While Democrats and Republicans battle over President Obama’s health care reform—a battle that intensified in January when U.S. District Judge Roger Vinson of Florida declared the reform unconstitutional—chain-store operators all over the country are struggling to figure out what they have to do right now to comply with the existing incarnation of the legislation.

Most of the recent confusion centers on limited medical plans, the lower-cost alternatives to traditional major medical insurance that are often employed by small businesses like quick serves. John Foley, senior vice president of domestic markets for Pan-American Life Insurance Company, says the administration’s Patient Protection and Affordable Care Act (ppaca) is confusing for businesses, “especially as it relates to limited medical plans.” To comply with the new reforms, some limited medical plans will have to undergo drastic changes.

Much of the confusion is based on the term mini med, says John Hennessy, principal and western region benefits practice leader for global consulting firm Hay Group.

“Many people tend to use the terms mini med and limited medical plan interchangeably when, in reality, there are two distinctly different types of limited medical plans,” Hennessy says. “What most people refer to as mini meds are actually coinsurance, also known as copay-based or expense incurred, because they have deductibles and annual caps.” As of this year, the PPACA has set a minimum cap of $750,000 per employee and is scheduled to increase it to $1.25 million next year and to $2 million in 2013. In 2014, PPACA expects to remove all limits.

Under the new laws, insurance carriers are required to spend 85 percent of premiums from client companies with 50 or more full-time-equivalent employees on benefits rather than on overhead. Due to elevated administrative costs incurred to handle chain stores’ high employee turnover and low spending on claims, many insurers say they are unable to continue offering mini med plans or must significantly raise their rates to cover the necessary expanded coverage.  

According to the University of Pennsylvania Annenberg Public Policy Center, about 1.7 million Americans receive their insurance coverage through mini med plans. But a survey of members of the Chain Restaurant Compensation Association (CRCA) conducted by Hay Group reports those numbers are likely to change as a result of the new legislation.

The survey showed that 70 percent of chain-restaurant respondents offer mini med plans to their employees. However, 77 percent of these operators said they are considering reducing employee hours to change their status from full-time to part-time.

Fifty-four percent are considering eliminating limited medical plans for their hourly workforce entirely. And 67 percent said they are still considering making no changes in 2011 and will likely apply for waivers. To receive a temporary waiver, which must be renewed each year, a company “must provide documentation to prove why compliance would result in higher premiums or interrupted access of care,” says Steve Larsen, director of the U.S. Department of Health and Human Services (hhs) oversight department.

In a 2010 survey of 33 McDonald’s franchisees representing 221 U.S. restaurants, many of the respondents said they were “not sure” of or “don’t know” the long-term effects the new laws will have on their per-store operating costs. Those who did offer an estimate predicted an average annual cost increase of $55,313 per store, resulting in a 15–20 percent decrease in profits, says Mark Kalinowski, lead restaurant analyst for Janney Capital Markets, which conducted the study.

“When you work on 3 percent margins, eating that amount of increased cost is not possible,” one franchisee said in the study. “It’s not known the amount of office personnel you will need to add for the accounting. We also are waiting for all the governments to raise the taxes they want before we can see if we can possibly survive.”

As of December, more than 200 companies had been issued waivers, double the number in early November. Among them are Jack in the Box, Noodles & Company, T.G.I. Fridays, and brands under the Darden umbrella. HHS expects that by 2014, the need for waivers will be negated because “workers … will be able to buy their own coverage through state-based exchanges … and low- and mid-income individuals can receive premium credits and subsidies to help them do that,” Larsen says.  

“This will have a catastrophic impact. If consumers won’t pay $5 for a Big Mac, we are sunk.”

Without relief from the prohibitive insurance costs, some restaurants working on already precariously slim margins might be forced to close or at least curtail expansion and raise consumer prices, says Angelo Amador, vice president of labor and workforce policy for the National Restaurant Association.    

As one of the McDonald’s franchisees in the Janney survey said, restaurateurs “cannot raise prices enough to cover [the new health care legislation] and also grow the business.” Another said he expected that “we are going to be forced to put management on [the new health care plan] instead of the outstanding care I offer now to save money.”

A growing number of chain stores and restaurants are turning to indemnity-based (also known as fixed indemnity or fixed payment) limited medical plans that, Larsen says, are not subject to PPACA regulations. Indemnity plans pay a predetermined flat rate for covered medical services such as doctor and hospital visits with no deductibles or annual coverage caps.  

“Indemnity-based insurance has been one of the most fundamentally misunderstood concepts because when people think of hospital coverage, they tend to immediately think of Major Medical, which is structured as a reimbursement plan with copayments and deductibles,” Foley says.

Whether operators go for waivers or indemnity-based insurance plans, the important thing is to avoid making any drastic moves such as employee hour-cutting or eliminating all health care benefits, Amador says. “The No. 1 thing to keep in mind is that everything is still in flux, and it is critical that operators get involved with local, state, and national trade associations to emphasize to Congress that the real focus here should be rising health care costs,” he says.

As the industry waits to see if any changes are made to health care reform, operators remain pessimistic. As one franchisee in the Janney survey said: “Operators with any significant debt are bankrupt. … This will have a catastrophic impact. If consumers won’t pay $5 for a Big Mac, we are sunk.”

Employee Management, Legal, Story, McDonald's