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McDonald's fires a warning shot about healthcare reform

October 1, 2010 |  1:12 pm

McD's Stories this week about McDonald's potentially rolling back healthcare benefits  and Principal Financial Group withdrawing from the health insurance market  illustrate one of the flaws in the federal healthcare reform law:  the unintended but predictable consequences of requiring insurers to spend 80% to 85% of their premium revenue on medical costs. I don't think the developments justify repealing the law; instead, they show why lawmakers should view healthcare reform as an iterative process, with many lessons yet to be learned and improvements still to be made.

According to the Wall Street Journal, McDonald's offers restaurant workers low-cost insurance plans designed to cover modest claims, not major illnesses. Such plans will probably evaporate by 2014, when the new law requires large employers to offer more comprehensive coverage or contribute to the cost of insuring workers through subsidized insurance exchanges. In the meantime, however, the law requires all plans to meet the 80% to 85% threshold (also known as the "medical loss ratio"). And that's a problem for "mini-med" plans such as the ones offered by McDonald's, which typically have high administrative costs -- a consequence of insuring businesses with high employee turnover.

The threshold is also problematic for insurers that have a comparatively small number of customers, like Principal, which has sold fewer than 1 million health policies. The more customers an insurer has, the easier it will be to meet the threshold -- its fixed administrative costs can be spread across more people.

McDonald's is likely to obtain a waiver from the feds that will allow it to continue its current insurance plan, and another insurer (United Healthcare) has agreed to take over Principal's customers after it exits the business. Still, the reports raise the question of why the feds should be setting minimum medical loss ratios in the first place.

After all, in a free-market system, profits should be limited by competition, not by regulation.

The reason is that the law's authors feared that insurers would reap windfall profits without some kind of brake on their prices. The law requires all American adults to carry insurance and provides billions of dollars in subsidies to help working-class families pay the premiums. In other words, it creates something of a captive market for the insurance industry. The individual mandate, meanwhile, is a necessary adjunct to the reforms that bar insurers from cherry-picking customers and denying coverage to people with preexisting conditions.

I have less faith in mechanisms like medical loss ratios than I do in unfettered competition on a level playing field. Congress could have done far more to promote competition among insurers had it built the healthcare reform law around the proposal from Sens. Ron Wyden (D-Ore.) and Robert Bennett (R-Utah) to decouple insurance from employment. That direction remains open to lawmakers, although it's such a fundamental change, I doubt they would have the stomach for it so soon after the bruising battle over Obamacare.

A less radical step would be to give individuals much more latitude to seek (and insurers to offer) low-priced coverage that isn't comprehensive. The risk is that such plans would be popular among younger, healthier people, leaving comprehensive plans with an older, more expensive pool of customers -- and driving up their premiums. But the risk of the current approach is that younger, healthier people won't carry any health insurance, choosing instead to pay the tax penalty in the new law. The more uninsured people there are, the harder it will be to attack rising costs by fundamentally changing the way healthcare is delivered and paid for. Better to have the young and healthy insured in an imperfect way than not at all.

Credit: Karen Bleier / AFP/Getty Images

-- Jon Healey

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