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McDonald’s, Mini-Meds, and Medical Loss Ratios: What’s to come, and what can Sebelius do about it?

Yesterday, the Wall Street Journal ran an article entitled McDonald’s May Drop Health Plan. The article reported that “McDonald’s Corp. has warned federal regulators that it could drop its health insurance plan for nearly 30,000 hourly restaurant workers unless regulators waive a new requirement of the U.S. health overhaul.” The insurance plan at issue is a so-called “mini-med” plan, which provides limited coverage but at low prices. The Journal reports, for example, that “[a] single worker can pay $14 a week for a plan that caps annual benefits at $2,000, or about $32 a week to get coverage up to $10,000 a year.”

The problem with mini-med plans is that they tend to run afoul of the new health care law’s “medical loss ratio” (MLR) requirement. That requirement mandates that an insurance company pay out in health care claims at least 80% or, for larger employers, 85% of all premiums collected. This is a tough requirement for low-wage employers like McDonald’s, which typically experience quite a bit of employee turnover and tend to hire younger employees who make fewer expensive claims. Combining a relatively low level of medical payments with high employee turnover (which increases the cost of administering the insurance system) can drive a plan’s MLR below 85 percent of premiums collected.

According to the Journal, McDonald’s sent federal officials a memo stating its concerns about the medical loss ratio requirement.  The memo, which the Journal claims to have reviewed, purportedly said:

  • “‘[I]t would be economically prohibitive for our carrier to continue offering” the mini-med plan unless it got an exemption from the medical loss ratio requirement;
  • “Having to drop our current mini-med offering would represent a huge disruption to our 29,500 participants”; and
  • “[Dropping the plan] would deny our people this current benefit that positively impacts their lives and protects their health—and would leave many without an affordable, comparably designed alternative until 2014.”

Health and Human Services Secretary Kathleen Sebelius, who has recently tussled with the Journal over a few things (see here, here, and here for the back-and-forth), insisted that “the McDonald’s story is flat-out wrong.”  She continued: “I’m sorry that they [the Journal] were not more accurate in their reporting.  The McDonald’s HR director, Steve Russell, has put out a statement flatly denying that they are considering withdrawing from the insurance market.”

She’s right on that last observation.  Mr. Russell did assert yesterday that “[m]edia reports stating that we plan to drop health care coverage for our employees are completely false. These reports are purely speculative and misleading.”   But the Journal never reported that McDonald’s was planning to drop insurance coverage altogether.  Indeed, the article stated that:

A spokeswoman for McDonald’s said it would look for other insurance options if it couldn’t get the waiver. The company’s chief people officer for the U.S., Steve Russell, said, “McDonald’s will continue to be committed to providing competitive pay and benefits.”

In an article today, the Journal insists that the misleading media reports to which Mr. Russell referred yesterday were “subsequent media reports that implied McDonald’s was entirely eliminating health-care coverage for workers,” not the Journal’s own report.  According to today’s article, “Jack Daly, senior vice president of corporate relations and chief communications officer, said in an interview Thursday, ‘We’re not denying your story,’ referring to the article in [Thursday’s] Journal.” If that’s the case, one wonders why McDonald’s would entitle its press release “Response to WSJ Health Care Article.” Perhaps the company is trying to stay in the good graces of Secretary “zero tolerance” Sebelius.

In any event, it doesn’t seem that the initial Journal article was “flat-out wrong.”  The headline, “McDonald’s May Drop Health Plan,” was a bit ambiguous and may have suggested that McDonald’s was considering dropping health insurance coverage altogether (although a fair reading of the actual article clarifies that the headline was referring to McDonald’s current health plan).  No one can deny, though, that the new health care law creates huge problems for affordable mini-med plans and may require employers to drop those offerings. 

Following publication of yesterday’s article, HHS released a statement saying that:

we fully intend to exercise [the HHS Secretary’s] discretion under the new law to address the special circumstances of mini-med plans in the medical loss ratio calculations. According to the Affordable Care Act, medical loss ratio “methodologies shall be designed to take into account the special circumstance of smaller plans, different types of plans, and newer plans.” We recognize that mini-med plans are often characterized by a relatively high expense structure relative to the lower premiums charged for these types of policies. We intend to address these and other special circumstances in forthcoming regulations.

The problem, though, is that the new health care reform law doesn’t afford the Secretary very much discretion on MLR requirements.  I’m no expert on the massive statute, but a quick reading of the applicable text suggests that Ms. Sebelius has no discretion at all over the 85% MLR requirement applicable to McDonald’s and other large employers.  The statute provides only two points of flexibility on the actual MLR thresholds.   (The relevant provision of the statute is Section 10101(f), which amends Section 2718 of the Public Health Service Act.  You can find it on page 767 of this 906-page version of the legislation.) First, the statute says that “The Secretary may adjust the rates described in subsection (b) [the 80% or 85% medical loss ratios] if the Secretary determines appropriate on account of the volatility of the individual market due to the establishment of State Exchanges.”  That provision wouldn’t apply here because any “volatility” is not due to the establishment of the State Exchanges, which will not be created until 2014.  The second point of flexibility applies only to the 80% MLR requirement applicable to “a health insurance issuer offering coverage in the small group market or in the individual market.”  When it comes to that requirement, the Secretary “may adjust such percentage with respect to a State if the Secretary determines that the application of such 80 percent may destabilize the individual market in such State.”  There is no corresponding flexibility, though, for the 85% MLR requirement, which applies to “a health insurance issuer offering coverage in the large group market.”  Thus, Ms. Sebelius could not exercise her discretion to lower the 85% MLR ratio a McDonald’s insurance plan must meet.  The only thing she really could do is mess around with the numerator in the MLR calculation (which is determined by dividing expenditures on medical claims by total premiums collected), so as to artificially inflate the MLR of mini-med plans.  She may be able to come up with some creative way to treat plan administration as “activities that improve health care quality,” thereby moving administrative expenses into the numerator and boosting the MLR, but at some point such manipulation strains credulity.

In any event, the McDonald’s story shows what a mess we’re getting ourselves into with this attempt to micromanage insurance contracts at the federal level.  This is, I fear, only the beginning.

Filed under: business, health care reform debate, markets, regulation