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The Doctor Is Out
By Geoffrey Colvin, Fortune Mail
November 14, 2005
How GM's deal to cut its medical benefits hurts every retiree.
Retirees, present and future, I have bad news: on Oct. 17, 2005, those medical benefits you were hoping to get from your employer-and maybe even were promised-got shoved much closer to oblivion. That date will be regarded in the future as a tipping point, the historic moment when, at last, it became impossible for any U.S. employer to offer meaningfully generous medical benefits to any significant number of retirees.
If your company doesn't offer such benefits, you must assume it never will. If it does offer them, but you're not yet retired, assume you'll never see them in their current form. And if you're retired and receiving medical benefits-even if they're specified in a union contract-you should assume they may now be considerably reduced.
While that advice sounds drastic, I believe it's fully warranted. I told you this was bad news.
Oct. 17 was, of course, the day General Motors and the United Auto Workers agreed to a substantial cut in the medical benefits GM gives its UAW retirees, who will soon have to make co-payments for visits to the doctor and pay about about a fifth of the cost of their coverage. That deal was epochal in part because the dollars were huge, even for GM: It saves the company an estimated $1 billion a year after taxes and reduces its total medical cost liability by about $15 billion. For perspective, remember that GM's total market value is about $15 billion.
But far more important is the concept of the tipping point: Though GM's new benefit levels are still fairly generous, in the wake of this deal, so few American companies are left offering top-notch retiree medical coverage (and the trend is so obviously headed toward scaling back), that no U.S. employer will find it viable to offer such benefits. It may seem surprising that an event at dowdy old GM could exert so powerful a force, but it does for a couple of reasons.
First is the immediate dollars-and-cents effect. Though it's easy to forget in a ceaseless blizzard of bad news, the auto industry is still arguably America's largest industry when you include the manufacturers, their vast supply chains, dealers, repair businesses, and aftermarket manufacturers and retailers. When the largest player in the largest industry achieves a significant cost reduction, the effects will be major. Imagine what's going on right now in the conference rooms at Ford and Chrysler as they contemplate their own UAW contracts, or in the offices of parts suppliers like bankrupt Delphi or struggling Visteon. Companies like those-big, old, and unionized-are where most of America's retiree medical benefits are clustered. Now no company can afford to be the last one in its industry offering those benefits.
The second reason the GM deal is so important is more psychological than financial, but perhaps even more powerful: It knocks the wind out of all other employees' attempts to retain retiree health benefits unscathed. Certainly the UAW wasn't doing GM any favors with this agreement. The union realized it was better off with reduced benefits than with no benefits, which might have resulted if GM had filed under Chapter 11 (which, to be sure, it still could). But health care was the UAW's most dearly protected issue. In the most recent contract negotiations two years ago, the union gave ground on such matters as plant closings and job reductions in order to preserve a virtually sacred principle: You shall not touch our health-care benefits.
And now it has given in-wisely, for sure-but how can other employee groups, all of them speaking for fewer retirees at smaller companies, hope to hold the line against further cuts?
Which brings us to a larger reality: This tipping point is global. America is almost unique in the world in delivering health-care coverage primarily through employers. Other countries either provide universal government-sponsored coverage or leave people to fend for themselves. Not us. The latest Commerce Department data show that among nonworking adults-mainly retirees-40% get health-care coverage that's based on employment. That's more than receive coverage from any other source, including all public sources combined.
Our system worked great for decades. But in today's global economy it is no longer sustainable. U.S. companies compete more every day with firms that pay zilch in direct costs for their retirees' health care. Our side can't win under those rules.
Let's be clear: In making their deal, GM and the UAW did the right thing. But in the years ahead, Oct. 17, 2005, will be a date most retirees will wish they could forget.
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