Walmart Supports Employer Health Care to Raise Rivals’ Costs

Lynne Kiesling

I have to admit, I thought that this point was obvious. Clearly Walmart (accurately, I think) sees itself as well-positioned to leverage its size nationally to negotiate better health care arrangements than its competitors, so its newly-announced support of employer-based health care is a classic example of raising rivals’ costs.

Apparently, it’s not so obvious to everyone, as Megan McArdle pointed out:

I find it hard to believe that none of the liberal commentators breathlessly celebrating Wal-Mart’s “capitulation” on national health care have even entertained the most parsimonious explanation:  that Wal-Mart is in favor of this because it raises the barriers to entry in the retail market, and hammers Wal-Mart’s competition.  Yet somehow, this appears nowhere in any of the analysis. …

Regulation has a very high fixed cost for compliance; the larger the firm, the more dollars/employees over which to amortize the fixed cost.  Meanwhile, market leaders have disproportionate bargaining power, and tend to get better rates from suppliers than smaller competitors.  Finally, a high fixed cost means either that it’s harder to initially enter the market, or (if there are exemptions for the smallest firms) harder to grow.

Megan also recommends what I think should be universal required reading:

All of which is to say, Bootleggers and Baptists should be required reading in all schools.  When you find strange bedfellows in politics, don’t look for a surprising outbreak of spontaneous virtue:  looking for the hidden conspiracy.

Note: I don’t particularly care about what “breathless commentators” of various partisan stripes do or don’t claim politically; I do care about the economic content and substance of their analyses. Raising rivals’ costs and the political economy of leveraging regulation to do so is an important economic lesson.

UPDATE: I just got around to reading this morning’s Wall Street Journal, which has a lead editorial making the same point:

The employer-mandate endorsement falls into the same self-interest department. A boost in the minimum wage helps Wal-Mart because most of its workers already earn well over the wage floor, and it hurts smaller, less-profitable competitors that can’t afford to pay more. On health care, an employer mandate will also reduce the margins of their rivals. This is especially true for businesses of a slightly smaller size that cannot insure on the same scale or currently don’t reach the 55% of the 1.4 million Wal-Mart employees who are insured through the company. (Another 40% or so are covered by spouses or the likes of Medicaid.)

2 thoughts on “Walmart Supports Employer Health Care to Raise Rivals’ Costs

  1. A plan that would introduce a portable public option wouldn’t likely affect Walmart’s competitive position. Since the plan is portable, it would weaken or eliminate the employer-based structure of health insurance, leading to no differences in costs between Walmart and competitors. Thus, any capitulation by Walmart to such a plan couldn’t be explained by Megan’s story.

    Regardless, isn’t the real issue in this story here that Walmart has sufficient buying power to act as a monopsonist purchaser of health insurance? If Megan’s story is right (although I doubt that it is), there is a strong case for pursuing Walmart for violation of antitrust.

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