The New War Over Wal-Mart

Wal-Mart has made its slogan (“Always Low Prices. Always.”) into a blood oath. The company has grown to prominence through legendary cost-saving acumen and a relentless adherence to low prices, which it maintains by rigid cost control. Today, Wal-Mart employs more people—1.7 million—than any other private employer, and by this measure is not just the largest company in the world but the largest company in the history of the world.

With size comes power. Several years ago, economists coined the term “Wal-Mart effect” to describe the consequences, large and small, that flow from the company’s unending war on prices. The Wal-Mart effect drives down consumer prices so powerfully that it helps check U.S. inflation. But it has hastened the outsourcing of U.S. manufacturing jobs to cheaper countries, and, some argue, it also drives down wages and benefits.

Big business in America is both admired and instinctively suspected, and the biggest business of all is a natural magnet for criticism. The overwhelming focus lately has been its health-care policy, which covers fewer than half its workers and leaves the government to care for tens of thousands of its em-ployees and their children through programs, like Medicaid, that were created to help poor people. Some states have begun to retaliate. Maryland passed a bill in January forcing any company with more than 10,000 workers to spend at least 8 percent of its payroll on employee health care—a law aimed squarely at Wal-Mart, the only company that qualifies. Similar “fair share” bills are pending or planned in thirty states. Especially in the nation’s capital, there’s a growing sense that after years of frustration the Lilliputians are finally tying down their man.

One of the major forces opposing Wal-Mart is organized labor. The United Food and Commercial Workers International Union has long wanted to organize Wal-Mart’s stores. Last year, it succeeded at a Canadian Wal-Mart, which the company immediately shut down. “If Wal-Mart doesn’t change its ways, we’ll turn it into Big Tobacco,” Chris Kofinis, communications director for the UFCW-funded Wake Up Wal-Mart, told me recently.

The company’s other main antagonist, Wal-Mart Watch, is also backed by labor, though at first glance its motivations are opaque. Wal-Mart Watch is heavily financed by the Service Employees International Union, whose president, Andy Stern, says he has no intention of organizing Wal-Mart. Not long after the Maryland law passed, I asked Stern, who helped push it, what he was up to. He smiled. A social service worker turned union organizer, Stern at fifty-five already has a full head of white hair. But he hardly resembles the stereotypical, cigar-chomping union boss. Fit and energetic, he speaks with the assuredness and big-picture worldview of a motivational speaker, an effect amplified by his bright purple shirt (purple is SEIU’s official color). The sleek purple chairs and frosted glass in the union’s Washington offices lend an air of Scandinavian minimalism and further the sense of calculated nonconformity. “Why go after Wal-Mart?” Stern replied. “Because Wal-Mart is the GM of our era. Whatever business practices they adopt have huge influence across other American businesses.”

Stern has something much grander in mind even than unionizing Wal-Mart. “Ford wasn’t created to be a health-care provider; it was created to produce cars,” Stern says. “My goal is to get Wal-Mart’s leadership out there in traffic and holler, ‘We can no longer compete in the global economy when health care is factored into the cost of our products.’ If Wal-Mart’s CEO, Lee Scott, were to come out and say, ‘We need a national health-care system that works for everyone,’ then it’s a whole new ball game.”

Stern says that he first contemplated trying to get Wal-Mart to change its practices in 2003, after the company announced plans to open forty Supercenters in California. Local grocery chains reacted by proposing to cut wages and health benefits in a pre- emptive bid to remain competitive, some even locking out their employees. The result was a massive strike. “When you saw that, you realized what an incredible effect this one company has on a market,” Stern said. It was a classic example of the Wal-Mart effect—and it didn’t stop there. When the supermarkets did in fact cut their health-care plans, the janitorial companies whose workers SEIU represents complained that they, too, could no longer remain competitive. “They came to us and said, ‘We’re not as big as the supermarket chains, and if they can’t afford to pay for health care, how can we be expected to?’” Stern said.

After the 2004 election, SEIU joined with environmentalists, women’s groups, and community activists to form Wal-Mart Watch, hiring seasoned Democratic operatives and jumping into the public debate. The new group focused much of its efforts on the company’s health-care programs, with considerable success. Wal-Mart, despite investing heavily in public relations and making slight improvements in its plans, was unable to stop the Maryland law or quiet the growing chorus of critics.

The company appears to have no clear idea of how to stop the fallout. Some Wall Street analysts believe the “headline risk” associated with the negative publicity is one reason for Wal-Mart’s sagging stock price. The company topped Fortune’s most-admired list in 2003 and 2004—but slipped to twelfth place this year.

Stern seemed to take a Bart Simpson– like delight at the spectacle of a flummoxed symbol of authority whose current chaos he’d helped devise. Spending around $5 million annually, Wal-Mart Watch has pushed anti-Wal-Mart laws in dozens of states, leaked damaging internal documents, and helped make the company known as much for its exploitation of government health plans as for its business acumen. Over the last year, and very much against its will, Wal-Mart has been moved to the center of the national debate over health care, and Stern has drawn one step closer to what he’s really after.

In Stern’s thinking, if the world’s largest company could be coaxed or bullied into publicly favoring a national health-care policy, here’s how things might play out: a rush of other companies already beset by health-care costs and accustomed to mimicking Wal-Mart would fall in line, putting business on the same side as labor. Governors burdened with soaring Medicaid costs might also join in. The pressure on the federal government would be overwhelming. Stern, in other words, is seeking to turn the Wal-Mart effect to his own ends, harnessing it to transform health-care policy just as it routinely transforms business policy. It’s an audacious plan.

In late February, Wal-Mart CEO Lee Scott gave a speech to the National Governors Association in Washington, D.C. The group’s chairman this year, Arkansas Governor Mike Huckabee, chose health care as the focus of the annual meeting. (Huckabee is an able governor and possible Republican presidential nominee, but he’s most famous for losing a hundred pounds and writing a diet book, Quit Digging Your Grave With a Knife and Fork, and he extols the virtues of healthy living just about any time he can.) In one sense Huckabee’s invitation to Scott was natural: Wal-Mart is based in Bentonville, Arkansas. But it promised a certain drama, too, because fewer than half of Wal-Mart’s American workers are covered through the company’s health plan.

Scott’s audience was also significant. Governors are caught in the middle of Wal-Mart’s health-care crisis. The company is believed to be the largest employer in at least two dozen states, so its well-being is important to them. But in many of those states, Wal-Mart workers correspondingly top the list of Medicaid recipients. The program itself has exploded, adding 8 million Americans between 2000 and 2004 and putting enormous strain on state budgets, which fund about 40 percent of Medicaid. What’s especially troubling is that so many new recipients aren’t jobless—their employers simply don’t offer health care, or not cheaply enough to keep them off public assistance. Many of these people work for Wal-Mart.

Scott got right to the point. “America is facing some pretty tough challenges these days,” he stated. “We know our benefits are not perfect.” His goal before the governors was to slow the onrushing storm directed at Wal-Mart’s health-care coverage. For maximum effect the press had been notified ahead of time that he had come bearing a peace offering of sorts—his speech would announce improvements in the company’s benefits.

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?