Battling rising premiums, a restaurateur considers cutting health insurance.
If you ask restaurant owner Matthew Prentice why his 14 restaurants and catering company are successful, he won't talk about his style of cuisine, fancy equipment, or choice of ingredients. Instead, he'll answer: "My reputation and my staff."
Prentice, president and owner of Unique Restaurant Corporation, has become Detroit's peerless culinary celebrity in part by attracting the best managers, waiters, busboys, and bartenders to work for him. The company, with $40 million in annual revenue, attracts such talent by providing excellent benefits. But with the auto industry slumping and health care costs soaring, Prentice recently found himself considering the once unthinkable: dropping employee health care coverage.
In an industry not known for generous benefits, Prentice has long stood out. He began providing health insurance 17 years ago, when he owned three restaurants, making the plan available to all full-timers, including hourly staff, as well as part-timers who had been with the company for three years and worked three shifts a week. According to the National Restaurant Association, 68% of full-service restaurants insure their salaried employees, but only 54% cover hourly workers.
Prentice's plan was a so-called self-insurance package run by the baby food maker Gerber. For a few bucks per employee per month, Prentice could tap into an HMO or PPO on Gerber's network. The costs were reasonable. If an employee had a baby and the hospital bill came to $8,000, Prentice paid about $3,000.
As the company grew, so did the buffet of benefits it offered. Prentice felt he needed top managers and staff because he couldn't be in three bistros at once. First, he added dental coverage; then, a prescription drug plan that covered the cost of drugs at 100%. A few years ago he began to pay a portion of his employees' child-care costs. And these programs were on top of paid vacations and the company's 401(k).
As a result of Prentice's generosity, employees came to Unique and stayed. Seven of Prentice's first 15 workers, hired two decades ago, remain on the payroll. Such loyalty enabled Prentice to build the largest catering business in the state. While competitors relied on temp staff, he dispatched cultivated employees on catering gigs. For a long time, everyone was happy. "I never had health insurance until I started working for Matt," says Larry Arbour, a waiter.
Two years ago, the troubles started. After the September 11 terrorist attacks, revenue in the hospitality industry plummeted. Just as it began to return this year, a harsh winter set in. Prentice estimates that weekly receipts were off as much as 14% compared with last year. More recently, the Big Three auto companies have taken a hit. Thanks to all those factors, fewer people are throwing lavish catered events or dining out at all.
Meanwhile, Prentice's medical expenses were climbing 10-15% a year, and the prescription coverage plan alone had jumped from $3,000 a month to $9,000. Prentice was not the only one hit by rising costs. Nationwide, premiums for restaurants increased 23%, according to the National Restaurant Association.
Prentice also discovered that the employee loyalty he had worked so hard to inspire was a double-edged sword and was beginning to hurt his bottom line. When he began offering medical coverage, his workers were generally young, healthy, and cheap to insure. After more than two decades in business, however, many of Unique's employees had grown up with the company -- and so had their medical expenses. And then there was the sheer size of Unique's work force: 800 people.
After six months of ignoring the problem, Prentice realized he needed to act. He felt he had three options, none of them particularly savory. First, he could eliminate all health benefits. The idea was repellent, but he had to admit that many of his competitors didn't offer health insurance, especially to hourly staff. Second, he could try to find a cheaper plan that would cover less, perhaps only emergency insurance. Finally, he could pass along the rising cost to his employees, who might not be able to afford it. He wasn't sure how his staff would react, and he considered them his business's secret sauce. "I've been cutting where I can to try and make things work," says Prentice. "The last thing I wanted to do was entertain cutting any portion of health care."
In February, Prentice decided to drop the company's prescription drug plan. He offered to personally loan money for prescriptions during the two-month period prior to the open sign-up for Unique's new HMO plan, which provides some prescription coverage. He also decided to pass along some of his cost increases but only to his hourly employees. They must now pick up a third of their own costs: roughly $125 in monthly premiums, with a $500 deductible. Though only 200 of his 800 employees were affected, Prentice says it saves approximately $150,000 annually. "I should have made this decision a year ago," Prentice says. He adds that he hopes, some day, to restore these paid benefits.
Some employees have since elected to get coverage through their spouses or go on Medicare. Other workers who were double-insured also left the plan. Nobody has quit.
Candice Hancock, Prentice's office manager, says Unique's plan is still less expensive than Ford's, where her husband works. Still, Steven Pryde, an hourly manager and bartender, opted out of the plan, but said he held no grudge. "I would have been upset if he would have dropped it completely," he says. Adds Marie Lilly, Unique's corporate training coordinator: "A few people were frustrated, but with the market so depressed, a lot of people are just happy to still have a job." Prentice says that was his biggest motivator. "A lot of big companies here are in bankruptcy," he says. "This is how we won't end up as one of them."
Mark V. Pauly, Wharton School of Business economist specializing in health and medical issues.
Prentice's reaction is fairly mild in comparison to what I've seen, but I think a smarter thing to do in that situation is to reduce employee raises and keep the insurance as is. Raising the premium will likely result in employees dropping their insurance. While some will take their spouse's coverage, others might decide not to take any insurance at all. Generally, it's a really bad situation to have a person working for you without any health insurance if that person's health, productivity, and ability to show up for work are important to you. If you value these employees, and if they value the insurance, you shouldn't take it away or try to drive them away from it.
Judy Wicks, president of White Dog Enterprises, which owns and operates the White Dog Café in Philadelphia.
We pay about two-thirds of our employees' health care premiums as well, but we don't pay all of it. It just doesn't work out economically, because the restaurant business has low profit margins and is so labor intensive. A manufacturing plant, for example, could earn the same gross sales with a lot fewer employees than a restaurant. Making employees pay also makes everyone aware of the health care crisis in this country. As wealthy as the United States is, we can afford to provide health care for our citizens. We just don't care to. The answer is universal health care. If employers keep paying health care for their employees as if there's no problem, then no one has any incentive for political activism. So I think it's very important for the employees to share the pain and be aware of the exorbitant, rising cost. Once they have to pay a real portion, their attitude changes.
Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, a nonprofit that studies employee benefits, based in Washington, D.C.
First, I'd like to say that Prentice is still exceptional in continuing to do what he's doing. He's basically the kind of guy you'd want to work for. For business owners considering curtailing benefits, our studies show that employees have a strong desire for health insurance protection. Even if an employer changes the plan so employees must pay 100% of the premium, it still provides access to cheaper insurance, with fewer hassles than if they had to purchase it alone. One thing an employer might consider is catastrophic insurance, which can bring the premium down and provide some protection to employees in the event of catastrophic medical expenses. Another option is an Archer Medical Savings Account. It's a combined employer- and employee-funding approach that often enables employers to continue to provide good coverage at reduced cost.
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