Wal-Mart's Health Reform Gambit

Just this week, Wal-Mart raised eyebrows across the country when it came out supporting an employer health insurance mandate.

Now, Wal-Mart has got to know that its endorsement is probably not good for its profits. Wal-Mart is the country's biggest employer, with more workers than the US Army.

What’s going on here? Does Wal-Mart, a cut-throat, calculating company when it comes to costs and the competition, know that an employer mandate is even worse for its competition's profits, and is getting on board to crush its rivals?

An employer health insurance mandate means companies would have to offer health insurance to their workers, no matter what.

The insurance could be paid for with higher taxes, possibly a new form of an 8% payroll tax that companies (translation, workers) would pay. It would mean workers would be enrolled in a low quality HMO type plan that wouldn’t cover the same level of health care costs now incurred.

Before we get to the details of the impact of Wal-Mart's move, watch this first. Wal-Mart’s support came a day or so before new Congressional Budget office numbers showing the impact on the mushrooming federal deficit of the Senate’s health reform proposal, spearheaded by Democratic Senators Chris Dodd and Ted Kennedy.

The new CBO numbers show the cost of this legislation is now below the $1 tn mark. How does the Senate get there? By not including the costs for expanding Medicaid costs, and because of the employer mandate.

Specifically, according to the CBO, by 2019 the Senate bill will cover 21 mn. That cost comes to about $597 bn. Again, the Senate bill does not include expanding costs for Medicaid. And the new CBO figures doesn’t include the cost of the 15 mn people expected to be enrolled in the employer-mandated coverage.

The CBO’s initial $1 tn plus number that the White House and Democrats in Congress had gulped at, then attacked, had assumed—get this—that employers would dump those 15 mn or so workers onto the US government—meaning, federal taxpayers.

This is a rare admission, a rare bit of candor, a rare acknowledgement of behavioral economics by the CBO. Meaning, a government research body is acknowledging what analysts have been saying all along--that companies would cancel coverage for 15 mn workers employees and shove them off onto the Health Insurance Exchange, where they would then get taxpayer subsidies to buy health insurance.

So, what’s the deal with Wal-Mart and an employer mandate for health insurance? Fox News analyst James Farrell weighs in.

First, Wal-Mart already provides more employee health insurance than its average competitors. Approximately 52% of Wal-Mart's 1.4 mn U.S. employees are covered by company-provided insurance, while the retail industry average is 45%.

To raise this coverage to 100%, Wal-Mart would have to extend coverage to 48% of its workers, while its average competitor would have to extend coverage to 55% of its workers. Advantage: Wal-Mart.

Second, Wal-Mart has economies of scale that its competitors lack. As a large employer, Wal-Mart already likely pays a lower premium than its competitors with far less employees.

For example, the CBO notes that the share of the health insurance premium that covers administrative costs varies significantly by the size of firms, from about 7% for firms with at least 1,000 employees to a more sizable 26% for firms with 25 or fewer employees.

Requiring employers to provide health insurance to all employees would thus probably cost Wal-Mart less on a per employee basis than its competitors. Advantage: Wal-Mart. 

Third, the economies of scale and greater percentage of covered employees would further benefit Wal-Mart if the government mispriced the penalty that it would assess on employers for failing to provide health insurance for its employees.

The government plans to smack companies that don’t participate with a fine, a so called play or pay requirement. The fine could be equal to 8% of pay for each worker not given coverage. Advantage: Wal-Mart.

Follow the math here. If the government prices the penalty lower than Wal-Mart's average contribution to health insurance per worker, Wal-Mart could just pay the penalty for each employee. Wal-Mart would have to math out its benefits here, taking into account the current cost of insurance coverage and the penalty times the number of employees whose coverage Wal-Mart would be dropping.             

Fourth, Wal-Mart has indicated that its endorsement (which will likely be touted by the Administration as evidence of the wisdom of its health insurance reform) is conditioned only upon the ultimate mandate being designed in a way that further advantages Wal-Mart compared to its competitors. Advantage: Wal-Mart.    

According to the Congressional Quarterly, Wal-Mart spokesman Greg Rossiter said "that Wal-Mart wanted an employer mandate that would have companies pay in based not on how many employees they have, but based on ‘profit per employee.’”

Wal-Mart has more workers than the US Army, and low-wage employees as well, so you can see why it wanted an employer mandate based on this metric. If an employer mandate was constructed otherwise, Rossiter said, "it certainly could become a disincentive to support it."