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Intended and Unintended Consequences: The ‘Darden Approach’ to Obamacare

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Intended and Unintended Consequences:  The ‘Darden Approach’ to Obamacare 

Courtesy of Dr. Paul Price 

One of the few bright spots for job creation over the preceding year or two was the hospitality segment. This includes restaurants, hotels, bars, etc. Most of the work comes with low base pay. Tip income makes up a majority of the employees’ total compensation.

Managements were happy to add workers as business conditions permitted. Obama’s reelection cemented the fate of his new healthcare monstrosity. It now will be implemented and that’s very, very bad news for the restaurant industry.

Why is that? Many fast food and casual dining chains generate decent revenues but low net profit margins. Some, like McDonald’s (MCD), have been offering employees low-priced but relatively bare-bones health care policies on a voluntary sign-up basis. That was affordable both for low-wage employees and MCD.

Obamacare takes away that option. Minimum coverage requirements under the ACA [Affordable Care Act] mean that (post-January 1, 2014) those limited coverage plans can no longer be offered.

So much for that infamous claim, “If you like your present health plan and want to keep it… you can.”

The ACA requires that full-time employees must be enrolled in an approved healthcare plan or the employer will be subject to a $2,000 per head penalty (now called a tax by the Supreme Court). Worse still, the definition of full-time has been dialed back to just 30 hours a week.

At November’s Restaurant Finance & Business Development Conference Darden Restaurants’ (DRI) test plan was much discussed. They are reducing hours of employees to below 30 to limit the number of employees who would be eligible for coverage.

Darden is the parent of Olive Garden, Red Lobster, Longhorn Steakhouse, Bahama Breeze and other chains. They employee about 185,000 people.

 

 

Can employers simply wait until 2014 to make adjustments to their employee hours? No. The ACA has a look-back period to keep businesses from doing exactly that. Determining if a worker meets that 30-hour threshold will be done using their 2013 hours worked.

The cost of providing an approved policy will likely be well above the $2,000 tax imposed. Employers have a huge incentive to purge their businesses of scheduled workers with 30+ hour schedules. That means many people will be getting hours cut back now, in 2012, in order to avoid being classified as full-time in 2014.

Instead of helping waiters, greeters, kitchen staff and busboys become more prosperous ObamaCare may well curtail their ability to work as many hours as they would prefer.

It might also deprive business owners of the chance at rewarding their best workers with maximum earnings power. The cost differential between part-time and full-time might be the swing factor separating profitability and bankruptcy.

Brad Richmond, Darden’s CFO, was asked whether reducing hours will allow the restaurant to maintain customer engagement and employee satisfaction. “I think it’s going to be very hard,” he said. “They work 30 – 35 hours for a reason.”

Another potential strategy discussed at the conference? Don’t provide health insurance at all. From a strictly economic viewpoint paying the $2,000-per-year, per-employee tax penalty for not providing coverage might well be the best choice.

Alexis Becker, of accounting firm SS&G, noted that most scenarios find paying the penalty will be cheaper for employers than providing coverage.

The ACA only covers employers with 50 or more workers. Franchise owners will be loath to exceed, or even approach this potentially business- lethal number.

That could mean cutting back on overall operating hours or running with much leaner staffing levels. It also makes opening new units much less attractive. All three of those trends are bad news for workers and jobs. 

Most franchiser owners keep each unit as a separate legal entity in order to avoid triggering the 50-employee rule. Rumors have been floating around about new government regulations that would  lump multiple units back together for ACA purposes.

That would be an absolute dagger to the heart of owners of these multiple units with segregated legal ownership.

Hasn’t our president been saying since 2008…“Job creation is my #1 priority”? Obamacare is a job killer.

Actions speak louder than words. 

No matter how this ultimately plays out, it will be a huge headwind for the profitability of this industry. Avoid stocks in this group until they start pricing in the future bottom line hits.

 

Dr. Paul Price, at Beating Buffett Blog, and Market Shadows,  Nov. 15, 2012

 

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Sun, 11/18/2012 - 13:40 | 2993774 SmoothCoolSmoke
SmoothCoolSmoke's picture

Here's the question:  Why does a hip replacement. at a new, state-of-the-art hopsital in Singapore. processed performed by US trained MDs, cost $8000 and in the US it costs $22,000?

 

Why?

Sun, 11/18/2012 - 13:31 | 2993744 SmoothCoolSmoke
SmoothCoolSmoke's picture

I always laugh at stupid business owners who think they'll lose money giving their worker HC coverage and fail to see how much productivty and money they lose from sick workers.

Sun, 11/18/2012 - 11:40 | 2993527 DOT
DOT's picture

More jobs being Twinkied soon.

Sun, 11/18/2012 - 11:25 | 2993501 SanOvaBeach
SanOvaBeach's picture

DRI can go fuck yourselfs.  I'm voting with my feet and many of my friends are doing the same.  Not dining at you fucking pig-shit resturants..............

Sat, 11/24/2012 - 18:29 | 2993548 honestann
honestann's picture

DRI didn't cause this, Obama (and all advocates of government-tampered health care/insurance) did.

Sun, 11/18/2012 - 11:18 | 2993486 SanOvaBeach
SanOvaBeach's picture

Most of the cheap, selfish, jack-offs that are making comments on this page know nothing about the Affordable Healcare Act.  The healthcare system is broken!  The steady rise in costs is unsustainable and can cause major damage to our economy.  (among other things!)  You idiot-fucks out there are quick to crtisize but don't have any solutions because that is when the real work starts.  No goverment on the planet has a perfect system, but at least Obama has tackled the problem.  No one really knows what is going to happen.  It is uncharted territory.  If your answer is to do nothing, your head is so far up your own ass, you should be drinking your own after shave.

Sun, 11/18/2012 - 12:25 | 2993621 nscholten
nscholten's picture

sanovabeah

And I suppose you have read the whole 2000 pages or however many pages it is.

obamacare is for insuraance companies and hospitals.  Just look at the stock performance.

the plan leaves out the ability to negotiate prices with one of the first monopolies of recent times, the pharmicutical companies.  

Sun, 11/18/2012 - 12:01 | 2993576 BraveSirRobin
BraveSirRobin's picture

"No government on the planet has a perfect system, but at least Obama has tackled the problem."

Perhaps the government should not have a system, except for the indigent, which we already have. Perhaps it's government intervention that is causing the problem in the first instance.

State politicians have for a long time been forcing private companies that provide health insurance to grant benefits they do not want to tax their constituents for. Across the land, these politicians have mandated all sorts of "health care benefits" such as massage therapy, "wellness counseling," sex change operations, transportation to a from doctors visits, chiropractic care (which is really a form of massage therapy), diet and nutrition counseling, etc, etc, etc. Then, you had to create a massive insurance bureaucracy to manage all "healthcare" activity to try and ensure benefits are used in only intended ways.

As a result, they caused a sharp, sustained increase in premiums which precipitated the "affordability crisis" that the politicians need to solve with, guess what, more regulation and more government involvement. Guess how that is going to work out? So you are beginning to see the ill effects and you want to shoot the messengers?

And as far as Obama tacking the problem, how you tackle the problem is at least as important as the effort. If a doctor prescribes draining a patient of blood and thereby kills him, would you attack those who pointed out the doctor erred and defend the doctor for “tackling the problem?”

And let’s try to refrain from insulting those you disagree with. It is unseemly and belittles yourself only.

 

Sun, 11/18/2012 - 12:12 | 2993597 SanOvaBeach
SanOvaBeach's picture

We have already seen the ill effects without goverment intervention.  It is not an insult, just an opinion.  Like the rating agencies.  Your not drinking your own after shave, but you probably shit ice cream!  Hey dude, you lost the election.  Go crawl back in your hole titled, True Believer..............

Sun, 11/18/2012 - 08:34 | 2993322 news printer
news printer's picture

An old interview from april 2008;  You may see what changed over 4 years
Gerald Swanson in 2008 interview - Bankrupting Country
http://goo.gl/6bQnW

 

Sun, 11/18/2012 - 07:54 | 2993301 Catullus
Catullus's picture

I work with a restaurant owner in Maryland. Said he's just going to cut hours this year and hire more people at less than 30 hours. It's just that simple. So now people who can barely get by in Food & Bev are going to get two or more jobs.

In a sick sense, it'll be a job creator because it'll spread the work, but it won't lower unemployment.

Sun, 11/18/2012 - 11:53 | 2993552 honestann
honestann's picture

This behavior won't be limited to restaurants.

And you know what is extremely sick?  Because millions of companies cut back workers to 28 hours per week and hire more workers, the government manipulated unemployment rate will fall significantly.  Not the total numbers worked, just the number of people working.

Also, when people get two 20~28 hour per week jobs, the government will probably count that as "two workers", thereby making it look like twice as many people are working as the fact.

Sick, sick, sick.

Sun, 11/18/2012 - 12:14 | 2993602 willwork4food
willwork4food's picture

The US gov stats are one of the three biggest ongoing governmental lies on the planet.

The other two are "Congress will break two months for recess and then get back to work" and "No, Janet ,the black leather & spikes definitely do not make you look too tyrannical."

Sun, 11/18/2012 - 11:45 | 2993541 SanOvaBeach
SanOvaBeach's picture

Are you drinking your own after shave?

Sun, 11/18/2012 - 09:50 | 2993367 d edwards
d edwards's picture

Yeah, sort of like using men with shovels to do digging that could and should be done with machines. Look at all the jobs created! Yippie.

Sat, 11/17/2012 - 23:50 | 2992920 steve from virginia
steve from virginia's picture

 

Behind all of the above ...

 

The corporate shills insist that housing sales are increasing (because working people are earning less and having to spend more, obviously this makes the expensive houses more affordable).

 

The corporate shills insist that non-real estate asset prices are increasing (because companies that have large labor components are somehow going to earn more from shrinking margins combined with fewer customers.).

 

The corporate shills insist that all of this is Obama's/labor's fault (because the private sector is inundated with debts the same businesses took on themselves to enrich their tycoon-bosses: see 'Hostess Bakeries', 'Simmons Mattress' or any number of other companies taken under by excess debt or unscrupulous management).

 

The real problem (besides the hundreds of millions of non-productive cars) is that the United States, the land of the not-so-free, is run by the Mafia.

 

Long prison terms would serve to warn others!

 

 

Sun, 11/18/2012 - 00:45 | 2993033 willwork4food
willwork4food's picture

I was thinking more along the lines of long ropes and high term trees...

Sun, 11/18/2012 - 03:12 | 2993185 Michaelwiseguy
Michaelwiseguy's picture

What stupid Americans don't realize is;

It's the Price of Health Care Stupid, brought to you by the International Banking Cartel and the Federal Reserve Corporation.

Sat, 11/17/2012 - 23:32 | 2992882 baldski
baldski's picture

Another Dingy Doctor in Politics! Don't we have enough with the assholes who are in Congress now? Those slimy billionaires in the restaurant and food business (papa john & applebee) just cannot pay their employees even the minimun wage. They got a dispensation ala Nine Nine Nine! They are a bunch of Yahoos who should be up against the waLL!

Sat, 11/17/2012 - 22:32 | 2992785 Abraham Snake
Abraham Snake's picture

First of all, I'm not fond of the current state of heath insurance. It's complicated and expensive. It seems designed to extract the maximum dollars from workers. Our health insurance premiums extract over 12% of our paycheck and with high deductibles, $50 copays, and barely discounted prescriptions, we don't see doctors when we get sick or hurt because we probably couldn't make the rent if we had to pay even light medical bills, because light bills run in the several hundreds now. We have no way to ballpark costs in advance or comparison shop.

It's the third week now I've had this awful hacking cough. Coughing till I gag. Whistling lungs. Out of breath. Horrid green mucus. All I can do is swallow triple doses of cheapest over-the-counter stuff. I should see a doctor, but I've only got a $5 per week budget for diagnosis and treatments. No copay money. Just cough pills is all I can do. It's 4 weeks now. No, 5 weeks? The county health clinic tuned me away because I have insurance. The city clinic has shut down.

For us, it's like buying really expensive car insurance. It's required by law, the kind that 3 time DUI convicts buy, hundreds $ per month car insurance, $10,000 deductible. And fuck, we don't even have a car. We don't drive dude. We can only afford old bikes! Ok, it's the law. It's the law, I understand it's required. It will be deducted from my paycheck, I know, the law.

Sun, 11/18/2012 - 13:26 | 2993725 Doctor Who
Doctor Who's picture

I haven't tried it, but if you're desperate, they look safe enough.

 

Fish antibiotics for human consumption.

http://preparednesspro.com/fish-antibiotics/

Sun, 11/18/2012 - 03:30 | 2993198 ElTerco
ElTerco's picture

Seriously, you need to go to the Walmart health clinic if you can't go anywhere else.  The whistling lungs and out-of-breath are not good signs.

Sun, 11/18/2012 - 12:17 | 2993606 willwork4food
willwork4food's picture

pneumonia or infection? Find yourself some penicillin-someone you know might have some extra.

Sat, 11/17/2012 - 22:04 | 2992736 sethstorm
sethstorm's picture

Most franchiser owners keep each unit as a separate legal entity in order to avoid triggering the 50-employee rule. Rumors have been floating around about new government regulations that would  lump multiple units back together for ACA purposes.

That would be an absolute dagger to the heart of owners of these multiple units with segregated legal ownership.

These attempts to evade the law should be penalized.

Sat, 11/17/2012 - 23:44 | 2992906 Longing for the...
Longing for the old America's picture

Those owners are complying with current law... not evading it.

Sun, 11/18/2012 - 10:30 | 2993406 csmith
csmith's picture

Exactly. And the larger point, which the entire Oblamer "administration" misses, is that people set up and run businesses VOLUNTARILY, and can stop anytime. Basic fact in this big lifeboat is that some people are rowers, some are sitters and some are in between. The rules can be written to create more of each over time. We're making bad choices.

Sun, 11/18/2012 - 01:15 | 2993077 sethstorm
sethstorm's picture

They're trying to evade PPACA with creative "compliance" - which is far from full compliance.

Sat, 11/17/2012 - 21:26 | 2992675 New_Meat
New_Meat's picture

"One of the few bright spots for job creation..."

presented without comment.

- Ned

Sat, 11/17/2012 - 21:06 | 2992650 jonjon831983
jonjon831983's picture

How about get universal state gov't basic healthcare and then let companies offer basic healthcare insurance options to cover some additional expenses like % of drugs and additional medical procedures.

Sat, 11/17/2012 - 19:06 | 2992439 mayjune1
mayjune1's picture

the united states of crooks

Sat, 11/17/2012 - 17:00 | 2992216 Don Levit
Don Levit's picture

A minimum benefits plan, even one with $50,000 of benefits per year, will not satisfy the PPACA's requirements for qualified health insurance - as a stand alone plan. After 8 months of intensive discussions with Milliman, an actuarial firm, we have designed a plan which builds paid-up benfits every month.  Each monthn as the paid-up benefits build, the price for a higher deductible plan is lowered (even though, technically, one has first dollar coverage).

After 36 months, the paid-up benefits build to $25,000 and after 60 months, one has $50,000 of paid-up benefits.

This lowers the premium by by 60-80%.

Used in tandem with a silver plan (in order to qualify for subsidies), the subsidies will be lower each year, as the paid-up coverage builds, and more risk is assumed by the participants.

I know a well-respected attorney who is applying for a waiver on an HRA, which is an employer-funded limited-benfits plan.  We will apply for a similar waiver for our plan.  The hope is the waiver will be approved, the plan will be eligible for subsidies, inorder to compete initially, and that we will be able to lower the subsidies over time.  By "lessening the burdens" of government, we will fulfill one primary reason for offering a not-for-profit health insurer.

Don Levit

Sun, 11/18/2012 - 14:12 | 2993864 Winston Churchill
Winston Churchill's picture

Sounds good with one proviso.

That sounds like a variant of the universal life insurance plans that were

all the rage twenty years ago.The insurance company's loved them as they

had all sorts of hidden fees tucked into the small print.

Would't to be too sure of any insurance company's solvency going foward.

I know that most have AAA ratings at least, but so did MBS.

e

Sat, 11/17/2012 - 16:29 | 2992156 ComeAndTakeIt
ComeAndTakeIt's picture

Where does everyone plan to go to see a doctor in the future?

Sat, 11/17/2012 - 18:24 | 2992354 BraveSirRobin
BraveSirRobin's picture

Belize and Costa Rica, I think.

Sat, 11/17/2012 - 19:07 | 2992440 sethstorm
sethstorm's picture

Presuming that the government doesn't repatriate.  

Sat, 11/17/2012 - 15:35 | 2992069 Everybodys All ...
Everybodys All American's picture

States will be challenging the Federal government again on this act in the coming days and months. Several states have already decided that they will not set up these state health insurance "exchanges" and the Fed has no means of setting one up inside those states. 2700 pages of rules and regulations and they left this loophole for the states to "opt out" by not setting up the exchange where you would go to sign up. The Feds can't go into these states and force these states to act because it's on the states budgets. So some states will have them and many will not.

Where does that leave us then? I'm not sure. I would also say the goal whether explicitly stated or intentionally left out of the plan is for the government to end up with everyone in a single payer system. As most have noted companies are getting rid of there health insurance because of increasing costs. This inevitably forces employees to look elsewhere which was supposed to be the single payer. ie the government exchanges.

Most people understand this is the goal of our government except it could never have been passed through even with a democrat controlled congress. This effectively would nationalize insurance companies and hospitals. Not good a good outcome if your for free market capitalism.

What will result in the near term will be a system with a lot of people without health insurance and a system far far worse than what was promised. Then at that point when everything is a mess with insurance coverage you can bet Obama will say we simply have no choice but to go to a single payer system and it will be accepted as a good idea.

Sun, 11/18/2012 - 09:03 | 2993334 overmedicatedun...
overmedicatedundersexed's picture

obuma care is simple a way to get healthy young people to pay for health ins most will not need until they are much older..more rev in you leftist love taxing the wealthy 20 somethings making 25.000/yr ..more .gov expenses to adm and run the plan hey more big office complexes in DC. while you drive co's that are marginal out of business..you know those wealthy guys running hot dog stands and shoe repair shops and such ..stupid stupid stupid ..

Sun, 11/18/2012 - 11:53 | 2993554 SanOvaBeach
SanOvaBeach's picture

R U drinking your own after shave lotion?

Sun, 11/18/2012 - 23:44 | 2995027 chenn
chenn's picture

You keep saying this.  What does it even mean?  Is it what you type in when you run out of other socialist tripe?  Did one of your heroes on TV say it once and you believed it to be clever?  I would suggest if you want to reply to somebody but this is all you have maybe you should just step back from the keyboard.

Sat, 11/17/2012 - 16:20 | 2992104 Navigator
Navigator's picture

You are seriously misinformed Everybodys All.  

The Federal government wil set up and run the exchanges in any state that's unwilling or unable to set one up itself.  So far it looks like about 18 states would choose to run their own exchanges, while 10 to 12 will seek partnerships with the federal government, and 18 to 20 will have federal exchanges.

I bet you thought what you heard on Fox was news, not entertainment.  Sorry you were taken in.

Sat, 11/17/2012 - 16:35 | 2992164 Everybodys All ...
Everybodys All American's picture

No I'm not misinformed. They can't set up the exchanges because they have no jurisdiction and nor is there money allocated for the Fed to do this in these states. There may very well be a Federal exchange run from DC but it will not be located in these states.

Sat, 11/17/2012 - 16:56 | 2992209 Navigator
Navigator's picture

Google is your friend Mr. All.  

Please pass along a link for us if you find any support for your views.

Sat, 11/17/2012 - 17:00 | 2992217 Everybodys All ...
Everybodys All American's picture

You add nothing so shut your pie hole.

Sat, 11/17/2012 - 15:10 | 2992012 Turdy Brown
Turdy Brown's picture

Why the hell is govt. involved in health care in the first place?  I kno whow it all started and all, but dang it: govt just needs to get the hell out of our lives!

Sun, 11/18/2012 - 11:56 | 2993560 SanOvaBeach
SanOvaBeach's picture

Does disease discriminate people like u?  When your bleeding-out on the street and also have no money, I'll just step over you and keep walk'in...

Sat, 11/17/2012 - 15:17 | 2992030 donsluck
donsluck's picture

I'll take this one. The same reason they're involved in water systems, roads, courts, drug purety, pollution laws, etc. When everyone in the society is effected, it makes logical economic sense to tax and spread the expense to everyone. The real issue is the confusion between health INSURANCE (which does not provide health care) and health CARE. What Obama did was force everyone into the INSURANCE model, guaranteeing their profit on top of the cost for CARE.

But I blame the Supreme Court, the assholes.

Sun, 11/18/2012 - 07:50 | 2993299 northerngirl
northerngirl's picture

I blame the people that keep electing and sending the, "Looting/Crony Capitalist Politicians", to office.  Oh yea, that is us the United States Citizen.  We get the government we deserve.   

Sat, 11/17/2012 - 15:08 | 2992006 Turdy Brown
Turdy Brown's picture

Biden 2016! Hell yeah!

Sat, 11/17/2012 - 13:20 | 2991786 linrom
linrom's picture

Hey its 1992 all over again. Doctors are millionaires minding their investments rather than treating patients; health care costs to the moon but Clinton's health care proposal was going to bankrupt the country! How did that work out?

Sat, 11/17/2012 - 12:46 | 2991703 nah
nah's picture

its not obamacare honestly

.

this is the best a government subsidized private market has to offer

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