Red Lobster’s Obamacare fail: Why ditching health benefits is really hard

December 6, 2012

In the world of health policy, Darden Restaurants may become a cautionary tale. The company, which owns Olive Garden and Red Lobster, recently announced plans to test limiting workers' hours, in order to dodge the health-law's mandate that employers with more than 50 workers offer coverage to full-time employees. 


Seafood platter with a side of health benefits, please.

It didn't exactly go so well: The company revised its earnings projections downward after seeing a backlash to the decision. Thursday, Darden announced it had completed the test period, deciding it would not move forward with the limited-hours model.

"We have always had a significant number of full-time employees and they are integral to our success," Darden CEO Clarence Otis said in a statement. "The data we have collected during our test around guest satisfaction and employee engagement has only reinforced this."

Darden's foray into limiting insurance coverage, and ensuing retreat, speaks to something I've heard from a lot of health-policy experts contemplating how employers will navigate the health-law's mandate. Nobody wants to be first to drop coverage, they'll usually say. If they're going to drop coverage, they want to be part of a big wave, not a trailblazer.

Employers could certainly save a lot if they dropped health insurance: Congressional Republicans put out a report earlier this year estimating that the largest 100 companies could save $422 billion over the next decade if they declined to offer insurance.

The math is pretty simple: The average family insurance plan costs about $15,000. The penalty for not providing coverage is $2,000. Drop insurance for just one employee, and you've saved yourself about $13,000. Companies would seem almost foolish, in this light, to keep offering benefits.

But here's another way to think about it: Right now, employers spend $15,000 on an employee’s health benefits when they could be spending…absolutely nothing. No law currently requires employers to offer health insurance. But the vast majority do so because it serves their interests: They can remain competitive when recruiting employees and keep their workforce healthier and more productive. It also helps a lot that health benefits are essentially tax-free compensation, giving employers yet another incentive to deliver workers' wages in the form of insurance benefits. 

This probably explains why a Towers-Watson survey of 512 large companies found exactly zero planning to drop insurance coverage.  

The calculus could, however, change if lots and lots of companies decide buying health insurance just isn't worth it. All of a sudden, providing health insurance becomes a competitive disadvantage, if you're throwing millions into a benefit package while competitors put those dollars elsewhere.

Darden tested the waters by being among the first companies to announce a shift away from employer-sponsored insurance. They then, essentially, retreated away from that decision after backlash. Their experience suggests that being first is just as difficult as health-policy experts have predicted.

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Neil Irwin · December 6, 2012