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The Benefits Divide: Health Care Purchasing In Retail Versus Other Sectors
This paper is the first to compare health care purchasing in the retail versus other sectors of the Fortune 500. Employing millions of low-wage workers, the retail sector is the largest employer of uninsured workers in the economy. We found that retail companies are using the same competitive bidding process that other companies use to obtain a given level of coverage for the lowest possible cost. However, they are more price oriented than other Fortune 500 companies are. The most striking disparity lies in the nearly fivefold difference in offer rates for health care coverage. This shows that the economy’s bifurcation in health benefits extends even to the nation’s largest companies.
In recent years the growing disparity between the low-wage service sector and the rest of the economy has spilled over into the area of health benefits. The result is a two-tier system of access to job-based health insurance. Numerous studies have examined access issues in the low-wage service sector, but most have focused on the problems and potential policy solutions for small businesses.1 This paper focuses specifically on the Fortune 500 companies in the retail sector, a sector comprising firms with lower wages, more part-time workers, and less extensive benefits than in the economy as a whole. According to the Urban Institute, more than a quarter of the uninsured population is employed in the retail sector.2 This makes it the sector with the largest number of uninsured workers. Given these characteristics, discussions about access issues among the low-wage service workers often focus on the retail sector. The Fortune 500 is particularly significant, as these companies often set the standard for benefits and compensation in the retail and other sectors. Other medium-size and small companies may be forced to follow their lead to compete with these larger employers in regional labor markets. Four of the top ten U.S. employers are retailers, with Wal-Mart employing 910,000 people—more than any other company (and becoming, in 2002, the first service-sector company to occupy the top spot in the Fortune 500).3 Together, retail companies in the Fortune 500 employ more than five million people and provide benefits to millions more retirees and dependents. As a whole, the sector employed twenty-four million people in 2001 and is one of the fastest-growing sectors of the economy.4 Based on our recent survey of health care purchasing in the Fortune 500, we found that large retail employers are purchasing health care by the same methods as other companies, relying heavily on the competitive (request for proposals, or RFP) bidding process to forge short-term contracts with a few carriers. These practices were widely adopted by Fortune 500 companies to reduce health care costs. However, retail companies are more price oriented than is the rest of the Fortune 500, emphasizing cost over the comprehensiveness and other characteristics of their coverage.5 Their price-sensitivity is reflected in less choice of health carriers and reliance on self-insurance in the purchasing process. It also is apparent in the extent of coverage for part-time workers and retirees and their contributions to coverage. These results have important policy implications; focusing on small firms may have a limited effect in a labor market shaped by large players. Rapid health cost inflation further exacerbates the problem of purchasing health care in the retail sector. As health care costs continue to rise, employers are shifting more of those costs to workers.6 For most Fortune 500 companies, cost containment comes in the form of higher employee premium contributions and copayments, especially for drugs and outpatient care. Unlike companies paying higher wages, large retail companies are finding it difficult to pass on the higher costs of existing health care plans to low-wage workers, many of whom are finding coverage unaffordable even at current rates. For these retail companies, the alternatives may be reduced benefits or various forms of "bare-bones" policies. For companies in the low-wage retail sector, changes could be more drastic and far-reaching. In terms of total compensation, workers in the retail sector are earning less than appears from a consideration of wages alone. Although unions can ameliorate or resist this movement toward lower compensation, most retail companies are not unionized. In those retail companies where a large percentage of workers are unionized, health care benefits are similar to those in other large companies. In other words, unions have been able to resist the erosion of company support for health care benefits present in other retail companies. In this paper we document the differences between large retailers and large companies in other sectors. We first describe our methods and measures. Next we present our results comparing purchasing practices, coverage rates, and employer contribution levels between the retail sector and the rest of the Fortune 500. We also explore the effects of unions and human-resource strategies on coverage and premium contributions. Finally, we discuss the policy implications of our findings.
During the first half of 2000 we conducted a telephone survey of senior health benefit and human resources executives at Fortune 500 companies about their corporate health care purchasing practices. In addition, we obtained corporate demographic and financial information from Compustat, a commercially available database. Methods for this study have been described in detail elsewhere.7 The primary research instrument consisted of a thirty-five-minute survey targeted toward senior benefit managers. We typically interviewed the most senior official responsible for health benefits, the supervisor responsible for all compensation and benefits, or the vice-president of human resources. We conducted supplementary interviews with managers at thirty-two companies—including prominent retailers—as a follow-up to the telephone survey. These interviews helped us to understand why companies chose specific purchasing strategies. We interviewed someone at 411 of our 489 companies, for a response rate of 84 percent. Eleven Fortune 500 companies had been involved in mergers and acquisitions, so they no longer had unique benefits policies. Thirty-six companies in our sample fall into one of the following subsets of the retail sector as characterized by Fortune magazine: general merchandisers, food and drug stores, and food services. Surveyed Fortune 500 companies ranged in size from 1,850 to 204,250 employees. The median Fortune 500 company had 16,730 employees. The median retail company in our sample had 15,100 employees, ranging from 2,600 to 145,800. Rather than selecting a random sample, we conducted the telephone survey with officials at firms in the complete 1999 Fortune 500 list, which consists of the 500 publicly traded, U.S.-based firms with the highest 1998 revenues.8 Our study represents the most comprehensive study of health purchasing practices to be conducted among the nation’s largest companies. We did not draw a sample but instead surveyed the population of the Fortune 500. The high response rate means that the reported means are almost population means—that is, the means shown are known with almost no error. Other studies such as the Henry J. Kaiser Family Foundation/Health Research and Educational Trust (HRET) annual surveys of employer-sponsored health benefits and the Robert Wood Johnson Foundation’s (RWJF’s) Employer Health Insurance Survey have some overlap in their sample, but they were not designed to fully characterize the population of large firms.9 Because of the lack of comparable questionnaires, we could not use many questions from other surveys. We did draw upon a small number of questions (for example, on types of health plans and employer contributions) from the RWJF’s Employer Health Insurance Survey.10 We adapted a question from the Foster Higgins health benefits survey about requirements for National Committee for Quality Assurance (NCQA) accreditation.11 We asked questions similar to those asked in national studies of eligibility and health coverage among full- and part-time employees. For retirees, we asked about the percentage who received coverage through their former employer. To standardize responses, we asked coverage questions about individual rather than family or dependent coverage. We felt that the collection of information on dependent and family coverage, although useful, was too time-consuming for a telephone survey with such high-level corporate executives. To examine changes in coverage over time, we asked respondents about current practices and about those from five years ago (1994). To document employee enrollment by plan type, we asked respondents to estimate "what percentages of covered employees are enrolled in each type of health plan: traditional indemnity, PPO, POS, and/or HMO."12 In this paper we use the word plan to refer to type of product—preferred provider organization (PPO), point-of-service (POS) plan, health maintenance organization (HMO)—and carrier to refer to vendors such as Kaiser Permanente or Aetna U.S. Healthcare. We developed our own questions on competitive bidding, self-insurance, and regional purchasing. We asked employers whether they self-insured or purchased health insurance for their employees, or both. We also asked them whether they used competitive bidding to add new carriers in a region, new managed care products, or other benefit components (such as mental health or prescription drugs). Companies were asked whether they adopted a uniform national strategy to purchase benefits or whether they purchased from different vendors in different regions. This information constitutes the "regional" variable.
We found that America’s largest companies have adopted a standard approach to purchasing health care: frequent competitive bidding for health carriers to ensure the lowest price for a given level of quality.13 The retail sector follows the same purchasing process as the rest of the Fortune 500 (Exhibit 1  ). This means that companies in this sector rely heavily on the competitive bidding process to select and negotiate with carriers. They depend on short-term contracts, usually one year in duration, but have lengthy relationships with their carriers.
While relying on the same general purchasing process, the retail sector adapts it to the low profit margins and high turnover characteristic of the industry. Some adaptations appear in the bottom four rows of Exhibit 1  , where the retail sector differs from other members of the Fortune 500. The retail sector is more likely to self-insure and to work with one or a small number of carriers. They also rely on national rather than regional purchasing strategies. This is a logical step for retail companies trying to administer benefits for employees and operations across the country. Employees in the retail sector usually work part time, have short tenure, and are scattered throughout the country. Communicating with such a dispersed workforce presents an administrative and financial burden. Apart from price, the retail sector also appears to show differences in quality management. For instance, they are somewhat less likely to require NCQA accreditation, although the difference is not statistically significant. This suggests that the retail sector may be more price oriented and less quality oriented than the rest of the Fortune 500. Offering employees a choice of carriers and disseminating quality information that allows them to make educated choices is particularly difficult for companies in the retail sector.
Retail companies, like most companies in the Fortune 500, offer health insurance to virtually all of their full-time employees (Exhibit 2
With about half of the workforce employed part time, rates of coverage for full-time workers are not an adequate measure of access to health benefits. The difference in coverage lies in the retail sector’s treatment of part-time workers. While Fortune 500 companies offer health coverage to nearly half of part-time employees, the retail sector offers benefits to only a quarter. The net result is a nearly fivefold difference in the overall percentage of employees offered coverage. Others have noted the presence of large numbers of uninsured workers in small retail firms; we show that they abound in large retail firms as well. There may be a size effect, but our data suggest that there is also a strong low-wage effect. We also looked at the percentage of retirees who received employer-sponsored coverage. While 71 percent of retirees at Fortune 500 companies receive coverage from their employers, only 34 percent of retirees of retail firms do. This percentage is low despite the small number of retirees in the sector. Not only are many workers in the retail sector less likely to receive coverage, but, on average, they must pay more for it. The average employer premium contribution has declined for both retail companies and the Fortune 500 as a whole. Fortune 500 companies (excluding the retail sector) reported an average contribution of 84 percent in 1999, 2.6 percent less than in 1994 (86 percent), while the retail sector only covered 73 percent of premiums (3.0 percent less than in 1994, when it covered 76 percent) (p < .05). Employees in the retail sector therefore were on average required to pay an extra 11 percent of their health care premium. This extra cost is an effective deduction from their wages; they are earning less than it appears from a consideration of wages alone. Aggregate wage data will not reveal this difference in usable compensation because the variation in health care coverage does not appear there. If the variation were random, this omission would not matter. On average, workers would have the same share of their wage to use for expenditures other than health insurance. Because we have found that companies with low-wage employees systematically pay lower portions of health care premiums, there is a bias in the aggregate wage data. Unions can ameliorate these difficulties. Among the Fortune 500, the median unionization rate is 5 percent. Although this rate is relatively low, 20 percent of these companies have more than 40 percent union penetration. Some firms have partial unionization, which appears to be in a restricted geographic area or of a section of the labor force with a specific skill. Other firms have full or virtually full unionization. To find out if unions can offset the retail-sector effect on health benefits and, if so, what degree of unionization is needed, we divided firms into four groups according to their degree of unionization (including zero unionization) and also by retail-sector status. The dividing lines between the four groups can be shifted in either direction without affecting our results.
Exhibit 3
The rate at which coverage is offered to part-time workers is twenty-four percentage points lower for retail firms than others in the Fortune 500 (Exhibit 2 ). There is a nonsignificant trend for partial unionization to offset some of this difference, but unions do not have as strong an effect on the presence of coverage as they do on employees’ premium contributions. With regard to part-timers’ coverage, workers do not gain from having full unionization, either. Retiree coverage is dramatically lower in the retail sector, and unions have the least effect on this dimension. There is some modest benefit from full unionization, but the gap between retiree coverage in the retail sector and other large companies remains wide. The positive effect of unionization on retiree and part-time coverage shows that while unions are an important safeguard for all retail employees, they primarily protect full-timers. This is important to consider as demographic changes (more retired employees and women wishing to work part time) and growth of the retail sector ensure a steady stream of uninsured part-time workers.
The unique nature of the retail sector and its workforce strongly influences certain health purchasing and coverage practices. Retail employers in our sample are purchasing health benefits for their employees using the same competitive bidding process that the rest of the Fortune 500 uses, although the retail sector is more likely to limit carrier choice and to self-insure. Retail companies appear to be more price oriented than other sectors are. Our findings provide support for the proposition in the literature that the labor market is segmented between high-wage jobs with generous benefits and low-wage jobs with poorer benefits. With its reliance on low-wage part-time workers, the retail sector may be the most striking example of this. Our supplementary interviews suggest that many firms in the sector have a deliberate strategy in place to hire part-time workers who are ineligible for coverage, as a way of reducing benefit costs. As other research shows, health benefits are difficult to offer on a prorated basis, because they represent a "quasi-fixed" cost for employers.14 There are other reasons why the retail sector offers coverage predominantly to its full-time workers. Enrolling and communicating to large numbers of part-time workers, who are usually dispersed across the country, present an administrative and financial burden. The high turnover rates (often greater than 100 percent annually) may make it difficult to invest in health insurance or prevention programs for part-time workers. Underwriting requirements by health carriers are still another obstacle. Because we did not collect data on take-up rates, we cannot determine whether some part-time workers elected not to have health coverage when it was offered. As other studies have suggested, some low-wage retail workers may decline coverage because they prefer higher wages to health benefits or because they already have coverage through a spouse.15 In an analysis of Current Population Study (CPS) data, Henry Farber and Helen Levy found, however, that the low rates of coverage for part-time workers were attributable primarily to ineligibility rather than to a low take-up rate.16 This is likely to be the case in the retail sector, where the offer rates for retail workers remain low. Companies that do offer generous benefits to part-time workers are most often heavily unionized or influenced by a strong human-resource strategy. We found that unions remain perhaps the most powerful, although incomplete, ensurer of employee health benefits. Unions are associated with high employer premium contributions (and wages) across the Fortune 500, but they have an even stronger influence within the retail sector.17 This is particularly significant because low-wage workers have been shown to be more responsive to premium increases.18 Unions have a positive effect on coverage for part-time workers and retirees. Nevertheless, most unions focus their efforts on protecting the interests of full-time, active workers in the retail sector. Moreover, most retail employees are not represented by unions, and unionization in all sectors has been declining. Our supplementary interviews with many retail employers suggest that corporate human-resource strategy can be another avenue for ensuring access to health benefits. Usually, companies do not offer coverage to part-time workers because they believe that such employees are easily trained and easily replaced. Full-time skilled employees, on the other hand, are more costly to train and generally more essential to a firm’s success. However, in certain cases, it is equally difficult to attract high-quality part-time employees. Disney, a firm operating in both the retail and service sectors, is exceptional because it offers generous coverage even to thousands of its part-time employees.19 Disney has been motivated by the need to attract and retain workers in Orlando’s tight labor market. Besides offering all employees rich benefits, Disney pays almost the entire premium. Because Disney believes that its customer appeal relies on the charm of its theme-park employees, those workers need to be cheerful and friendly to park visitors. Through its generous benefits policy and other related human-resource practices, Disney enjoys a much lower turnover rate than is true for other service-sector employers. Starbucks, the Fortune 1000 coffee chain, offers both full- and part-time employees generous benefits and contributes 75 percent of the premium.20 After ninety days of employment, all employees who work at least twenty hours a week become eligible for coverage. The Starbucks approach is designed to have financial benefits as well. Compared with an industry average of 400 percent, Starbucks boasts a turnover rate of 55 percent and thereby reduces the costs of training and hiring new employees. Our study demonstrates how the economy’s bifurcation both by sector (into low-wage and unskilled versus high-wage and highly skilled sectors) and by employment type (full-time "core" workers versus part-time "peripheral" workers) has extended into the area of health benefits.21 Retail workers face lower employer contribution levels and are less likely to be offered coverage. There is further disparity in coverage between part-time and full-time retail workers. With the downturn in the economy, these disparities have likely increased since our data were collected in 2000. Because both large and small service-sector firms face this dilemma, policy tailored to size alone will not solve the problem. Employer premium subsidies and individual tax credits targeted to small businesses can help their employees but may neglect similar employees in large firms. There are also possible unintended consequences of targeting just small businesses, as it may cause possible distortions in local labor markets. Instead of targeting small businesses, policymakers should consider focusing on sectors such as retail, which employ a large number of low-wage uninsured workers.
James Maxwell is director of health policy and management research at John Snow, Inc. (JSI) Research and Training Institute in Boston. Peter Temin is Elisha Gray II Professor of Economics at the Massachusetts Institute of Technology in Cambridge. Saminaz Zaman is a research associate at JSI Research and Training Institute. This work was made possible by funding from the Robert Wood Johnson Foundation (RWJF) through its program on Health Care Financing and Organization (HCFO). The authors thank Eugenie Coakley for her statistical assistance and John Dodson for his research support. They thank Forrest Briscoe for his work on the survey; Rachel Kohn and Stephen Lemuth for their management of the survey; and the dedicated team of interviewers at JSI: Bob Hickey, Marianne Lee, Katherine McGrath, Cindy Meng, Deb Picciuto, and Jennifer Eckerman. They also acknowledge the generosity of all of the busy executives who donated their time and experience to the study.
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