Reference no: EM131497802

Question: Wal-Mart and Health Care Policy

On June 30, 2009, Wal-Mart executive vice president Leslie Dach went to the White House to deliver a letter to President Obama's Chief of Staff Rahm Emanuel in which the company announced its conditional support for mandatory health insurance provided by companies. The letter was signed by Wal-Mart CEO Mike Duke, Andrew W. Stern, president of the Service Employees International Union (SEIU), and John D. Podesta, who headed the Obama administration's transition team and was head of the Center for American Progress, a liberal policy organization. The letter stated, "We are for an employer mandate which is fair and broad in its coverage, but any alternative to an employer mandate should not create barriers to hiring entry level employees. We look forward to working with the Administration and Congress to develop a requirement that is both sensible and equitable. Support for a mandate also requires the strongest possible commitment to rein in health care costs. Guaranteeing cost containment is essential." The SEIU had been at war with Wal-Mart for years.72 It had attempted without success to organize Wal-Mart employees and, given its failure and its inability to get Congress to act, decided to conduct a private politics campaign against the company. In 2005 it provided $1 million to create and staff Wal-Mart Watch, an NGO that campaigned against the company for years. In 2006 Wal-Mart developed a new nonmarket strategy.

73 It had presaged its strategy in 2005 when it called on Congress to increase the minimum wage.74 It also broadened its health insurance offerings and reduced the waiting time before an employee became eligible. By 2009 53 percent of its employees were insured through the company, up from 46.2 percent 3 years earlier. The average for the retail industry was 45 percent. The company estimated that 94 percent of its employees had health insurance through the company, a spouse, parents, or Medicaid, which covered 36,000 of its 1.4 million employees. Then-CEO Lee Scott began meeting with Andrew Stern of the SEIU in late 2006, and gradually relations between the company and the union improved. The SEIU continued to fund Wal-Mart Watch, which relentlessly criticized the company, but the staff of the activist group decreased from 40 to 10 in 2009. Wal-Mart had opened a war room in 2005 to address the barrage of criticism it faced, but closed it 2 years later as it embarked on its new strategy. The company and the SEIU joined to call for affordable health care for all by 2012. One objective of Wal-Mart's new health insurance strategy was to obtain a seat at the table as the Obama administration, Congress, and various affected interest groups bargained over the configuration of a new health care policy. The pharmaceutical industry had initiated this strategy by pledging cost reductions of $80 billion over 10 years, and hospitals pledged cost reductions of $155 billion over 10 years. "Everybody is now trying to get their seat on the train," said Emanuel.75 In a scathing editorial the Wall Street Journal criticized Wal-Mart's support for an employer mandate and more generally for going along with the Obama administration's desire "to transfer the choices about [health care] coverage to government from consumers."

The Journal explained why businesses like Wal-Mart were participating, "Businesses are going along with this and other gambits in part because of a prisoners' dilemma. They're terrified of being shut out of the Democratic health negotiations lest they get stuck with the bill." The Journal more generally criticized big businesses for "trying to buy protection or some political reprieve .... Yet the political class is simply pocketing these concessions and demanding more, hastening the day when government controls most U.S. health dollars."76 The National Retail Federation (NRF), which represented 1.6 million retail establishments employing 24 million people and with sales of $4.6 trillion, was shocked by Mal-Mart's support for an employer mandate.77 Two weeks after the announcement the NRF swung into action. NRF CEO Tracy Mullin wrote to its members, "When Wal-Mart sent a letter to President Obama two weeks ago supporting government mandates on businesses as a part of reform, the retail industry was astonished. Seeing the company in lock-step with the unions on this issue was troubling to say the least. Although the move may provide a short-term public relations boost to Wal-Mart, it could have long-lasting, devastating consequences to retailers throughout the country.

This stunning turn of events left NRF with a decision to make. We could stand idly by and allow Wal-Mart to tip the scales on the health care debate, cower and release an innocuous statement that would neither support nor condemn their decision, or stand up for all retailers and come out swinging."78 The NRF sent a letter to the chair and ranking minority member of the House Ways and Means Committee expressing strong opposition to the House health care reform bill. The letter stated, "Employer mandates of any kind amount to a tax on jobs. We can think of few more dangerous steps to take in the middle of our present recession."79 NRF executives and lobbyists intensified their efforts in Washington, speaking with members of Congress about the health care reform alternatives under consideration. NRF executives also worked the media, appearing on television news shows and meeting with reporters. Neil Trautwein of the NRF said, "We have been one of the foremost opponents to an employer mandate. We are surprised and disappointed by Wal-Mart's choice to embrace and employer mandate in exchange for a promise of cost savings."80 He added that an employer mandate was "the single most destructive thing you could do to the health-care system shy of a single-payer system" and "would quite possibly cut off the economic recovery we all desperately need." Wal-Mart spokesperson David Tovar responded, "We know that others may have a different opinion, but we believe that we have taken a pro-business position.

The present system is not sustainable."81 Costco CFO Richard Galanti commented that Wal-Mart probably believed it was "going to be dragged into providing coverage one way or another, and might as well drag everyone else in retailing along with them."82 Over 90 percent of Costco's employees were enrolled in the company's health care plan. Costco's employees were unionized. A central concern about the Obama administration's health care reform was how costly the expanded insurance coverage sought by the administration would be and how it would be financed. The administration claimed that health care costs to those currently with health insurance could be lower with widespread coverage. The administration also pledged that any health care bill would contain the growth in health care costs. Market Effects As a retailer Wal-Mart faced competition from other domestic firms, including large firms such as Target and Costco and numerous small retailers. Many small retailers did not offer health insurance to their employees, and an employer mandate would directly increase their costs. An employer mandate thus would hit most other retailers harder than Wal-Mart. Moreover, Wal-Mart was one of the few retailers that had weathered the recession well. The cost of mandatory insurance would be incurred by employers, but health insurance and other benefits were part of the total compensation of an employee.

In a perfectly competitive economy the cost to the employer of mandatory employerprovided health care coverage would be borne entirely by employees through lower wages. In a less competitive economy the cost would be shared between the employee and the employer, with the employer bearing some portion of the cost. For some marginal firms the additional cost could force them out of business. Len Nichols of the New America Foundation described an employer mandate as "essentially a tax on low-wage labour."83 He favored an individual mandate that required people to have health insurance just as people are required to have automobile insurance. The Chamber of Commerce, which represents 3 million businesses, opposed an employer mandate. Wal-Mart recognized the potential effect on small businesses. The letter delivered stated, "Not every business can make the same contribution, but everyone must make some contribution. We are for an employer mandate which is fair and broad in its coverage, " Recognizing the impact, congressional leaders were discussing a lower requirement for small businesses. Congress had provided exemptions for small businesses on a number of regulatory measures. Under the current health care system Wal-Mart faced rising medical insurance costs and higher wages to the extent that employees had their own coverage if for no other reason than U.S. health care expenditures have been increasing at a 6 percent rate annually. Rising health care costs affected all employers, so the competitive positions in a domestic industry would not be greatly affected. The rising costs, however, were borne by the company and its employees and passing higher costs on to consumers would reduce demand. Cost containment thus was likely more important to Wal-Mart than was a government mandate.

1. What is the likely effect of an employer mandate on Wal-Mart's competitiveness relative to other retailers? Are small retailers likely to be exempted?

2. Is an employer mandate a tax on low-wage labor?

3. How likely is it that Congress and the Obama administration can contain the cost of health care?

4. Should Wal-Mart have joined with the SEIU and the Center for American Progress? Identify the reasoning that led Wal-Mart to this decision. Do you find any fault in that reasoning?