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Adverse Selection at Wal-Mart
Wages for low-wage workers have been flat in recent years but health care costs have been increasing. For a company like Wal-Mart, which pays many of its workers modest wages but does offer a reasonable health insurance plan, this is an invitation to adverse selection. As the value of the wage component of the Wal-Mart benefit package has declined relative to the value of the health insurance component Wal-Mart has attracted more workers who want the job for the health benefits, i.e. sicker workers. Reed Abelson writing in the NYTimes notes:
The Wal-Mart work force reflects a growing fear of many employers that the people who work for them are increasingly at risk for health problems. Many of Wal-Mart's employees are obese, the company says, and a result is rapidly rising numbers of cases of diabetes or heart disease. The prevalence of these diseases among Wal-Mart employees is increasing much faster than the national average, it says.
"The low-income population generally is not as healthy and does not engage as much in preventive care," said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured. A risk that a company like Wal-Mart faces, especially when it competes with smaller retailers that offer no insurance at all, Ms. Rowland said, is attracting too many workers who want the job primarily for the health coverage.
Wal-Mart's health care costs are rising faster than their revenues. Other companies are trying to shift some of the cost of health care onto their workers but Wal-Mart's workers are already paying more than the national average so Wal-Mart may try to reverse adverse selection by adjusting their work and benefit package. An internal memo suggests that:
...the company could require all jobs to include some component of physical activity, like making cashiers gather shopping carts. It also recommends redesigning and expanding benefits to appeal to a different type of worker, someone more interested in buying a home, say, than in getting health insurance.
Wal-Mart will probably be pilloried for this sort of thinking but you can hardly blame them when the workers are engaging in almost the identical actions in reverse. The more fundamental problem is the tying of insurance to work, a problem for which I am afraid there no win-win solution.
Comments are open.
Addendum: Rey Lehmann offers excellent commentary.
Posted by Alex Tabarrok on October 30, 2005 at 07:18 AM in Economics | Permalink
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Comments
Pardon my ignorance, but--
Are there any GOOD reasons for health insurance to be tied to one's employer, as opposed to just being a privately paid bill, like car insurance?
Posted by: devil at Oct 30, 2005 9:35:43 AM
As many companies have more generous health insurance, Wal-Mart loses in providing none, no matter how much it would make sense to separate health care costs from employers.
A cheap incentive program to directly sponsor preventative health care is probably the best alternative. Rather than risking having to pay for more expensive procedures, the cost of getting an obese person to try to join a gym is probably lower than the eventual cost to the company of a very sick employee.
Why haven't we seen more company provided HSAs with bonus employer contributions for those that are _more_ healthy?
Perhaps I'm biased because I'm young and healthy :)
Posted by: Ivan Kirigin at Oct 30, 2005 9:57:08 AM
Devil,
The reason health insurance is tied to employment is that, because of the same problem of adverse selection, a health insurance policy is more expensive for an individual than for a company.
An insurance company will not want to sell to a private individual, fearing that the individual wants to purchase the policy because he has reason to believe he'll use it, i.e. he is unhealthy.
The insurance company will sell to an employer acting on behalf of its employees, if the insurance company knows that the company has a standard statistical mix of healthy/unhealthy employees.
All the Walmart problem shows is that employer-purchased insurance is not a complete solution to the problem of adverse selection in low-wage industries. The adverse selection "seeps through" when the employee chooses to work primarily for the health benefits.
The only full solution is some form of universal health insurance. That may bring with it its own set of problems, but it does solve the adverse selection problem.
Posted by: Brock at Oct 30, 2005 10:25:44 AM
I've always wondered why there isn't a sort of Btu tax on food as a means to encourage healthy food consumption. Kind of like a snack tax, but it would apply to all food. The greater the fat level/calorie content/etc. the greater the payment, thereby discouraging overconsumption of "bad" foods. Maybe implement it like a VAT tax even. Anyway, force those who create health problems to bear the burden of those costs; could this not be used to finance an insurance package?
Posted by: Robert S at Oct 30, 2005 10:41:09 AM
Doesn't WalMart have a 3-6 month waiting period to get coverage? Some protection against A.S., no? Anyway, WM provides so much of everything and controls so much of these people's lives and already accomodates health-related services (e.g., vision): would it not be possible for WM to create a WM-run HMO? I wrote a comedy sketch about what this could look like (e.g., mamograms with a waffle iron; a dressing gown that really is a paper towel); but, part of what makes it funny is that they really could exercise cost control and really could bring down treatment costs. Of course, this might mean an end to having a Wendy's or selling 1/4-lb hot dogs and 44 oz sodas to people to get them through the shopping and working experience.
Posted by: Robert S at Oct 30, 2005 10:49:09 AM
Is there any way to have something like universal health insurance not implemented by a government?
Posted by: Chris Monnier at Oct 30, 2005 11:49:45 AM
The more fundamental problem is the tying of insurance to work, a problem for which I am afraid there no win-win solution.
Ummmm, public health care?
Posted by: Andrew Edwards at Oct 30, 2005 11:51:29 AM
One of the many significant differences between the vision of the man who founded WM and the people who run it now, is the perception of the place of the employee. (just one of many, many shifts in strategy from the halcyon days of it's early growth)
One of the most significant statements in the (now) infamous memo that has started this conversation is being missed by most economists.
The memo stated that a tenured "associate" was no more productive than a new one. Sam Walton would have been horrified if management was falling down on "associate" development as they presently are.
This is central to understanding the trap WM has fallen into. The founder of this corp built it by refusing to view "labor" as a standard commodity, realizing that it was his responsibility (as management) to utilize this factor to maximize profits in general. Simply, he realized that investment in his workforce would pay a significant return.
The present governing body of WM however does not view the workforce as dynamic, and hence is increasingly attracting those who have little incentive to better their lives.
Under the founder, in rural areas, WM was an attractive employer, as an associate, you were part of a team where your contribution was considered important to the general welfare of the corp. This was recognized through management initiatives, promotions and training, as well as competitive wage and stock packages. Twenty years ago, I met a woman with a college degree, who after raising kids returned to the work force as a WM cahier. Through promotions and stock options, she raised herself, and her family to a higher caste level in American society.
This was part and parcel of the origina genius that founded the corp.
Now however, WM exclusively recruits among the unmotivated, and the under motivated. An individual with self respect will rarely darken their interview rooms.
No, their present strategies cannot be looked down upon, there are only a natural outgrowth of rejecting the business plan which built the corp in the first place.
Posted by: johnny at Oct 30, 2005 12:18:39 PM
Johnny makes an interesting point.
The more jobs at WalMart are seen as essentially dead-end day labor the more the adverse selection problem appears. If prospective employees see a real chance for advancement, then there are attractions besides health care, and the problem is reduced.
Alex speaks of a wage component and a health insurance component of WalMart's compensation. But there is also an "opportunity" component. As the value of the opportunity component declines the value of the insurance component rises, and the adverse selection problem becomes more severe.
Posted by: Bernard Yomtov at Oct 30, 2005 1:03:19 PM
Maybe a year ago I heard a conservative caller on a local talk show dumping hard on Wal-Mart. She was a exurban community hospital administrator and bitter as Hell about the increase in they'll-never-be-able-to-pay patients they started carrying on their books when first Wal-Mart and then, eighteen months later, Sims Club opened in her area. She was quite clear that she opposed government intervention in health care but quite bitter that Wal-Mart was, in her opinion, calculatedly offloading part of their workforce cost on the local community. She was fairly direct and economist-minded about it: Beyond percentage-of-income X people voluntarily or involuntarily default on their hospital bills. Average hospitalization costs more than the average Wal-Mart employee's percent X, therefore past a certain wage point Wal-Mart is only transferring costs in the local economy rather than reducing them.
I'm totally prepared to be persuaded that I'm better off in the long-run by paying more for my own or my own (non-Wal-Mart) employee's true healthcare costs (plus hospital non-performing patient accounting-administrative overhead) in order to save a matching amount in my aggregate Wal-Mart purchases, but to my self-interested eyes I'm not seeing much economic benefit.
(Question: How much of the reported annual increase in medical bills for paying customers are due to uncovered costs by the uninsured?)
I agree that there's no "win-win" solution. I'm not convinced we can't find a more economically optimal win-lose solution than the suboptimal one we seem to be getting.
---
See also, via Brad DeLong
LEE SCOTT KENNEDY: Wal-Mart CEO Lee Scott channels Ted Kennedy, advocating a higher minimum wage out of enlightened self-interest. He finally realizes there's a connection between the minimum wage failing to rise over the past ten years and Wal-Mart's stock failing to rise over the past five years. Ann Zimmerman reports:... "Mr. Scott, noting that minimum wage hasn't changed in almost a decade, described Wal-Mart's core customer base as finding it increasingly difficult to afford basic necessities between paychecks. 'We simply believe it is time for Congress to take a look at the minimum wage and other legislation that can help working families'."
Posted by: David Innes at Oct 30, 2005 1:24:41 PM
Is there any actual data to support the claims made in this post? Is there anything empirical that demonstrates health plans are comparatively more important to Wal-Mart hires? On what basis does Tabarrok claim that Wal-Mart employees are "engaging in almost the identical actions in reverse?"
Or does this merely reflect a set of prejudices by Tabarrok (and like minded economists) about human behavior?
Posted by: alex at Oct 30, 2005 2:46:13 PM
> Are there any GOOD reasons for health insurance to be tied to one's employer, as opposed to just being a privately paid bill, like car insurance?
As Brock said in the comments above, "The insurance company will sell to an employer acting on behalf of its employees, if the insurance company knows that the company has a standard statistical mix of healthy/unhealthy employees."
So there's no a priori reason why health insurance should be tied to an employer, but there doesn seem to be a definite advantage in tying health insurance to some aggregate number of individuals. In a sense, organizing those individuals around an employer is arbitrary (but somewhat convenient).
The question is, how can people be organized fairly? It just doesn't seem fair to charge some people more for health care because they're more at risk of health problems, *especially* when those problems are genetic.
Organizing individuals around their employer doesn't seem to be working. Is there any other way to organize individuals objectively and fairly without just lumping everyone into a government plan?
Posted by: Chris Monnier at Oct 30, 2005 8:35:12 PM
Clarification in above comment:
"...but there doesn seem to be..."
That was supposed to read, "...but there does seem to be..."
Posted by: Chris Monnier at Oct 30, 2005 8:36:55 PM
Is there any actual data to support the claims made in this post?
The article details claims by Wal-Mart, which claims to have such data.
Or does this merely reflect a set of prejudices by Tabarrok (and like minded economists) about human behavior?
Well, those prejudices certainly do exist. Economists believe that both corporations and people will tend to act in their own self-interest. Why, what do you believe? If you're young and healthy, you're going to prefer a company that pays you more and not care as much about a good health plan as you would if you're prone to illness. I certainly know lots of young people my age who feel that way.
As Bryan Caplan said, "In the minds of the public, prices apparently go up when businesses suddenly start to feel greedier. Economists, in contrast, expect businesses to be
greedy year-in, year-out; but depending on market conditions, greed may call for prices to go up, go down, or stay the same." What do you think?
Posted by: John Thacker at Oct 30, 2005 9:17:47 PM
Wal-Mart pushing for a higher minimum wage also sounds like they've decided that they'd be better off by paying more wages and offering fewer health benefits, but they want to make sure that their competitors have to offer higher wages as well.
Posted by: John Thacker at Oct 30, 2005 9:18:39 PM
The reason that health insurance is provided through employers is a historical reason (also known as a path-dependence problem), and is due to government interventions 60+ years ago.
During WW2, the US government essentially "froze" wages (and lots of other prices). Employers in certain industries, wanting to offer more to employees for competitive reasons, discovered that the wage-freeze order did not apply to "fringe benefits", and so added health insurance as a "fringe benefit" to attract/retain employees.
Posted by: Anthony at Oct 30, 2005 11:42:46 PM
It'd be interesting to examine wal-mart's growth over the years.
Without doing much research in the company, i haven't any clue as to their current growth rates in capital (ie new stores) and new hires.
John, mentioned the idea of WAL Mart's lobby for raising the US minimum wage is a way for walmart to make sure that its competitors are forced to raise wages.
It would be interesting to know, what the firm's hire rates are in comparison to the past. A smaller employee base being payed a bit more in wages would require a smaller aggregate health care cost for the company.
In canada, we have universal health care and a higher minimum wage rate. Is wal-mart 'doing better' in Canada then in the usa? A whole lot of Union propoganda in Canada has argued for Decades that big manufacturing companies have LOWER costs of doing business in Canada for the simple arguement that we have government provided health care (like the Big 3 Automakers, GM especially).
Posted by: Tommy at Oct 31, 2005 1:50:34 AM
the other big reason that medical insurance is tied to employment is the tax code --
the company pays for it is with pre-tax dollars.
The company can buy $66 of insurance for $66
But if your tax rate is 33% the company has to pay you $100 so you can have $66 after tax to buy insurance.
So it is a way for the company to give you a $100 benefit for $66.
Posted by: spencer at Oct 31, 2005 9:24:36 AM
* I don't think employer-provided insurance is a true path-dependence problem. It's a legislative problem, smuggled in by the tax code.
* Yes, there is an adverse selection problem at Walmart, precisely because they did start recruiting less educated employees who tend to be more obese and more likely to engage in activities like smoking than people with more education. If you read the actual memo (at walmartWatch.com), you will find that one of the approaches listed is to capture productivity improvements already in progress, which I read as meaning that they are going to start recruiting more educated employees and use more automation. Is that desirable? Where are those less educated people going to find employment? That is certainly congruent with their push to raise the minimum wage: it puts pressure on Walmart copycats relying on cheap labor to overcome Walmart's technological lead ("technology" including procedures).
* Can we stop calling health plans "insurance" when they have nothing in common with what we usually mean by insurance? If we used the same model with respect to cars, we would expect car insurance to cover the automotive equivalent of colds and cold medicine - minor repairs and oil changes. It would be correspondingly more expensive.
* I doubt that the total costs of production are that much if at all lower in Canada. After all, where does the money to pay for national health care come from? Taxes? Those are still costs, even if the cash wages the workers see in their wallets is lower. Does the savings come from rationing health care? I doubt that will work in a country where people would rather demand high tech solutions to their obesity (a point alluded to in the Walmart memo) rather than change their behavior. Even the Canadians are struggling with the problem, if the Chaoulli v. Quebec decision in the Canadian Supreme Court earlier this year is anything to go by. In that case, the court basically threatened the national health care with legalizing private insurance if they didn't start reducing the queues.
I highly recommend reading the actual Walmart memo; it's a little longer than the average memo, but readable. The NYT article missed lots of interesting points and initiatives. For example, it cites comparative statistics to show that much of the healthcare cost increase is due to obesity-related disease (heart and diabetes), and points out that a more educated workforce would be both more productive and would opt for cost effective perqs like discounts on fruits and vegetables and education benefits. It discusses the popularity and "leveragability" of Health Savings Accounts, 401(k), life insurance, spouse subsidization, and in-store clinics. It also discusses the problem with getting statistics on doctors' rates and performance and suggests an aggressive campaign to overhaul the healthcare industry. Walmart vs. AMA should be the fight of the century.
Posted by: Eric H at Oct 31, 2005 9:25:26 AM
Implementing universal healthcare does not help the poorest workers as one might imagine.
Here in Britain the NHS spends its budget disproportionately on (mostly middle class) swing voters. Unsurprising as government priorities are usually political rather than purely altruistic. Introducing a similar system in the US would result in some groups, such as blacks who mainly vote Democrat, being disadvantaged.
A better solution is one of means tested co-payment, used in some parts of continental Europe. There are several forms of this but essentially people pay what they can afford too and get the rest from government. This provides free or cheap healthcare for those on low incomes but maintains a competitive market. It is hardly perfect but by minimising government interference it also minimises political distortions in the healthcare market.
Posted by: Mark at Oct 31, 2005 10:08:23 AM
* If we used the same model with respect to cars, we would expect car insurance to cover the automotive equivalent of colds and cold medicine - minor repairs and oil changes. It would be correspondingly more expensive.
EricH:: I agree with you completely. Total cost (company and personal) of my health insurance is about $800/month. This works out to about $10 grand a year...even accounting for the implied coverage for the health care equivalent of wrecking my car or losing my house to a hurricane, that's still a lot more cash than the family uses in a typical year.
I wish I could just buy the insurance with, say, a $5,000 (annual) deductible...
Posted by: John Galt at Oct 31, 2005 11:43:19 AM
I don't see it happening for a long time, but I'm generally wrong with predictions: We need a national health care system.
Are we able, as a nation that shows disparity in just about every financial and benefit-related statistic, to go beyond the academic arguments of Wal-Mart's posturing and realize pure and simple that our health care system is broke? Rationalization, givebacks and speedups are fine and dandy for other industries, but why not healthcare and the gatekeeper insurers? The list of scoundrals here are endless, from big pharma to politicos, think tank econ-types (really, no insult intended here I love the site) who tell us the government or a national entity isn't capable of pulling off such a scheme to the countless mid-level managers and salespeople who'd be cut out of the action...Think about it, in most other endeavors this type of system would be ideologically and realistically punished with ruthless efficiency by the quirky notion of competition...thanks joe
Posted by: Joe at Oct 31, 2005 12:43:39 PM
One important factor that has been lost in this debate is the true cost of health care. Try dropping your basic health care plan, picking up a catestrophic health care plan and paying cash. Doctors love patients who pay cash because they do not have to waste time making claims. What you pay in cash can be up to 50% lower and the amount claimed with your normal health care plan. If people paid the real cost and removed the administrative nightmare, costs would go down. Start asking around.
Posted by: Patinator at Oct 31, 2005 1:31:35 PM
Walmart's insurance has a $1000 annual deductable, with a hefty co-pay, and their median employee makes $19,000. For the average hourly walmart employee, that plan may as well not exist at all.
As for why they want the minimum wage raised, their main shopping demographic is the lowest paid members of society. Looking for a pay raise for their main demographic is a way to get their customers to spend more money there.
Like Patinator, I find doctor's offices offering 50% discounts for cash. I haven't been covered by healthcare insurance for almost 5 years.
Posted by: Peter at Oct 31, 2005 6:06:35 PM
Don't be fooled by Wal-Mart advocating a rise in the minimum wage.
They already pay well above minimum wage, and so this is nothing more than an attempt to force their competition to raise their labor costs.
Posted by: Thought at Nov 1, 2005 11:09:04 PM
