Wal-Mart Cost-Cutting Finds Big Target in Health Benefits

Restrictions, Tough Stance on Basic Claims Keep Its Outlays Below the U.S. Average

BENTONVILLE, Ark. -- Wal-Mart Stores Inc. is famous for cutting costs everywhere it can. Today a giant target for the world's biggest retailer is the health-care costs of its employees. Wal-Mart makes new hourly workers wait six months to sign up for its benefits plan and doesn't cover retirees at all. Its deductibles range as high as $1,000, triple the norm. It refuses to pay for flu shots, eye exams, child vaccinations, chiropractic services and numerous other treatments allowed by many other companies. In many cases, it won't pay for treatment of pre-existing conditions in the first year of coverage. The payoff: Last year, average spending on health benefits for each of the company's roughly 500,000 covered employees was $3,500, almost 40% less than the average for all U.S. corporations and 30% less than the rest of the wholesale/retail industry, according to estimates by Mercer Human Resource Consulting, a unit of Marsh & McLennan Cos. As the nation's biggest private employer, with a U.S. payroll of 1.16 million, Wal-Mart could carry enormous influence with this approach at a time when all companies are struggling to contain the soaring cost of health care. In 2003, some 13% of U.S. employers trimmed health benefits, while 7% increased them, according to the Kaiser Family Foundation, a nonprofit research group in Menlo Park, Calif. It's too soon to say whether Wal-Mart will pioneer a trend toward less-generous benefits. At the very least, other companies in the retailing industry, where margins are razor-thin, are watching Wal-Mart closely. Soaring health costs "are absolutely an acute issue in the whole retail industry," says Blaine Bos, a principal at Mercer. "You've got to benchmark constantly what your competition is doing. And if you are in this industry, you certainly want to benchmark to Wal-Mart." Many companies are having employees pick up more of their health-care tab. Just recently, a top Wal-Mart rival, Minneapolis-based Target Corp., reduced health benefits for its part-time employees. Wal-Mart says part of its philosophy is that the company should pay for catastrophic health expenses -cancer treatments, organ transplants -- that could financially ruin an employee. It typically pays 100% of medical charges above $1,750 a year in out-of-pocket expenses; in addition to the deductible and premiums, employees pay 20% of medical costs up to $1,750. And Wal-Mart has no lifetime caps on coverage -- a benefit offered by just 42% of retailers and 47% of employers overall, according to Watson Wyatt Worldwide, a Washington-based consulting firm. Tom Emerick, benefits vice president, says the company covers medical bills that exceed $100,000 each on at least 800 employees a year. A further 20,000 cases a year cost Wal-Mart more than $10,000 each. The company has paid for more than 300 organ transplants in the past five years, costing $1 million or more each. Wal-Mart has been using a team of six people to scour every state for the lowest-cost networks of doctors and hospitals. In Colorado, for instance, Wal-Mart has contracted in the past two years with MMA, a Greenwood Village, Colo., managed-care provider that has a network of 7,000 doctors and 62 affiliated hospitals statewide. MMA calculates the cost of each medical procedure according to the market rates in 14 different regions in the state. Statewide rates tend to be higher. Last week, Wal-Mart announced that it has ended its state contracts, such as that with MMA, in favor of a national contract with Blue Cross benefit plans to administer its health plan nationally. "The state-by-state analysis showed us we could save even more money by shifting to the Blues," says Mr. Emerick, referring to Blue Cross and Blue Shield. Wal-Mart executives say shifting routine-care costs to employees keeps premiums down. The company has raised premiums 50% during the past two years, but an employee still can join the plan for $13 every two weeks, well below many employer-sponsored plans. That rate, however, comes with a high annual deductible of $1,000. Wal-Mart offers other plans with higher premiums and deductibles as low as $350. About 90% of retailers and of U.S. employers overall have deductibles of $310 or less, according to Watson Wyatt. Wal-Mart employee premiums covered about one-third of the $3,500 spent per employee on health benefits last year, a share that experts at Segal Co., a benefits consultant, say is typical for large retailers.

The United Food and Commercial Workers union has made health benefits the centerpiece of its drive to unionize Wal-Mart's work force. One of the union's chief complaints is that Wal-Mart's plan discourages workers from signing up for coverage at all. The union cites, among other things, the company's six-month waiting period for new hourly employees, high deductibles, tight coverage restrictions and $50 charge every two weeks to cover spouses who could get insurance elsewhere. About 60% of the roughly 800,000 employees eligible for coverage at Wal-Mart sign up, compared with 72% for the whole retailing industry, according to a 2003 survey by the Kaiser Family Foundation. Company executives say they don't try to dissuade employees from taking coverage. Executives note that some retailers have even-longer waiting periods and don't offer health insurance to part-timers, who can join Wal-Mart's plan after two years on the job. "When General Motors was the biggest company, it raised the bar on benefits and wages," says Al Zack, an official of the UFCW union in Washington. "Now Wal-Mart is the biggest, and it has lowered the bar." "The problem is rising health-care costs," responds Jay Allen, Wal-Mart's senior vice president for public affairs. "We're grappling with it like everyone else." Larry Allen (no relation to the Wal-Mart executive) and his wife, Jacque, were hired last year by a Las Vegas Wal-Mart as produce clerks and chose to forgo coverage, in part because they considered it too costly. They each earned about $8 an hour, so monthly health-care premiums of $200 would have eaten up more than 10% of their combined take-home pay. Mr. Allen also was deterred by the plan's strict rules on pre-existing conditions. He previously had been treated for a liver disorder and high blood pressure, neither of which would be covered for at least a year under Wal-Mart's self-funded plan. Since the mid-1990s, these clauses have become less common in employer plans and remain in force for less than a third of new employees in self-funded plans, according to Kaiser. Such plans, common at most big employers, use corporate revenue and employee contributions to finance a menu of benefits. Mr. Allen, 47, soon suffered a stroke and incurred $31,000 in medical bills. "I'm going to have to pay this debt, but I'm overwhelmed" by collection agencies, he says. This summer, he left Wal-Mart and took a job at the UFCW. He's now insured under a plan offered by the new employer of his wife, who left Wal-Mart last October. Wal-Mart's benefits sometimes are a godsend. Two years ago, John and Tina Millwood's son, Simuel, was born with biliary artesia, a liver disease that required a transplant. Mr. Millwood, whose annual salary as a store assistant manager is $32,500, estimates that he has paid about $5,000 a year on health care since his son's birth. The child received $1.5 million of health care during his first year or so. Seven months after Simuel was diagnosed and hours after he was placed on a transplant list, the Mayo Clinic told the Millwoods that a liver was available. Wal-Mart arranged for a private jet to fly the family from their East Texas home to Minnesota. Its health plan paid for the transplant, two months in the hospital, the parents' lodging during that time, several follow-up trips for additional operations and (for a year) a $1,000-amonth medicine bill that included costly antirejection drugs. Wal-Mart employees, through contributions to a special fund, also helped subsidize the family so Mr. Millwood could take two months off. "For the rest of his life, Wal-Mart will pay his medical costs, because there's no lifetime maximum," says Mrs. Millwood, who quit her $22,000-a-year payroll-clerk job at a gas company to care for her son. The only thing Wal-Mart doesn't cover anymore is the current tab for his antirejection drug of $8,400 a year, so that's covered by Medicaid, the state and federally funded health program for the poor. At the same time, Wal-Mart refuses to budge on items covered by most employers. Four out of five employees in the U.S. covered by self-funded health plans get contraceptive-drug benefits. Wal-Mart employees don't. The policy triggered a lawsuit by a female customer-service manager in Georgia, which has turned into a class-action lawsuit in federal court in Atlanta. The plaintiffs claim that Wal-Mart's policy discriminates against women, forcing them "to choose between paying their own out-of-pocket prescription costs or risking unintended pregnancy." Janine Pollack, one of the plaintiffs' lawyers, says Wal-Mart has 500,000 female employees of child-bearing age, although only a portion of them are covered by the company plan. Still, if Wal-Mart loses a class-action suit, the cost of paying for contraceptives would be "tens of millions of dollars per year," she says. Wal-Mart executives say

they are worried that giving in on birth-control pills, which cost about $30 a month, could invite pressure to pay for everything from eyeglasses to Viagra. Wal-Mart also refuses to cover obesity surgery, which effectively reduces the size of the stomach to suppress appetite. About 120,000 Americans are expected to undergo the increasingly popular surgery this year, up from 80,000 in 2002, according to Frost & Sullivan, a consulting firm. Robert Dean, a Tampa, Fla., internist who treats about 200 Wal-Mart employees, says he has been in frequent futile battles to get Wal-Mart to approve this and other procedures. He says employer insurance plans have paid in 29 of the 30 cases where he has recommended the procedure. The exception: Sherri Parker, who is 42, stands 5-foot-6, weighs 425 pounds and is the wife of a Wal-Mart night supervisor. Ms. Parker has sent numerous letters to Wal-Mart and to public officials, pleading for help in getting the company to pay for her surgery. In one August 2002 letter, to her Congressman, Ms. Parker wrote, "The problem has been with me all my life, and is not going away. I am just getting bigger and bigger." Recently, however, she concluded that her quest to get Wal-Mart to approve the procedure is hopeless. Mr. Emerick, the benefits vice president, says Wal-Mart doesn't cover obesity surgery because there is no consensus among doctors and insurers that it's medically safe and effective. He estimates that between 2,000 and 3,000 employees or family members would apply for the procedure each year, at perhaps $40,000 apiece. And "there's a really high rate of complications" that can cost up to $500,000 a patient, he adds. The company also fears that, with Wal-Mart's annual turnover rate of about 50%, workers would join the company, undergo the surgery and leave. In the past few years, Aetna Inc., Cigna Corp. and other insurers have begun covering the procedure in cases of morbidly obese patients who can document failed efforts to lose weight by other means. On the other hand, United HealthCare, another major insurer, recently dropped obesity surgery as a covered treatment in its standard plans. United HealthCare stopped covering the procedure because, a spokesman says, there isn't enough peer-reviewed medical literature in the U.S. that the surgery is safe and effective. Wal-Mart also is aggressive in controlling medical costs related to on-the-job injuries. The company says these claims are a related and additional expense on top of the 18% increase in its health-care outlays last year, a rise in line with industry averages. Mittie Funderburk, 52, says she injured her back in 2000 while moving photo-lab merchandise in the San Angelo, Texas, Wal-Mart. She didn't report the incident until two months later, when growing numbness in one of her legs immobilized her. Her doctor prescribed surgery, and a second doctor, selected by Wal-Mart, concurred. Nevertheless, Wal-Mart fought the claim for months, first alleging Mrs. Funderburk hadn't reported the accident in a timely fashion and then arguing she didn't need the surgery. The company finally relented and she underwent surgery in April 2001, eight months after being injured, and returned to work that August. But by January, Mrs. Funderburk says, she was crippled with pain and went on medical leave. After several epidural pain blocks failed to work, two doctors advised more-extensive surgery. Wal-Mart fought even harder, as the Texas State Workers' Compensation Commission and its Independent Review Board sided with Mrs. Funderburk three times. But Wal-Mart refused to give up. In May, it appealed the commission's final decision supporting the need for surgery to the state district court in Travis County. The case is still pending. Last June, Wal-Mart terminated Mrs. Funderburk because she had been off work for more than a year. "My doctor wouldn't release me to go back to work until I got better, and he didn't think I would get better without the surgery," Mrs. Funderburk says. Wal-Mart declined to comment on this or any other specific case. She applied to have the state of Texas pay for the surgery and underwent a spinal-fusion procedure in July that cost $30,000. If Wal-Mart doesn't pay, the state agreed to pay for the surgery and then pursue Wal-Mart for reimbursement.