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Supplemental Benefits Documentation

Board of Directors Retreat FY06

Wal-Mart Stores, Inc.

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Reviewing and Revising Wal-Mart’s

Benefits Strategy

Memorandum to the Board of Directors

from Susan Chambers

The purpose of this memorandum is to update you on our efforts to review and

revise Wal-Mart’s benefits strategy. In response to concerns about cost trends

and growing public scrutiny, I, with the support of McKinsey & Company,

recently led a 15-person team, drawn from across the company, in 1) evaluating

Wal-Mart’s approach to benefits, and 2) developing a strategy to address any

shortcomings.

We evaluated Wal-Mart’s current benefits offering through three lenses – cost

trends, Associate satisfaction, and public reputation – and are now

recommending revisions to our benefits strategy built around nine “limited-risk”

initiatives and five “bold steps.” While we continue to refine our thinking, I

wanted to take this opportunity to share with you the breadth of our

considerations, to highlight the direction we are headed, and to solicit feedback

that will guide our final recommendations.

This memorandum summarizes our work and is divided into three sections:

¶ Section 1 provides a detailed analysis of the three most significant

benefits-related challenges we face:

Growth in benefits costs is unacceptable (15 percent per year) and

driven by fundamental and persistent root causes (e.g., aging

workforce, increasing average tenure). Unabated, benefits costs

could consume an incremental 12 percent of our total profits in 2011,

equal to $30 billion to $35 billion in market capitalization.

While Associates are satisfied overall with their benefits, they are

opposed to most traditional cost-control levers (e.g., higher

deductibles for health insurance). Satisfaction also varies significantly

by benefit and by segment of Associates. Most troubling, the least

healthy, least productive Associates are more satisfied with their

benefits than other segments and are interested in longer careers

with Wal-Mart.

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Wal-Mart’s healthcare benefit is one of the most pressing reputation

issues we face because well-funded, well-organized critics, as well as

state government officials, are carefully scrutinizing Wal-Mart’s

offering. Moreover, our offering is vulnerable to at least some of their

criticisms, especially with regard to the affordability of coverage and

Associates’ reliance on Medicaid.

¶ Section 2 discusses in detail the nine limited-risk initiatives and five bold

steps we are recommending. Given conflicts inherent in the challenges

we face, any set of solutions will require carefully balancing, and

sometimes making trade-offs between, cost, Associate satisfaction, and

public reputation.

Limited-risk initiatives: We are recommending that Wal-Mart

realign eligibility requirements for health insurance; decrease cross-

subsidization of spouses; give Associates more information about

how to use healthcare and health insurance; lower company-paid life

insurance coverage levels; capture savings from current initiatives to

improve labor productivity; add a combination of best practice care

management programs; further develop high-performance provider

networks; offer Associates bundles of other benefits (e.g., paid time

off) from which to choose; and continue to explore adding health

clinics in stores. These initiatives will reduce costs and will slightly

improve Associate satisfaction.

Bold steps: The nine limited-risk initiatives will not fully address all

the benefits-related challenges we face. To fully address these

challenges, we recommend that Wal-Mart take five bold steps that will

require more explicit trade-offs between cost, Associate satisfaction,

and public reputation. The first two recommended steps primarily

address cost trends, the third addresses attracting a healthier

workforce, and the last two steps address improving our public

reputation.

–

Move all Associates to “progressively designed” consumer-driven

health plans to help control cost trends while allowing Associates to

build up savings in Health Savings Accounts.

–

Restructure the retirement program (i.e., profit sharing and 401(k)

program) to reduce costs and help Associates better save for

retirement.

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–

Redesign benefits and other aspects of the Associate experience,

such as job design, to attract a healthier, more productive

workforce.

–

Make some select strategic investments in our healthcare offering

(e.g., lower maximum out-of-pocket expenses) so it can better

withstand external scrutiny.

–

Improve communication of Wal-Mart’s benefits offering so we get

more credit for what we provide, and, over the long-term, work to

shape state and national outcomes on healthcare.

¶ Section 3 summarizes the combined impact of the limited-risk initiatives

and the bold steps. The team believes this new strategy will bring

powerful advantages to Wal-Mart, including:

Maintaining benefits spend at or below today’s level as a percentage

of sales;

Offering a more attractive benefits package for healthy Associates;

Better positioning us to fight Wal-Mart’s critics.

We presented this material to the Executive Benefits Steering Committee (Tom

Hyde, Lawrence Jackson, and Tom Schoewe) in late July. They received the

recommendations enthusiastically and asked that we share them widely within

Wal-Mart, something we have begun to do. They also asked that the team

continue to test and refine the strategy, especially with Associates and external

stakeholders. Our aspiration is to complete this work by late September, receive

Executive Committee approval on the overall strategy by early October, and hold

a special session with you in November for further discussion.

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1 Major Benefits-Related Challenges

We analyzed the benefits-related challenges facing Wal-Mart through three

lenses – cost trends, Associate satisfaction, and public reputation.

COST TRENDS

From 2002 to 2005, our benefits costs grew significantly faster than sales, rising

from 1.5 percent of sales to 1.9 percent. Benefits spend grew from $2.8 billion to

$4.2 billion during this period, at a rate of 15 percent per year. Striving to hold

benefits costs as a percent of sales constant is critical for Wal-Mart’s long-term

economic success.

A few benefits made up the bulk of this increase: healthcare ($1.5 billion) grew

by 19 percent, paid time off ($1.4 billion) grew by 14 percent, and the profit

sharing and 401(k) program ($740 million) grew by 13 percent. (Over the period,

the domestic Associate base grew at 5 percent and domestic sales grew at 11

percent.)

Increased utilization of medical services, which grew by 10 percent per year, was

the primary driver of the rapid growth in our healthcare costs (Exhibit 1). Almost

half of this utilization growth was due to three Wal-Mart-specific workforce factors

(distinct from national trends):

¶ Our workforce is aging faster (0.50 years per calendar year) than the

national average (0.12 years per calendar year).

¶ Our workers are getting sicker than the national population, particularly

with obesity-related diseases. For example, the prevalence of coronary

artery disease in Wal-Mart’s population grew by 6 percent compared to a

national average of 1 percent, and the prevalence of diabetes in our

population grew by 10 percent compared to a national average of 3

percent. (That said, our workforce is no sicker at present in absolute

terms than the national population.)

¶ A segment of our workforce consumes healthcare inefficiently, in a

pattern similar to a Medicaid population. Our population tends to over

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utilize emergency room and hospital services and underutilize

prescriptions and doctor visits. This pattern is most evident among our

low-income Associates, and one hypothesis is that this behavior may

result from prior experience with Medicaid programs.

Compounding these problems are several national trends, such as the increased

use of technological innovations, which are driving increased utilization of

medical services across the U.S. healthcare system.

The cost of Wal-Mart’s profit-sharing and 401(k) program and paid time off grew

faster than overall Associate growth, due largely to increasing Associate tenure.

Over the past 4 years, the average Associate tenure has increased by 0.2

months per calendar year. As a result, more Associates qualify for participation in

benefits programs like the profit sharing and 401(k) plan and for more paid time

off. An even more important factor is wages, which increase in lock-step with

tenure and directly drive the cost of many benefits (e.g., 401(k) is a percentage of

wages). Given the impact of tenure on wages and benefits, the cost of an

Associate with 7 years of tenure is almost 55 percent more than the cost of an

Associate with 1 year of tenure, yet there is no difference in his or her

productivity (Exhibit 2). Moreover, because we pay an Associate more in salary

and benefits as his or her tenure increases, we are pricing that Associate out of

the labor market, increasing the likelihood that he or she will stay with Wal-Mart.

We have also not effectively leveraged our benefits spend per Associate, which

should be thought of as a fixed cost for employing that Associate. We have

allowed our full-time Associates to average only 34 hours of work per week;

increasing the hours worked per Associate would enable Wal-Mart to lower our

labor cost per hour by spreading benefits costs over more hours. We also have

one of the highest percentages of full-time Associates in the retail industry, even

though full-time Associates are more expensive per labor hour (in terms of both

benefits and wages).

ASSOCIATE SATISFACTION

Associates are satisfied with their overall benefits package, but they have

expressed significant opposition to most traditional cost-control levers. For

instance, Associates strongly oppose higher deductibles or limits to their choice

of providers. Satisfaction varies significantly, however, by benefit and by

segment of Associate, creating an opportunity to rebalance the benefits portfolio

to improve satisfaction while reducing costs. In particular, the least healthy, least

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productive Associates are more satisfied with their benefits than other segments

and are interested in longer careers with Wal-Mart.

Overall, Associates are satisfied with their benefits relative to peers at other

retailers. In a survey of retail workers, Associates ranked Wal-Mart’s benefits

above the industry average in availability, ability to qualify, quality, and execution

(e.g., claims processing). The cost of healthcare coverage was the only factor on

which we scored poorly.

Associate satisfaction and view of importance vary significantly by specific

benefit (Exhibit 3). For example, Associates rank health insurance as the most

important benefit Wal-Mart offers, but they also say it is the one with which they

are least satisfied. The stock purchase plan, the profit sharing and 401(k)

program, and life insurance are all ranked high-satisfaction, low-importance,

suggesting an opportunity to rebalance Wal-Mart’s investment in these benefits

into other more important benefits. Paid time off and the discount card are the

only high- satisfaction, high-importance benefits.

Associate satisfaction with benefits also varies significantly by segment of

Associates. The team analyzed the Associate population on a wide variety of

factors (e.g., attitude, health behavior, tenure), the most fruitful of which was

annual healthcare spend. The so-called “low utilizers” are the most attractive

Associate segment because they cost Wal-Mart less in terms of healthcare

expenses and are more productive in their jobs. (Productivity findings were

based on analysis of individual cashier items per hour data.) Moreover, this

segment also showed healthier behaviors, specifically less prevalence of obesity.

Unfortunately, the “low utilizers” were also least satisfied with our benefits and

were planning shorter careers with Wal-Mart. This segment favors a different

type of benefits package than do the “high utilizers,” and different than what we

offer today: health insurance more closely modeled on consumer-driven health

plans – lower premiums, higher deductibles, and health savings accounts. They

also prefer certain non-medical benefits, such as help in saving to purchase a

home and help in paying for more education, neither of which do we offer in a

robust way today.

It is worth noting, however, that overall benefits only play a small role in attracting

Associates to Wal-Mart and in keeping Associates satisfied while at Wal-Mart.

Our benefits offering played a key role in attracting just 3 percent of our

Associates. Moreover, satisfaction with benefits does not correlate with

satisfaction with Wal-Mart. A variety of factors – especially Associates’

interactions with management – are more important.

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PUBLIC REPUTATION

Healthcare is one of the most pressing reputation issues facing Wal-Mart.

Survey work done last summer shows that people’s perception of our wages and

benefits is a key driver of Wal-Mart’s overall reputation. Several groups are now

mounting attacks against Wal-Mart focused on our healthcare offering. These

increasingly well-organized and well-funded critics – especially the labor unions

and related groups, such as Wal-Mart Watch – have selected healthcare as their

main avenue of attack. Moreover, federal and state governments are

increasingly concerned about healthcare costs, and many view Wal-Mart as part

of the problem (a view due, in part, to the work of Wal-Mart’s critics). Medicaid

costs are a major priority on most governors’ agendas; already a quarter of

states are spending more than 25 percent of their budgets on Medicaid, and

observers across the political spectrum assert that the current system – with

spiraling costs, a large population of uninsured, and an increasing number of

medical bankruptcies – is unsustainable (although there is little consensus on

what should take its place). In this environment, we can expect efforts like those

in Maryland (which is trying to mandate that companies spend a certain

percentage of revenue on healthcare) and New Hampshire (which requires

health services to track where Medicaid enrollees are employed) to accelerate.

Proposals such as these, if successful, will bring added costs to Wal-Mart.

Moreover, these battles with critics and governments are contributing to the

decline of Wal-Mart’s overall reputation.

Our healthcare offering is also vulnerable to attack. We have not effectively

communicated the generosity of our healthcare benefits to the general public;

instead, we have thus far allowed our critics to frame the debate. For instance,

only 22 percent of Americans find it very believable that Wal-Mart provides health

insurance to 900,000 people. Wal-Mart’s critics can also easily exploit some

aspects of our benefits offering to make their case; in other words, our critics are

correct in some of their observations. Specifically, our coverage is expensive for

low-income families, and Wal-Mart has a significant percentage of Associates

and their children on public assistance. Consider the following:

¶ On average, Associates spend 8 percent of their income on healthcare

(premiums plus deductibles plus out-of-pocket expenses) for themselves

and their families, nearly twice the national average. The number varies

significantly by plan type, rising to 13 percent for those on the Associate

and Spouse plan. In 2004, 38 percent of enrolled Associates spent

more than 16 percent of the average Wal-Mart income on healthcare.

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¶ Critics contend that the costliness of Wal-Mart’s healthcare coverage

causes it to enroll fewer Associates in its health insurance plan than do

most national employers (48 percent versus 68 percent) (Exhibit 4).

¶ We also have a significant number of Associates and their children who

receive health insurance through public-assistance programs. Five

percent of our Associates are on Medicaid compared to an average for

national employers of 4 percent. Twenty-seven percent of Associates’

children are on such programs, compared to a national average of 22

percent (Exhibit 5). In total, 46 percent of Associates’ children are either

on Medicaid or are uninsured.

On both of these issues – affordability and public assistance – it is important to

note that our offering and performance are on par with other retailers; Wal-Mart’s

critics, however, hold it to a “large company” standard, not a retailer standard.

Despite the difference in industry economics, critics believe we should behave

more like a GM or a Microsoft than a Target or a Sears. While critics have not

yet harnessed all of these facts, they are successfully exploiting those they do

have, suggesting that, when discovered, the others will also become effective

ammunition.

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2 Proposed Revisions to Benefits Strategy

Against the backdrop of these challenges, the team is recommending that Wal-

Mart implement the nine limited-risk initiatives and five bold steps discussed in

detail in this section.

LIMITED-RISK INITIATIVES

These nine initiatives require little or no trade-off between cost, Associate

satisfaction, and public reputation. Exhibit 6 provides an overview of these

initiatives:

1. Realign eligibility requirements for health insurance so that

Associates (full-time and part-time) and their children could qualify after,

for example, a defined number of hours. This move would simplify

external communications, make Wal-Mart even more competitive in the

part-time labor market, and help align costs with the economics of the

business (in that the benefit is based on hours worked). On average, for

example, a 1000 hour requirement would translate into 6 months for full-

time Associates (same as today) and 1 year for part-time Associates

(versus 2 years today).

2. Decrease cross-subsidization of spouses through higher premiums

or other charges. Spouses are by far the most expensive plan members

to cover, and Wal-Mart pays more per spouse than per Associate. This

change would allow us to put more dollars towards Associates and their

children.

3. Give Associates more information about how to use healthcare and

health insurance. Many Associates are making inefficient decisions

about what healthcare services to use, e.g., relying too much on

emergency rooms. We need to give Associates more information on the

cost and quality of specific health services, better educate them on how

best to utilize healthcare, and develop education efforts specifically for

those Associates who have previously been uninsured or on public

assistance.

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4. Lower company-paid life insurance coverage levels to a maximum

payout of $12,000. Life insurance, although a small cost, is the fastest-

growing benefits cost. It is also a high-satisfaction, low-importance

benefit, which suggests an opportunity to trim the offering without

substantial impact on Associate satisfaction. The company-paid policy

currently covers one times an Associate’s annual salary, which is slightly

more generous than most retailers.

5. Capture savings from current initiatives to improve labor

productivity. These initiatives include reducing the number of labor

hours per store, increasing the percentage of part-time Associates in

stores, and increasing the number of hours per Associate. These

changes represent a major cost-savings opportunity with relatively little

impact on existing Associates. The most significant challenge here is

that the shift to more part-time Associates will lower Wal-Mart’s

healthcare enrollment (even with the more generous part-time offering

outlined above), which could have an impact on public reputation.

6. Add a combination of best practice care-management programs,

including utilization management, case management, disease

management, and errors and omissions programs. These programs

primarily improve quality of care, but we believe they may also produce

modest cost savings by improving care coordination and compliance for

extremely sick Associates, who drive a disproportionate share of the

cost.

7. Further develop high-performance provider (e.g., doctors,

hospitals) networks, so as to direct Associates to the most efficient and

effective healthcare providers. The quality of care and cost of care vary

significantly among doctors. We should be on the cutting edge of efforts

to identify the best doctors by, for instance, working with payors to find

new ways to identify them. We should then create provider networks

made up only of those doctors and provide Associates with incentives

for using them.

8. Offer Associates bundles of other benefits (e.g., paid time off,

education, discount card) from which to choose. Our benefits

package today is “one size fits all,” even though different segments of

Associates value specific benefits differently. For instance, one segment

would happily give up some paid time off in exchange for a more

generous discount card. While we believe every Associate on a Wal-

Mart plan should have a core healthcare and retirement offering, we

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could more effectively spend our remaining benefits dollars by allowing

Associates to choose from among several packages of benefits.

9. Continue to explore adding health clinics in stores. Wal-Mart is

starting an effort to put clinics in stores, a strategy currently framed as a

real-estate opportunity. Over the long term, and with several important

modifications (e.g., innovations to create lower-cost visits), these clinics

could become an important part of our healthcare strategy, especially as

a substitute for emergency room visits.

Taken together these nine initiatives should reduce Wal-Mart’s projected

healthcare costs from a projected 2.3 percent of sales in 2011 to a projected 2.0

percent of sales, largely due to the impact of Initiative 5 on productivity. The

initiatives should also slightly improve Associate satisfaction. They will not likely

have any significant impact – positive or negative – on public reputation.

BOLD STEPS

The following five bold steps will be more difficult to execute than the limited-risk

initiatives, but their impact will be much greater. Exhibit 7 provides an overview

of these steps.

Move all Associates to “progressively designed” consumer-driven

health plans to help control cost trends, while allowing Associates

to build up Health Savings Accounts

While relatively new in the United States, consumer-driven health plans have

been proven to control medical cost trends more effectively than traditional plans

in both domestic (e.g., Logan Aluminum) and international (e.g., Singapore)

settings. In the place of traditional plans with deductibles, Associates get a

Health Savings Account (HSA) or a pretax bank account for health expenses that

is similar to a 401(k). An HSA can be funded from three sources: annual seed

money from Wal-Mart, an annual contribution from the Associate, and a matching

contribution from Wal-Mart. The Associate uses the HSA to cover his or her first-

dollar medical expenses every year. When an Associate has used up his or her

HSA, there may be a “bridge” the Associate must cover, which would be the

difference between the amount in the HSA and the point at which coinsurance

takes over (typically a level equivalent to a traditional high deductible plan).

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Consumer-driven health plans are more effective at controlling costs than

traditional plans because enrollees have greater responsibility for their healthcare

spending. HSA funds belong to the Associate, so he or she has a stake in using

the money wisely. If the Associate leaves Wal-Mart, the HSA funds go with him

or her. If HSA contains money at the end of the year, those funds roll over for

use in the following year. The bridge which an Associate with high healthcare

expenses may face would also serve as a further brake on spending. Consumer-

driven health plans are particularly attractive to the healthy, productive Associate

segment, because this segment now “gets something” for enrolling in health

insurance and staying healthy – they can save money in their HSA.

The key to achieving these advantages is to have the vast majority of Associates

participate in HSA plans or other plans that incent behavior modification and cost

control. Otherwise only the healthiest enroll and there is very little cost reduction

because healthy people spend so little on healthcare. During this year’s

enrollment cycle, we are offering a few consumer-driven health plans, alongside

many other options. These existing offerings can serve as an effective starting

point for the transition.

Such plans would have several advantages for Associates. More than 80

percent of Associates would be better off financially under the proposed

consumer-driven health plans than under traditional plans. Associates can also

accumulate wealth in their HSAs. A typical Associate who is generally healthy

would have $600 to $2,100 in savings after 3 years. Associates can use this

wealth both for significant health events and retirement. Associates can also use

their HSAs to cover a wide variety of health expenses, including vision, dental,

preventive care, and other spending not covered by the plan.

To make this change palatable externally, the plan design must be “progressive,”

meaning it cannot involve any cost shifting. In transitioning to consumer-driven

health plans, many companies have chosen to push more costs onto employees,

a move that has given these plans a bad reputation among progressives. The

plans proposed by the team do not involve any cost shifting. Moreover, a

growing number of companies are implementing such plans, providing Wal-Mart

with more political cover. Many retailers (e.g., Staples, Toys R Us) are offering

consumer-driven health plans as one option among many, and the ever-

progressive Whole Foods recently moved all of its employees to such a plan, to

much media fanfare.

The primary reason for making this transition would be to reduce future benefits

costs, and those savings would be significant: $400 million to $700 million in

FY2011, all from reduced trend. This change does, however, come with several

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challenges. Overall consumer-driven health plans are less popular with

Associates than traditional plans, albeit not dramatically so, and are more difficult

to communicate. Strong opposition is isolated to approximately 10 percent of

Associates. Wal-Mart will also face reputation challenges in implementing this

change given that progressives view such plans as a “Republican answer.”

Wal-Mart will have to be sophisticated and forceful in communicating this change

internally and externally.

Restructure the retirement program (i.e., the profit sharing and

401(k) program) to reduce costs and help Associates better save for

retirement

We should reduce our overall investment in the profit sharing and 401(k) program

from approximately 4 percent of wages to approximately 3 percent of wages.

Doing so would bring the program more in line with retail offerings and would

save Wal-Mart a substantial sum of money. Hewitt ranks our retirement program

as the best in its non-union hourly retail benchmark set. Given the scrutiny that

Wal-Mart receives on healthcare and that retirement is a low-importance benefit

for Associates, the retirement program seems to be the wrong place for

overinvestment.

We should also redesign the specifics of our retirement program. In particular,

we should convert the 401(k) program from a “no-strings-attached” flat

contribution to a matching program in which Associates receive funds from Wal-

Mart based on the contribution they make to their 401(k). Such a program would

help Associates better prepare for retirement. A fully participating career

Associate would be able to replace 30 to 40 percent of his or her income at

retirement, compared to 15 percent today, resulting in some 80 to 90 percent of

income replaced at retirement (when Social Security is included).

Overall this proposal would save Wal-Mart a significant amount of money: $350

million to $400 million in FY2011. With respect to Associate satisfaction,

Associates reacted positively to a matching retirement program, although they

slightly preferred the current program. Although critics will contend that the new

program is less generous than the current one, retirement has not been a major

issue in the external environment.

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Redesign benefits and other aspects of the Associate experience,

such as job design, to attract a healthier, more productive workforce

Given the significant savings from even a small improvement in the health of our

Associate base, Wal-Mart should seek to attract a healthier workforce. The first

recommendation in this section, moving all Associates to consumer-driven health

plans, will help achieve this goal because these plans are more attractive to

healthier Associates. The team is also considering additional initiatives to

support this objective, including:

¶ Design all jobs to include some physical activity (e.g., all cashiers do

some cart gathering);

¶ Offer savings via the Discount Card on healthy foods (e.g., fruits and

vegetables);

¶ Offer benefits that appeal to healthy Associates (e.g., an education

offering targeted at students).

A healthier workforce will lead to lower health insurance costs, lower

absenteeism through fewer sick days, and higher productivity. It will be far easier

to attract and retain a healthier workforce than it will be to change behavior in an

existing one. These moves would also dissuade unhealthy people from coming

to work at Wal-Mart. Even a modest shift in Wal-Mart’s ability to attract and

retain a healthier workforce could result in significant savings: $220 million to

$670 million in FY2011. The key tasks in implementing this fourth bold step,

once the team has developed a more complete list of actions, are to create a

clear set of metrics to measure success, to run pilots in several stores to

understand each idea’s effectiveness, and then roll out the most successful ones.

Make a series of strategic investments in our healthcare offering so

it can better withstand external scrutiny

The team is investigating several ideas to identify if there are targeted

investments or plan modifications we could make that would yield significant

reputational benefit. The following are a couple of ideas being explored:

¶ To address concerns about affordability, maintain commitment to offer

an insurance plan that covers Associates for $1/day (or $14 per pay

period) and allows them to cover their children for another $1/day.

¶ To further address concerns about affordability, lower an Associate’s

maximum exposure to medical financial risk (premiums plus deductibles

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plus co-payments) to a more manageable level, potentially 15 percent of

the average income for a full-time Associate.

¶ To address concerns about access, help Associates gain access to the

private insurance market after 30 days of employment and potentially

provide them with limited funding for doing so while they wait to become

eligible for Wal-Mart’s plan.

These changes would give us a powerful set of messages to use in combating

critics. (For instance, “Wal-Mart offers Associates access to health insurance

after they’ve worked with us for just 30 days.”) These kinds of changes would

also make Wal-Mart’s coverage more affordable and accessible, directly

addressing critics’ and Associates’ most persistent arguments.

While this fourth bold step should create goodwill both internally and externally, it

will be expensive. In FY2011, the cost of these three proposals would be

between $300 million and $350 million. Considering the steep cost, as well as

the potential unintended implications on underlying plan design, the team is

rigorously testing these ideas with the public and policymakers to determine

whether these investments would effectively “move the needle” on Wal-Mart’s

public reputation.

Improve communication of our benefits offering so we get more

credit for what we provide and, over the long term, work to shape

the outcomes of state and national healthcare reform efforts

We need to be more proactive in the public arena. Three efforts are needed

here:

¶ Address the Medicaid issue head-on by reframing the debate (e.g., this

is everyone’s problem, not just Wal-Mart’s) and by offering some type of

counterproposal or compromise. This first effort is critical because

Wal-Mart is under serious attack from state governments with regard to

the number of Associates on publicly funded health insurance. These

attacks show no signs of abating – in fact, they seem to be accelerating

– and elected officials are proposing increasingly costly solutions.

¶ Clarify and improve messages about our healthcare offering (building on

the proposed changes outlined above) and engage in a sustained

communication campaign. This kind of communication will help us

reframe public perception of our healthcare offering, the only way for us

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to start winning the debate with our critics. It will also help us build the

credibility needed to weigh in more broadly on U.S. healthcare issues.

¶ Become more engaged in the national healthcare debate, to position

Wal-Mart as a leader in healthcare in general and on access (e.g.,

individual mandates) and affordability (e.g., bringing IT to healthcare) in

particular. Establishing Wal-Mart as a leader on this critical issue will

help deflate our critics. It will also put us in a position to help shape the

outcome of the public debate about the healthcare crisis in a way that is

at least somewhat advantageous to our interests.

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3 Impact of the Proposed Changes

Taken together the limited-risk initiatives and the bold steps create a powerful set

of advantages for Wal-Mart.

SIGNIFICANT ADVANTAGES

The new strategy will enable us to deal with all three of the benefits-related

challenges we face.

¶ Cost control. Benefits costs are modeled to be at or below 1.9 percent

of sales (i.e., level as of FY 2005) in 2011. (The limited-risk initiatives

result in a reduction in projected 2011 benefits costs of about 16

percent, and the bold steps yield another reduction of about 9 percent.)

¶ Associate satisfaction. Associates will have a more generous

healthcare benefit with an HSA to cover first-dollar expenses, greater

protection against medical risk, and the ability to accumulate wealth in

their HSAs; a retirement benefit that helps them prepare more effectively

for retirement, and more choice, especially with regard to selecting other

benefits (e.g., paid time off). Moreover, we will be more effective at

attracting and retaining the healthy, productive workforce Wal-Mart

wants.

¶ Public reputation. By providing Associates more affordable health

coverage and responding to concerns about Wal-Mart’s Medicaid/S-

CHIP enrollment, we will have addressed our critics’ most potent

arguments. We will also have stepped-up our efforts to communicate

the strengths of Wal-Mart’s benefits offering and counter critics’ claims.

Finally, we will have positioned Wal-Mart to have a “seat at the table” in

the public debate about healthcare reform.

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RISKS

The risks associated with these changes are worth carefully noting. Addressing

them will require, among other things, attention to implementation planning,

communication, and execution.

¶ Cost risk. If costs saving initiatives are not properly sequenced with

those that require investments, costs could increase before they

decrease.

¶ Associate satisfaction risk. Some of the proposed revisions to the

benefits strategy (e.g., the move to consumer-driven health plans, the

changes in the retirement program) have the potential to upset

Associates, especially more tenured Associates.

¶ Public reputation risk. Healthcare enrollment will fall several

percentage points due primarily to a shift to more part-time Associates,

which could draw additional attacks from Wal-Mart’s critics. Also,

despite the proposed efforts, the Medicaid problem will not be “solved.”

A significant number of Associates and their children will still qualify for

Medicaid. Because many of these programs will offer more generous

health insurance than Wal-Mart provides, many Associates will still

choose to enroll in Medicaid, leaving the door open for continued

attacks.

The team believes that the advantages of the proposed strategy outweigh these

risks.

* * *

I appreciate your taking the time to engage so fully on this topic and look forward

to discussions with you at the special Board meeting in November. In the

meantime, I would welcome hearing your reactions to our work to date.

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Supporting Exhibits: 7

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