NCPA - National Center for Policy Analysis


October 11, 2006

Critics of Wal-Mart's health plans need to understand that workers - not employers - ultimately pay for employer-sponsored health coverage.  Workers bear the cost indirectly through reduced wages and direct contributions.  Employers who sponsor health coverage are merely providing a portion of workers' compensation in the form of a non-cash, tax free benefit.

But, in order for non-cash compensation to be effective, workers must be willing to forgo a pre-tax dollar of wages in return for a dollar's worth of fringe benefits.  In other words, if workers themselves are not willing to forgo $3,000 worth of pre-tax wages in exchange for health coverage, then savvy employers would be foolish to provide workers with health coverage costing $3,000.

Thus, if a company doesn't provide health coverage, it likely pays higher cash wages.  Conversely, if a company provides generous health coverage, it likely pays lower cash wages than a comparable business that doesn't.

The amount of compensation paid to an employee is determined by the supply and demand for each employee's specific skill set.  Of course critics would prefer Wal-Mart be altruistic and increase workers' compensation by giving each a lavish health plan.  If Wal-Mart were to do this, its profitability would fall and prices would rise.  In the end, Wal-Mart would build fewer stores and create fewer new jobs.  As a result, low-income consumers would pay higher prices and more would be unemployed.

Critics of Wal-Mart need to understand the personnel policies are just a manifestation of workers preference. Most low-income workers would prefer a greater portion of their compensation in cash rather than in fringe benefits.  Wal-Mart executives are attempting to align their health coverage offering to what Wal-Mart workers can afford. A first step toward this is the new policy of offering only consumer-driven health plans to new hires.

By paring down their health care offerings, Wal-Mart is attempting to offer a viable health care benefit their employees can afford and be willing to trade their wages for. Wal-Mart would do well to better communicate to their employees the fact that health coverage is not free at any business.  People pay for it.  Unless the workers want their pay stubs to be smaller, the trade-off the make is a less generous health plan. 

Comparisons of Wal-Mart to Costco, which has some of the most generous benefits of any large retailer, are misleading.  Costco and Wal-Mart do not compete in the same market.  Costco has associates who have to be knowledgeable about upscale goods and Costco emphasizes a higher level of customer service.  Cosco's employees - more experienced and paid accordingly, naturally prefer a larger portion of their compensation in non-cash (fringe) benefits such as health insurance.

But if the truth be known, critics of Wal-Mart already understand these facts.  Since Wal-Mart's vocal critics represent business interests whose higher-paid, union jobs are being whittled away by competition with Wal-Mart, the "concern" isn't for Wal-Mart workers or low-income consumers - rather it's for higher-paid union members.

Read the Wall Street Journal article about Wal-Mart's new health plan offerings.


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