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Intended and Unintended Consequences: The ‘Darden Approach’ to Obamacare
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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Yes, health insurance was so incredibly cheap before. They were practically giving it away and it covered everything and had no lifetime maximum. Deductible? Co-pay? No way. I seem to recall that everyone thought the health insurance industry was the bees knees before Obama came along and wrecked it. Fucking socialists. They ruin everything.
@LTER: Obama signed the bill that the Insurance companies wrote, lobbied, and delivered to his desk. Neither he nor the Insurance Industry is working in the public interest.
Including,but not limited to any chances Miami or Tampa Bay will be near the Super Bowl before 2097..
"Yes, health insurance was so incredibly cheap before."
For me & most everyone else who had coverage it was. Mine went from 3-5% increases per year (BO...before Obama) to 100% from what I was paying in 2008 for coverage (AO...after Obama).
You SOB's...in order to cover TEN PERCENT without coverage (whether they wanted it or not) "changed" it for ONE HUNDRED PERCENT of the population.
You and your kind are a menace to society...you fuck up everything you touch.
Ideological nonsense and strawman as usual (I did not support OCare). The system was broken "BO" and it remains broken. If you didn't see that "BO", you are just a fool. Wait. You are just a fool (YAJAF). Less equivocal.
What system was broken BO?...how to pay for it?...thats complete bullshit, I should know.
I had an MRI in one week and I decided on surgery the next week. It was affordable and efficient. This is whats coming...
http://www.bbc.co.uk/news/health-12964360
The problem was states were mandating employer provided health plans cover more and more services such as rides to doctors' offices, massage therapy, substance abuse treatment and councilling, sex change operations, and on and on and on, all with low deductibles and co-pays. And so, rates skyrocketed.
If health insurance was designed to cover catastrophic events to keep people from going bankrupt, the entire system would be simpler and much more affordable.
Instead, politicians saw an opportunity to give away other people's money, nor realizing the people pay for it in the end. Government intervention is the cause of this problem in the first instance. The more they intrude, the worse it will get. They are NOT geniuses. Most policiticians were "C" students, and even if they performed well in school, they have no expertise in the matters they legislate upon. Is it any wonder they screw things up?
This is why the founders thought the government that governs least, the government that governs best, and sought to strictly limit the power, scope and reach of government.
A government that confiscates the wealth of the people will always bring them to ruin. Each andevery time.
oh yeah!!! well we will all quit and go on obamas true job creation....welfare and foodstamps...and maybe some crack
Remember, unemployment compensation is the best stimulus.
I know hat we on ZH should all pity the "poor ontapenoor" This article is bunkum. Make an attempt to twist your mind around a reply from Kevin Drum @ Mother Jones
http://www.motherjones.com/kevin-drum/2010/10/revisiting-mcdonalds
I rarely post and won't return to this thread.
I went to the link, the author wrote: "Under ACA, the vast majority of McDonald's workers will get genuine health insurance that's either free or no more costly than even the laughable micro-med option."
This demonstrates the imbecility of the author. First, I wish I did not have to state this, but health care and health insurance IS NEVER FREE. Some one pays for it. The question is who pays, and what do they have to pay for.
Second the health insurance mandated by the ACA will cost at least $1,000 per month for a family plan, substantially more than MCD's micro-med option. So, MCD's has the option of either drastically expanding medical insurance costs, and becoming unprofitable, or dropping coverage alltogether. Either way, the employees lose their health insurance coverage eventually.
That is the reality of the Obamacare.
With all due respect Sir Robin I gotta tell you that MCD is doing pretty well these days @ 85 B market cap up to 85/share form 12/share just a decade ago. I'm fairly certain that the board is also partying all the way to the bank and if they can't afford a little extra skim from the cream to the people that helped make them rich I kinda think they might be a little greedy.
Well, maybe it's different for Wal-Mart?..umm, eh...nope.
MCD stock price has fallen 16% YTD, and a p/e of almost 16 is based on forward earnings that are now failing to materialize. Third quarter earnings declined and same store sales are now negative. Market cap tells you nothing about a business except that the sheep are buying the hype.
The only time I ever go into a McD's is when I'm on the road and looking for coffee. But I have to say that paying four bucks for a plain chicken sandwich with no drink, no fries, no nothing, is probably not very appealing to people with little money and a 29 hour/wk job making $8.50 an hour at WMT.
Ah, but you CAN buy a McDouble, a Spicy McChicken sandwich, 3 cookies, and a large soda for 4 bucks plus tax. Trade out a sandwich and buy a small fries or ice cream cone, add 29 cents. Now THAT's a value meal!
Regards
Anytime I see "will work for food"I know a lie is to follow. Have you ever been responsible for a business ? Labor organizer more likely.
As a matter of fact I am-and employ several people non union but not min wage either.
I know what you mean about beggers on the side of the road holding signs, but you have to allow that there ARE those that truely want to work and feed their family without much hope for anything else anytime soon.. Ergo my icon.
It doesn't bother any of us that you rarely post. Your link is from 2010, has no specifics and no sources.
Actually I prefer his post to the nonsense this author has posted. ZH has a strong cadre of right wingers who can't see past the Faux News party line.
Red-wingers, rednecks, same thing. You Rommey lovers, you lost big time! Fuck you!
San,
I like the Darden restaurants available to me--no need to rant, unless you happen to be one of the unfortunate 185,000 employees. So, I decided to multiply $2000 by 185,000, the number of employees, just to see what ACA forces. $370 million dollars per year!!!!! And that's for doing nothing. Compare that number to what they pay in med bennies now, and we'll know what path they take. The fact that franchisees may yet be lumped together by the tax mongers is frightening, indeed.
The best workaround I see for workers is to carry two 20-29 hour per week jobs. Perhaps a market for 49-employee companies that specialize in managing job-sharing opportunities will become a going concern. I wonder if the law allows splitting bennies for one employee between two occupants of the job slot. It has been an option to now. II wonder if ACA kills that strategy as well.
Nothing like a look-back provision to accelerate a deadly process! I wonder how many people will die because of ACA?
Regards
Everybody lost big.The country is bankrupt.
Enjoy your temporary food stamps,medicare ,and Obummercare.
I cannot see how any of those programs can exist much longer.
You will soon see how the Govt. will take care of you ,or do you think
those billion rounds the DHS bought were for target practice ?
Useful idiots is the phrase I believe.Enjoy.
I'm not sure what Ilene said that was so incorrect. She was (sorry) quite fair and balanced (LOL). I just wish, when a poster dismisses an articl as "nonsense" they'd at least give a reason instead of blathering about Faux News. Using that term is so intellectually shallow and such a cliche.
The low-wage Walmart/franchiser interests are lining up on one side of the field with the insurance racketeers lined up on the other side. Instead of clubs, they have their employees to use as weapons to bludgeon each other ... (bludgeon the employees).
Something has to give, the employees are the businesses' customers.
Something has to give part deux: the prob with the whole Obamalamacare is the absence of cost controls or any way to opt out ... and thereby put pressure on the two warring groups.
The government won't call out the fast-food bosses about the blubber-inducing garbage they offer the public. There is no limit to the poison found in the food ... which makes the people sick and needful of care in the first place!
If you think through the entire bit of cynical business ... the outcome is Revolution: burning the District of Columbia to the ground and hanging all the special interest 'friends'.
DC would be a good start,but only a start.
+1. Lighters for Liberty. Flick your Bic for Freedom.
Good riddance.
If you cannot learn from this site ,you're not welcome.
Go back to your doctrinaire sites, enjoy your misery..
this site is a fucking big echo chamber
echo chamber
What? Do you only want posts and posters that mirror your own narrow opinions? God forbid you should be exposed to something outside your comfort zone. And by the way, who died and made you moderator? Shame on you. Did you even read the Mother Jones article?
Yes I did.
I visit many different sites on a regular basis.
Just as the guy who sweeps the floor in a business can usually
tell you more about whats going on, even if he doesn't understand the
most basic concept of how its made.Sometimes there are gems to be found.
Its called having an open mind.Try it sometime.
Don't worry we can't offend them. They're not coming back to this thread or did they?
From a European perspective - for the few of us who are knowledgeable - the Obamacare system is absolutely crazy.
Tens of millions of Americans will still be without insurance
Millions of Americans could lose both insurance and working hours or their entire jobs
Costs of US health care and insurance are spiralling out of control and beyond reach of ordinary people
Yet most Europeans are fooled by the propaganda in major media ... Most Europeans think, 'That Obama is a good guy because he is finally giving all Americans health care' ... Ha! ... Hard to explain to Europeans how it is all a big lie and fraud there in the USA
But most Americans are fooled in a different way ... Americans do not realise that you can have health care for everybody - like we have in north-west Continental Europe ... and it can be cheap and work very well, with very little delay or waiting time.
It is not even necessarily 'socialised medicine'. Here in Belgium, we have private hospitals and doctors, but it is mandatory to have health insurance, which is quite cheap because we do not have criminal corporate rape-artists running health care here. Our low-income people get the same insurance essentially free, and it costs very little for middle class or wealthy people. Our whole system works brilliantly and people are free to select their own doctors and hospitals, no one goes broke here getting medical care. But Americans seem to have no clue this is possible.
May God put an end to the American nightmare.
It is unfair to compare the European and American populations and ask why health care differs. We've been to Europe numerous times and Americans can be identified instantly by their enormous asses, extended bellies and panting waddle. In the US this epidemic is increasingly consuming both money and time. My cousin, a GP, says at least a third of his patient's problems are due to obesity. Europe has escaped this problem until now but when it happens, it too will shift funds away from standard care.
Paradoxically, US medicine is (by far) the best. The sheer volume of patents, inventions, drugs and research is the envy of the world. If you are seriously ill, you do not want to be in much of Europe. A friend on a cruise got sick near London and swore if he ever got out, he'd never return. Horrible care, medieval facilities and "lots" of on the job training that seemed to include the "real" doctors - most of whom were not native.
Judging by the knee-jerk junkiing, the truth hurts.
"you can have health care for everybody - like we have in north-west Continental Europe".
Yeh just like they have had in Greece, and Spain.
Why do you think European economies are imploding? Your cheap, free, health care will soon be going the way of that of Greece and Spain.
This is what happens when the oligarchs own the media. Never was there any serious debate in the U.S. about having a single payer system, yet Obamacare is called "socialist." It's a fucking joke. The American public still has no idea what was foisted upon them by the industry or that there is a completely different alternative no one (save a few fringe players) is even talking about.
Single payer is THE answer, too bad most "Merkans don't even know what it is. And too bad it was off the table on Day 1 with Obomba
Obamacare is a slow motion train wreck that is set in concrete for the next 4 years. The law cannot be changed even one tiny bit as long as divided government persists. This guarantees that the 2016 election will be about a single issue - How will the USA pay for health care/ sick care?
You don't get it! The whole point of ACA is to spread the cost around and healthcare costs start to come down. Hope it works! If is does'nt, who gives a fuck! We'll pay for it like EVERYTHING ELSE. Print more money..................
This is indeed a stimulating article. It makes sense that this effect will happen...but this could be a good thing.
Yes there will be some movement in the restaurant industry but I say To all those chain restaurants that ruined numerous local fare...eat it!
Think of the positive side. Cool if this $2000 tax on corporate restaurants, per employee, made them unable to compete. They'd go ass up and their stockholders might actually need to get a job.
And there would be plenty of them when locally-owned restaurants sprout up and take their place.
It's like what happens after a forest fire. All the dormant seeds go off now that the old growth sun suckers are gone.
Local establishments generally treat their employees better and could easily keep under 50 employees.
We all know things aren't working the way it is. These foodsters aren't selling food any cheaper than a local shop could produce. They don't really care about their employees and they sure don't give a shit about the local community. They only care about the blood-profits they take out of town.
Getting rid of these (local blood) sucking corporate chains is actually what this country needs..
Make those foodsters pay our new corporate surcharge...I mean health care tax.
A chance (and way) to tax the corps...I say Bring It On
SomebodySpecial - Very nice thought exercise. Taking the other side of the story. +1
"And there would be plenty of them when locally-owned restaurants sprout up and take their place. "
somebody: you been too long in gov schools..you think small local co's can comply with this added tax and regulations- who do you think is going to fill out the new paperwork each year on top of all the other regs??
all business is going to suffer and fewer new business ventures will be started as this might be the straw the breaks anyone who is thinking of going into business..try starting a business and see the mountain of paperwork and regs and legal and accounting expense waiting for you.
how did you find your way to ZH?? too stupid to live is too kind for the likes of you.
It is called creative destruction and it is not taught in schools. Strumpeter is credited for the term.
Did someone piss in your Cheerios this morning?
My opinion is that this is about keeping the bigs big and the small out of business. You cannot dismiss the other side of these arguments.
Fancy chains like Olive Garden, Paparazzi, etc. make tens of thousands per location in revenue every night. $2000 per year per employee is a joke, and is DRASTICALLY cheaper than a year of insurance, not merely possibly cheaper. They will simply squeeze the money from employees whether by cutting their hours or cutting their pay, anyway. Obamacare is an unmitigated disaster. Add to the thousand different reasons not to vote for that shithead Romney: that he wasn't going to end Robomneycare outright, but simply meddle in the details slightly.
Amazing how many economic illiterates comment on ZH.
Graduates of the school of Obummer econimics.
Revenue does not equate to income for a company like it does to an individual.
You obviously have absolutely no clue what epenses and overheads have to
come out of that gross revenue.Net margins in these types of operations is
extremely small.$2k a year per employee will wipe out ALL that net profit, and some.
They will close their doors as the consumer is in no state to pay more.
old poor rich is that way because he thinks in very primative programed ways..if making money in retail is so easy big mouth- go do it.
Then make sure that there is a penalty for this approach - bring in the anti-structuring laws (from the banking world) to solve the Darden Problem.
The avoidance by structuring approach wont work when the law is aware and penalizes it.
Hasn’t our president been saying since 2008…“Job creation is my #1 priority”? PPACA is a job killer.
The businesses were free to take other, non-adversarial action at any time. The government doesn't own that business and didn't make any specific or implied direction.
The problem is that businesses are all but doing everything to invite government action against them on behalf of the workers. The post-election weaponization of HR/Personnel by business is only going to make it worse.
HR has been openly weaponized since Jimmy Carter, the democrat (party of slavery) who won a Nobel peace prize for viciously exterminating the people of East Timor.
They will close the doors voluntarily or by bankruptcy.
This may well be the intended consequence of a Cloward Piven type
strategy..Intended or unintended,the result will be the same;
More capital filght fron the USA ,and fewer , and fewer jobs,even
piss poor paying ones.
FORWARD