Washington June 2006

The New War Over Wal-Mart

The mounting attacks on the world’s largest company could change American business—and transform the health-care system

These turned out to be relatively minor concessions: reducing the waiting period for part-time employees to qualify for benefits, broadening availability of Wal-Mart’s cheapest plan, and allowing children of part-timers to become eligible with their parents. Though constructive, such increments won’t solve the larger problem, as Scott seemed to understand. Wal-Mart’s CEO is fifty-seven and slightly doughy, with the bland, unassuming aspect of a middle manager. But when he finished his pitch, he became soberly defiant: “We cannot do it alone. No business can. No business should have to. The fact is the soaring cost of health care in America cannot be sustained over the long term by any business that offers health benefits to its employees.” This is exactly Andy Stern’s position.

Scott made clear that he had not come to surrender, to unions or state governments. “I believe we’re seeing a little too much politics,” he said. Bills like Maryland’s “may score short-term political points, but they won’t solve America’s health-care challenges.” He angrily denounced them as “horrible public policy.” Clearly, Stern and his fellow critics have Wal-Mart seeing purple.

For all Wal-Mart’s size, its business model leaves it more vulnerable than most companies to the rising cost of health care. Its key to consistently outcompeting everyone else on price is low margins and high volume. Wal-Mart doesn’t make a lot of money on any individual sale; it makes huge multiples of small profits on a torrent of sales.

In 2005, Wal-Mart earned profits of $11.2 billion on sales of $312.4 billion—a hefty sum, to be sure, but a startlingly thin margin of less than four cents per sales dollar—about $6,000 in profit per employee. (Exxon Mobile, by comparison, earned around $300,000.) That’s fine if you can keep holding down costs, as Wal-Mart goes to incredible lengths to do. (Among the exquisite revelations in Charles Fishman’s recent book, The Wal-Mart Effect, is the company’s policy of reimbursing meal tips only up to 10 percent—there goes its image with one big sector of the American workforce!) But one cost that is well outside its formidable power to control is health care. At Wal-Mart that outlay has risen 19 percent over each of the last three years.

Just how big a problem this poses was brought to light last October, when someone leaked an internal memo written by the company’s executive vice president for benefits, Susan Chambers, to Wal-Mart Watch. The Chambers memo reported that the company’s cost of benefits was outpacing its profits. “Growth in benefits is unsustainable,” it warned, going on to recommend fourteen measures of containment: nine “limited-risk initiatives” and five “bold steps.” These ranged from such benign ideas as giving employees discounts on healthy foods to highly controversial ones like thinning the number of unhealthy (and thus more expensive) workers by adding physical tasks, like collecting carts, to jobs that currently don’t require them.

The uproar that ensued focused on the practice of discriminating against unhealthy workers—a potential violation of federal law. But the truly startling thing is the memo’s estimate of how little even the most extreme “steps” could accomplish. Enact every proposal, and Wal-Mart will still merely maintain its current ratio of benefit costs to profits for five more years. That’s it.

The significance of the Chambers memo isn’t that a major company is plotting to scale back health-care coverage; it’s that employer health-care costs are growing so sharply that the apotheosis of American capitalism is frantically digging in its heels merely to slow their rate of growth. The alarming implication for a company whose greatness rests upon squeezing a few pennies out of every dollar in sales is a microcosm of the health-care issues beating against American business. As employers are hit with spiraling benefits bills, economic rationality leads them to want to dump their most costly employees. This pushes those most in need of care into the ranks of the uninsured or onto the dole.

Wal-Mart has little cushion to absorb increased costs, which is why laws like Maryland’s, which force it to spend more on health care, are such a threat. Stern’s gamble is that Wal-Mart won’t be able to maintain its profit margin in the face of sustained political and economic pressure, and that sooner or later this reality will force the company in the direction he wants it to go.

There’s something shrewd, and at the same time deeply cynical, about the critics’ moves against Wal-Mart. Stern shows no qualms about supporting “fair share” laws like Maryland’s, even if they slow the arrival of a national plan, operating as they do through the current employer-based system he says is broken—and do so by singling out one company and punishing it for shortcomings that exist across the entire retail sector. “Fair share is not the ultimate answer to this problem,” Stern concedes. “But it’s the difference between tactical and strategic. There will be state-based efforts like Maryland’s to shore up the present health-care system or there’s going to be a national effort to convert from it.”

What the war against Wal-Mart tends to gloss over is that it’s not at all clear that the company behaves any worse than its competitors. When it comes to payroll and benefits, Wal-Mart’s median hourly wage pretty much tracks the national median wage for general merchandise retail jobs. And its health-care benefits are a good deal more accessible, if still not entirely affordable, than those of many of its competitors. Target, for instance—unlike Wal-Mart, to which it is often compared—does not offer benefits to part-timers. A recent report on the company by Jason Furman, a visiting scholar at New York University and a former Clinton health-care official, dubbed Wal-Mart a “progressive success story,” noting that “more Wal-Mart employees are eligible for health insurance than in the retail sector as a whole and even slightly more than the nationwide total.”

Looked at from another angle, the most damning statistic deployed against Wal-Mart—that its workers and their families form the largest company group on the Medicaid rolls in so many states—is a function of Wal-Mart’s size more than mean-spirited company policy. In percentage terms, rather than raw numbers, the company’s workers and their children are less likely to draw Medicaid coverage than their counterparts elsewhere in the retail sector. Among retailers, Wal-Mart is actually one of the better providers of health care—which shows how terrible the problem has become.

There is every technical reason why Wal-Mart should support universal health care and shift the burden onto the only entity in the country bigger than itself: the federal government. Lee Scott’s speech to the governors very nearly went this far. What lies at the bottom of Wal-Mart’s angry resistance to what is in its own self-interest are matters of corporate culture that extend to most big businesses. First, corporations typically don’t think in broad public-policy terms—particularly not Wal-Mart, which until recently was a regional company so reverent of its small-town heritage that most of its executives started as hourly workers. Second, business in general, and Wal-Mart in particular, reflexively distrusts anything that resembles “Democratic” policy or is favored by labor unions, like universal care. This is not an unreasonable reaction when the chief advocate is a union president busily promoting laws aimed at boosting your company’s health-care spending. Third, businesses are inherently suspicious of government—in this case fearful that bargaining over a national system could leave them worse off than they are now, by saddling them with new spending mandates. This concern is reinforced by their Republican allies, who are ideologically opposed to government-run health care.

Wal-Mart’s health-care problem, and the nation’s, is partly the result of historical accident. During World War II, a labor shortage forced U.S. employers to compete for workers. Wage controls at the time prevented them from offering higher salaries. So health and pension benefits, which were unregulated, became a means of competing for employees. This turned out to be popular with workers and businesses alike, because employer-provided health benefits, while unquestionably valuable, are not part of a worker’s taxable income; and they gave employers a justification for paying more moderate wages.

For a long time, health benefits were not a major expense. But as health-care costs have spiraled upward, they’ve become a significant part of the payroll—more and more, the most significant part. Stern’s real reason for pursuing national health care is that he’s every bit as hurt by soaring costs as business is: “As a union we are steadily trading wages for health care.”

During the last presidential campaign, a couple of hard-hit automakers indicated privately that they liked John Kerry’s health-care plan, recognizing how significantly it would reduce their burden. Under Kerry’s plan, the government would have helped pay catastrophic medical expenses—greatly relieving businesses of the fastest-growing benefit cost, the one driving Wal-Mart and others to try to dump unhealthy workers. “But none of [the automakers] would say that publicly,” says Furman, who worked on the Kerry campaign. “None of them wanted to get involved in the political debate.”

That won’t be true forever. The sheer economics of the health-care crisis for business is forcing Wal-Mart and other large companies to balance reflexive opposition to government with enlightened self-interest. What makes Stern’s idea so intriguing is that this is no typical union shakedown: it is in Wal-Mart’s own financial interest, as well as Stern’s. As much as Lee Scott must dislike his critics, it’s hard to dispute much of what they’re arguing—indeed, Scott sounded the same themes in his speech to the governors.

And what Scott is saying lately is changing the debate. “The controversy over Wal-Mart is framing the failure of the health-care system in a very public way,” says Chris Jennings, a former senior adviser to Bill Clinton and a health-care-policy consultant. “And not just failing workers but businesses, too.”

Barring a major terrorist attack, health care could be the biggest domestic issue in 2008, and a vehicle for any number of presidential hopefuls. It would be a natural for a Republican governor and economic moderate like Mike Huckabee, a dark horse who must distinguish himself. In Massachusetts, Republican Governor Mitt Romney just agreed to a bill creating the first mandatory statewide health plan. The most politically astute Democrat has already taken a provocative step: Hillary Clinton recently brought in as her legislative director Laurie Rubiner, who helped write the late Republican Senator John Chafee’s plan for universal coverage.

A national health-care plan need not be a “single-payer” system in which government covers all costs—most likely it won’t. Stern suggests something modeled after the health benefits plan for federal employees. Most of the Democrats who sought the nomination in 2004 offered plans based on expanding existing programs like Medicaid. Rubiner has proposed a system modeled after auto insurance: everyone would be required by law to have health insurance, but government would subsidize the poor. (The Massachusetts plan works like this.) None of these approaches would be the dreaded “socialized” medicine—they would be organized by government but operate through private doctors and health plans. Employers would still contribute something toward health care, but their contribution would go through the government, and in exchange they would at last receive a measure of cost predictability.

Still, Washington’s hypercautious culture seems unlikely to produce a solution anytime soon. The United States currently spends 16 percent of its gross domestic product on health care—far more than any other country. Who better to initiate the mother of all cost-saving efficiencies than Wal-Mart?

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Joshua Green is a senior editor at The Atlantic.

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