In the pre-dawn hours of Wednesday morning, General Motors and the United Auto Workers announced that they had reached an important deal which not only ended the UAW’s two-day old strike against GM, but also provides the basis for a new contract based on one of the most important trade-offs in the history of corporate America.
GM has promised its American auto workers that most of their US jobs will not be outsourced and that the company will hire (“in-source”) 3,000 temporary workers in return for GM being able to fund a health care trust fund for retired workers with one large initial payment and then no longer having responsibility for the retirees’ health insurance.
Initial reports suggest that GM will fund a Voluntary Employees Beneficiary Association, or VEBA, with about $30 billion, an amount that UAW President Ron Gettelfinger said should cover health care costs for over 300,000 retirees for at least 80 years based on his assumptions about health care spending , returns generated on the trust’s investments, and the modest premiums of about $50/month to be paid in by retirees. GM will also pay over $5 billion for retiree health care before the VEBA is created and “backstop” the fund with $1.6 billion.
Although not yet ratified, this agreement will substantially reshape the thinking in corporate America about how to deal with employees’ health insurance costs. It has significant political import as well.
Steve Moore of the Wall Street Journal’s Editorial Board makes the broad economic argument: “The GM deal shows that American companies are moving away from defined benefit health care plans just as over the last decade they’ve migrated out of defined benefit pension plans. Out of control health costs are the biggest deterrent to U.S. manufacturing competitiveness.”
GM spends more on health care than on steel, giving the company labor costs at least $20/hour higher than foreign competitors. Noted less frequently is that GM is far from unique. Ford, even with a better health care structure than GM, also spends more on health than on steel. In 2005, Starbucks chairman Howard Schultz reported that his company spent more on health care than on coffee beans.
From a company’s point of view, there are two enormous inter-related problems with employer-provided health care: Since workers view their health care as free, they tend to use too much of it which taxes supply and forces prices up. The increased cost…health care costs are almost universally the fastest increasing cost in business…makes it exceptionally difficult for companies to make even modestly long-range plans and budgets.
Because health care is more of a service than a physical product, people tend to ignore supply concerns. After all, how often do you consider that you might not be able to get an appointment with a lawyer or mechanic? And then do you expect those appointments to be free?
Imagine if auto insurance covered, with minimal or no out-of-pocket cost to the consumer, new wiper blades, oil changes, and small paint scratches. There would be so many customers that car repair shops would not only be able to raise prices, they would have to raise prices to keep up with their increased costs for staffing and other overhead. Whether they’re fixing something minor or repairing serious damage, there’s about the same amount of paperwork to fill out, especially when trying to recover money from an insurance company. Consider a small auto repair business of 5 employees which gets a rush of new customers wanting their “free” oil change. (“Just bill my insurance!”) The company hires someone to keep up with the extra paperwork, raising their overhead costs 20% without increasing their ability to repair more cars, so they raise their prices causing the insurance companies to then raise auto insurance premiums.
Then imagine this problem translated to health care, including how much harder it is to deal with health insurance companies (and their lawyers) than with auto insurance and how much more it costs to hire another doctor than another mechanic or bookkeeper. It’s easy to see why the cost of and dissatisfaction with health care increases as you insulate the consumer from the cost of what he consumes.
When a system is at the edge of what it can supply, even small increases in demand can causes large increases in price. The chaotic nature of such a system makes forecasting all but impossible. So if you’re a company like GM where that particular component of cost is the largest single item in your expenditures, it wrecks your budgeting process, your profitability, and your cost of money when you want to borrow. There is a reason that GM debt may for the first time in years be raised to “investment grade” by bond rating companies when this agreement is ratified.
There is a political lesson here as well, though not one I expect to be easily learned: GM’s long-standing paternalistic approach led to out-of-control increases in costs which nearly bankrupted the company, risking the jobs, pensions, and health care of its workers and retirees. Yet this is precisely the system that is offered by HillaryCare and other Democratic plans to socialize American medicine.
The VEBA trust will be owned by GM’s retirees. That sense of ownership will give them reason to be diligent in how they spend those resources, reducing demand pressure on the health care system and lowering the rate of increase in health care costs. That direct connection between the consumer and the service consumed is precisely what is created by Health Savings Accounts, high-deductible insurance plans, and co-pays of more than the price of lunch. It is these discipline-creating policies which offer the most likely solution to current problems in our health care system (which, despite media cries, is not in crisis).
The realization by both General Motors and its workers that their current system is unsustainable and that a solution is to be found in increasing individual responsibility should be as loud a message to voters as it undoubtedly is to industry. As the old saw goes, if you think medical care is expensive now, just wait until you see how much it costs when it’s free.
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