On Sept. 26, something happened that is likely to wreck
Ben Carter's time-honoured health care business model.
That's the day the United Auto Workers and General Motors Corp.
settled on a revolutionary new contract that shifts US$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 labour union into one of the largest
health care consumers in the United States.
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 per cent to 62 per cent 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
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 six to eight per cent 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 U.S. 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 healt4K,Iproviders.
``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.''