent MLR mandated by the Affordable Care Act due to high employee turnover that leads to heavy administrative costs. This is the same company that offers labor-intensive yet identical low-cost products in 125 different countries.

It was bad enough McDonald's was using their minimum wage workers as pawns, but that's beside the point. This is part of an effort among payers to gain leverage in the simmering debate regarding MLRs and how they will be regulated in the post-reform world. Unfortunately, it's a debate that's quickly becoming home to some whoppers. Providers could be left holding a super-sized bag of them.

The Obama Administration, which caved after pressure from insurers on the public option, announced late last week that it would exercise "discretion" on MLRs, opening a potential floodgate of waivers. That's not exactly heartening news to hospitals and other providers, which I will explain shortly.

That MLRs have become a fulcrum of reform is an astoundingly swift reversal of their position in the world. It's a stat health plans typically tack onto the rump of their quarterly reports, often referred to as "medical cost ratios" to tone down the rhetorical presumption that any money spent on healthcare is a lost dollar.

But any person who dunks potatoes into synthetic vanilla ice cream tends toward the wonkish, and I've studied MLRs fairly closely for 20 years now. A typical for-profit health plan spends in a band of roughly 82 percent to 87 percent of premium dollars on healthcare, with occasional blips caused by outbreaks of flu and other seasonal afflictions.

The Affordable Care Act requires that insurers spend 85 percent of premium dollars on large group enrollees and 80 percent on small group and individual plans. The bulk of the estimated 35 million new lives are going to be in the latter group. Reform, therefore, gives insurers a terrific opportunity to recoup anywhere from a couple to several percentage points to their bottom lines.

Moreover, the National Association of Insurance Commissioners, which is helping promulgate the regulations, recently proposed that telephone hotlines and wellness programs be made part of the overall MLR, so long as they're linked to quality initiatives. That's a huge loophole that no doubt could prove richly exploitive. Nonetheless, the insurers are agitating for even looser guidelines.

The reason is clear: MLRs are a huge predictor of profitability. When I conducted a close study of MLR trends in 2003, I discovered the nation's six major health plans had clipped an average of four percentage points off their MLRs within a short period of time. Their profits soared as a result.

Any further relaxation on MLRs will make reform an even bigger Happy Meal for the insurers. That means hospitals and physician groups will get lassoed into ever-nastier tugs-of-war regarding provider contracts, face shrinking wiggle room to provide charity care and patient discounts, and have less capital for infrastructure improvements. It also means fatter bills for patients and no abating of the personal bankruptcies closely linked to unpaid medical expenses--one of the original premises for reform.

In other words, the newest flavor McDonald's is whipping up won't be odd or compelling. It will just be bitter, and awfully tough to swallow. - Ron