Wal-Mart's Rapidly Shrinking Benefits

In what seems to be an emerging annual ritual, an internal Wal-Mart memo detailing employee benefit cuts recently surfaced. According to news reports, Wal-Mart plans to limit its 2007 health insurance options for new hires to two choices, both high deductible plans, in an effort to squeeze benefit costs.

While it isn't news that Wal-Mart's benefits are skimpy -- and Wal-Mart certainly isn't the only employer looking to trim its health care costs -- the mega-retailer's abandonment of traditional health insurance in favor of high-deductible health insurance takes the benefits squeeze to a whole new level: it puts a dagger through the heart of the very concept of insurance.

Wal-Mart's health insurance options for 2007, dubbed the "value plan" and the "freedom plan," feature deductibles reaching as high as $6,000 for family coverage under the "freedom plan" -- meaning that a Wal-Mart employee selecting that plan would have to fork over $6,000 before insurance started covering their family's medical bills. That's a lot of money for a cashier earning Wal-Mart wages, and it begs some serious questions about how a deductible that high can be met without going into debt.

According to an analysis by Wake-Up Wal-Mart, which supplied the internal corporate memo to the media, a full-time Wal-Mart worker could spend as much as 60 percent of his or her income on family health expenses before reaching the out-of-pocket maximum. Of course, most workers will be relatively healthy most of the time and won't incur health expenses quite so high in any given year. As a result, while serious financial hardship will occur among some Wal-Mart workers who become ill, it won't be the norm. And for Wal-Mart, that fact is the key to their cost-cutting benefits strategy.

In a backdoor way, Wal-Mart's strategy is to do what many insurers have always done: get into the game of cherry-picking. Insurance companies have long been aware that one of the best ways to turn a profit is to enroll people with low health risk. Large nationwide employers, however, have never really been in the game of hiring workers based on health status. Typically, ability to perform the job in question is the deciding factor, making Wal-Mart's entry into the cherry-picking game revolutionary. And as the nation's largest private employer, Wal-Mart's employee benefit decisions will reverberate throughout the economy.

For better or worse, the health insurance system in America has relied upon employers as the primary delivery mechanism for health insurance for over half a century. This system has always had gaps, and in recent years it has been unraveling with greater speed and force, but it has historically grouped people of varying ages and health statuses together fairly well, spreading the risk of high health expenses among large numbers of people. At least partially for that reason, the system has persisted.

Wal-Mart's specific approach to reducing the growth of its health insurance costs centers on providing disincentives for less healthy workers to take a job at Wal-Mart in two ways: by incorporating physical activity into all job functions (the benefits memo suggests, for example, that cashiers should gather carts) and by providing health benefits that expose workers to much more cost-sharing for medical expenses than their wages suggest they can reasonably afford.

By offering high deductible policies instead of eliminating coverage altogether, Wal-Mart can still say to its critics that it is providing a benefit that works well enough for most of its employees, and technically, they will be right. But future health isn't always predictable, and the slice of Wal-Mart workers who will fare poorly under the new plan are the very ones who will end up actually needing to use their insurance. After all, while many medical expenses are predictable, many are not -- that's part of the reason we have insurance in the first place. And for those workers or their family members with unanticipated health expenses -- those who become pregnant, are in a serious accident, or have children who are diagnosed with a chronic condition -- well, they won't just be slightly worse off. They'll likely end up in a sea of medical debt.