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UAW could spark shift in retiree-health benefits

If the union is successful in its cost-cutting efforts, those reforms likely would spread to companies and other health care consumers, expert says.
/ Source: The Associated Press

On Sept. 26, something happened that is likely to wreck Ben Carter's time-honored health care business model.

That's the day the United Auto Workers and General Motors Corp. settled on a revolutionary new contract that shifts $46.7 billion worth of retiree health care costs from the company to the union.

As chief operating officer of the Detroit Medical Center, Carter sees the deal as a major change in the way health care is priced and delivered. He and others see it as a catalyst for change in a business that costs employers millions and rises in price by double the rate of inflation almost every year.

"We're viewing it as an opportunity to work with the union leadership and their retired members to design a better mousetrap that keeps them healthier, have a better standard of living and reduces the cost of providing that," Carter said.

The UAW worked similar deals this year with Ford Motor Co. and Chrysler LLC, turning the labor union into one of the largest health care consumers in the nation.

In early 2010, the union will become responsible for the health care bills of 540,000 retirees and their spouses, a population equal to that of Portland, Ore.

The numbers give the UAW bulk buying power and enough clout to bring costs down, according to some experts. Retirees, now on the same team as the entity paying their bills, will have incentives to live healthier and limit their health care use. Some observers also say the move will lead the union to step up its lobbying efforts for a national health care system.

If the union is successful in its cost-cutting efforts, those reforms likely would spread to companies and other health care consumers similar to the way health maintenance organizations led to cost cuts decades ago, said J.B. Silvers, professor of health systems management at Case Western Reserve University in Cleveland.

"If they come up with better models for how to provide health care, that will diffuse across the system probably pretty fast," he said. "In that sense, everybody's going to benefit."

In the contracts, GM, Ford and Chrysler agreed to put billions into union-run trusts that will pay bills for all retirees and spouses and for active workers and spouses after they retire. Formulas for the companies' contributions are complex, with varying levels of cash and notes that are convertible into stock, and further payments if the funding level drops.

GM will put about $26.5 billion toward its obligation, while Ford will pay around $13.2 billion on a $23.7 billion liability and Chrysler about $9.9 billion on a $16 billion liability.

The companies are paying 56 percent to 62 percent of the obligations into the trusts, called voluntary employee beneficiary associations or VEBAs.

The VEBAs have other funding sources, including wage contributions from active workers and increased payments from GM and Chrysler retirees who will get corresponding pension increases from the companies.

Union President Ron Gettelfinger has said the VEBAs will be solvent for 80 years, and union summaries of the contracts say that due to a court decision on 2005 health concessions, benefits cannot change at least until the end of 2011.

For the VEBAs to work, experts say the union must invest wisely and make more money than the rate of health care inflation, which generally runs at 6 to 8 percent per year. But they also must control costs with bulk buying, perhaps negotiating directly with health care providers.

The UAW could hold down costs by encouraging its members to exercise, take their medicines and limit unnecessary doctor or hospital visits, experts said.

"They all go down together if it doesn't work. They've got organizational cohesiveness on their side where they didn't have it before," said Silvers.

Carter, of the Detroit Medical Center, said his nine-hospital group wants to work with the union, potentially scrapping the traditional model of employers contracting with insurance companies.

"They probably need to be looking at how to bundle this stuff up and get good pricing," Carter said.

With patient and health care provider on the same side, the union could use new technology to end duplication of services, treat people in their homes and encourage patients to comply with doctors' instructions, he said. That could help cut down on costly emergency room visits and hold down costs, Carter said.

But other experts say cutting costs won't be easy. If it was, efforts by GM or the federal government would have been more successful, said W.C. Benton Jr., a management professor at Ohio State University who specializes in health care economics.

The union says the boards that run the trusts will contract out investment and health care duties, but Benton said the fees will be expensive and the nonprofit UAW will have to quickly learn the nuances of health care finance or risk being manipulated by more savvy insurance companies or health care providers.

"For-profit entities will just hover over the UAW now," he said. "In most cases I've studied, the for-profits always prevail over the nonprofits."

It also costs more to care for retirees, and although Medicare will pay many of those bills, the UAW won't be able to offset its costs with a younger population as insurance companies do, said Kenneth Lee, associate dean of finance and administration at the Wayne State University Medical School in Detroit.

The UAW can make gains by negotiating, but Lee noted retirees often undergo expensive treatment for life-threatening conditions. And no one wants to make the decision against treating them.

"Who's going to make those kinds of tough decisions?" he asked. "That's where the real cost of the health care dollar comes, in those end-of-life issues."

UAW spokesman Roger Kerson wouldn't comment, but even the summaries handed out to members warn VEBA projections are based on reasonable expectations of medical cost inflation and investment returns, and trustees "may need to make benefit adjustments to maintain long-term solvency."

Russell Kula, 58, retired in 2001 from the Chrysler truck plant in Warren, Mich., after 30 years with the company. Standing outside of his union hall recently he said he isn't worrying about the trusts running dry.

"There's nothing you can do about that," Kula said. "If they run out, they run out."