Walmart and Strategic Health Care

Wal-mart came out in favor of an “employer mandate” approach to health insurance, in which employers are forced to purchase health care for their employees. Now I’m more of a public option kind of guy. I didn’t vote for Obama so Wal-mart lawyers could go ahead and try and stack the deck for part-time high-turnover labor which will be exempted, leading to incentives to make labor even more transient than it already is, which is almost certainly what they’ll do here.

However the general consensus among internet blogs is that Walmart is using this to bully and squeeze their competition by creating barriers to entry that other businesses can’t afford as well as Walmart. This has a few flavors. One is that it is strategic competition between the big guys:

But it all became clear when the lobbyist explained the reason for Wal-Mart’s position: “Target’s health-benefits costs are lower.”

I have no idea what Target’s or Wal-Mart’s health-benefits costs are. Let’s say that Target spends $5,000 per worker on health benefits and Wal-Mart spends $10,000. An employer mandate that requires both retail giants to spend $9,000 per worker would have no effect on Wal-Mart. But it would cripple one of Wal-Mart’s chief competitors.

I highly doubt that story. That is predicted on Wal-mart giving great health benefits, both better than Target and/or less cost-efficient, which I know of no evidence of. Wal-mart and its competitors work hard to keep good data and numbers here from getting to the public, but we have this:

In a state analysis, the Massachusetts Department of Health and Human Services found that in 2003, Wal-Mart covered only 52% of total health care premium costs compared to K-Mart which covered 66%, Target which covered 68%, and Sears which covered 80% [“Employers Who Have 50 or More Employees Using Public Health Assistance,” Division of Health Care Finance and Policy, 2/2005]

And we have Target Transfers More Health Costs To Its Employees
(2006, WSJ) : “Target Corp. has changed its health-care plan so that employees are responsible for more of the costs and it is considering entirely eliminating its traditional health insurance…” As people noted, this is the same approach Wal-mart had at the time. Target was trying to get its health care costs down to the level of Wal-mart.

Team Rortybomb's last trip to Target;  Wine cubes and a swiffer vac.  I am a functioning adult, fyi.

Team Rortybomb's last trip to Target; Wine cubes and a swiffer vac. I am a functioning adult, fyi.

So let’s think of this as a prisoner’s dilemma. Target and Wal-mart have been engaged in a competition to reduce health care as much as possible. However Wal-mart is the one that is getting zinged for it. So it is like the PD with the special condition that the outside Mob only observes one person, Wal-mart, confessing. Note this representative story:

But somehow, perhaps because of its relative small size compared to Wal-Mart, Target has largely avoided negative publicity.

In fact, it benefits from anti-Wal-Mart anger, a fact that isn’t lost on company officials.

Media reports describe Target executives booing and hissing at a Wal-Mart logo during sales meetings and calling it the “evil empire.” While communities often fight tooth and nail against new Wal-Marts, residents usually welcome Targets, as local governments offer the corporation generous tax breaks and subsidies to locate in their area.

That is what happened last fall in West St. Paul, Minn., where a new Target reaped $731,000 in local tax breaks, while 30 miles away, Ham Lake was fighting Wal-Mart’s efforts to open a superstore. The Target in downtown Minneapolis received $68 million in public subsidies, according to the Star Tribune newspaper. In Chicago in 2004, a city-wide coalition formed to oppose two proposed Wal-Marts and the fight roiled the city council for months. Meanwhile at least three new Target stores have been built in the metro area in the last several years.

Picture your normal prisoner’s dilemma, where both Target and Wal-mart are playing the “poor health benefits” card, but only Wal-mart is being observed and penalized by the government for it. (Rationally too; these costs are just being transfered over to the government to handle.) It’s easy to see Wal-mart wanting to change its strategy, but that would only lead to it getting nailed by Target even worse. So it wants a mechanism in which they both have to move at the same time. I suspect this is what is going on.

In case this seems exaggerated, there are several Wal-mart specific lawsuits going on across the country. Rather than deal with 50 angry state governments, or hundreds of angry city counsels, all stabbing little bits off the current strategy, why not simply deal with it for once at the federal level and get to the other equilibrium?

Economies of Scale

The government does all kinds of things to benefit Wal-mart over small competitors. As anarcho-capitalist Kevin Carson pointed out, if we didn’t publically build highways there would be no Wal-mart business model. That initial start-up cost of Wal-mart, having a national transportation grid, is paid for by small businesses and ordinary taxpayers. The question is how much the tradeoffs are worth these hidden benefits, and how great the benefits are?

People talk about competitiveness of small businesses, but what this really means in this context is competing with providing less health care. Or an ‘optimal’ amount of health care if you will. The major way to innovate here is to make people think you are giving them more health care than you will actually give them. If your goal is to get more people covered than what the current market, with its adverse selections and moral hazards, provides, which is my goal, then are going to be winners and losers. But by how much? I’m curious to see better numbers on this.

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3 Responses to Walmart and Strategic Health Care

  1. karl smith says:

    Word is that Target, used to at least, have the same health care plan up and down the line – newly hired associates all the way to the CEO.

  2. Mike says:

    If true, and generalizable to other big-box retailers, that would be motive right there. They eat a lot of bad publicity, small-grass movement, and local law efforts based on something their major competitors do likely do, and something that they can’t move away from without making themselves worse off compared to the rivals (and on Wall Street, it’s all zero-sum), this move makes sense.

    I’m always fascinated by I/O economics.

  3. anne says:

    What I find fascinating about tying “reform” of health care to the employer mandate is that it institutionalizes one of the most troubling aspects of health care – it is a benefit tied solely to your employer.

    I am a freelancer, married to a freelancer – we pay handsomely for health insurance as a result. Because I have a high deductible – to keep premiums as low as possible – I know exactly how much each doctor’s visit costs. And I know that pretty much every bill has an error (never in my favor – funny how that is…) that I will need to set aside time to resolve.

    At a time when employees are being shed from jobs by the hundreds of thousands every month, it makes absolutely no sense to establish a mandate that chains health care benefits to the employer-provided system. Not only does it mean health insurance is lost once a job is lost, it also continues to allow the majority of people to have absolutely no idea what their health care really costs, outside of the $20 co-pay they fork over at the doc’s office.

    I read Wal-Mart’s letter and agree with some of what they say: “…payment reform and efficiency initiatives must be at the center of health care reform….health care reform without controlling costs is no reform at all.”

    I see an employer mandate creating a lot more red tape and administrative tasks that will end up costing more money – but I do not see this mandate being effective in controlling costs. The more we move our focus away from that vital topic, the less likely health care in America will be reformed.

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