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Health Costs Soaring,Automakers
Are to Begin Labor Talks
By
DANNY HAKIM
New
York Times, July 15, 2003
DETROIT
- The Big Three automakers, which open contract talks with the United Auto
Workers union on Wednesday, are making a bigger issue out of reducing
medical costs than they have in years. But
the union has staked out health insurance as untouchable. "We're not
going to share costs," said Ron Gettelfinger, the U.A.W. president,
at a recent news briefing. Instead,
many in the automobile industry think, the union, knowing the competitive
pressures that Detroit is under, may give ground on issues like wage
increases, plant closings or work rules. The matter of controlling medical
costs would remain largely untouched. Health
costs have been soaring for many employers. In other industries,
businesses have generally passed along more and more of the costs to
workers and retirees, if they maintain benefits at all. Not so in the auto
industry, where union leaders have negotiated some of the most substantial
medical benefits in the country for their members. What
is more, in contrast to recent years when sport utility vehicles and
pickup trucks were highly profitable, vehicle prices are falling, if one
factors in the effect of interest-free financing and rebates as high as
$4,000. Proposals
in Congress to add prescription drug coverage to Medicare would help the
likes of General Motors, the largest automaker and also the nation's
largest buyer of popular drugs like Viagra, Prilosec and Nexium. A recent
Goldman, Sachs report referred to the proposed drug plans in Congress as
the "automaker enrichment act." But
even this change would barely scratch the surface of the Big Three's
health cost problems. For G.M., which is also the largest private buyer of
health care in the United States, such a plan might trim $2 billion from
the $57 billion health care liability it projects in coming years. As
contract talks open, few expect anything like a strike over health care
payments because both sides have too much to lose. G.M. and the other big
American producers, Ford and Chrysler, could little afford a strike in the
face of bruising competition from foreign automakers like Toyota and
Honda. And as the Big Three go, so goes the U.A.W., whose membership has
dwindled to fewer than 650,000 at the end of last year from 1.5 million
active workers in the late 1970's. "The
balance of power has shifted to the unions' favor because they have the
power to shut the companies down, and these companies, because of
international competition, are very fragile," said Douglas A. Fraser,
a former president of the U.A.W. and now a professor of labor relations at
Wayne State University. "There
would be devastation if there were shutdowns even for a few weeks,"
he said. "But the union knows the competitive landscape and will
exercise that power with intelligence." In
the late 90's, the booming sales of high-margin sport utility vehicles and
pickup trucks helped mask sharply rising health care costs. But now, the
hold of the Big Three on the sport utility and pickup truck market is
under assault from far more profitable Japanese automakers, which have
better reputations for quality. That
has left domestic automakers fighting to hold ground, offering incentives
three times as large as those of Toyota, Honda and Nissan, yet still
watching their market share diminish in a sputtering market. The
absence of a national health system in the United States means that the
Big Three take on social responsibilities that the governments in Japan
and Germany bear. Gary Lapidus, a Goldman, Sachs analyst, referred in his
recent report to the Big Three as "H.M.O.'s with wheels" that
only happen to make cars. G.M. alone provides medical coverage to nearly
half a percent of the United States population, when dependents are
included. And
although Toyota and Honda assemble in the United States most of the cars
they sell here, their plants are much newer, their work forces younger and
their retirees number in the hundreds, not the hundreds of thousands that
depend on the Big Three. They are also not unionized, except in joint
ventures with the Big Three. While
the out-of-pocket health costs of auto workers have not risen in years,
many American workers have seen quite the opposite, and even white-collar
Big Three employees can pay several hundred dollars a month in premiums
and other out-of-pocket expenses. Auto union members enrolled in H.M.O.'s
and P.P.O.'s generally pay $10 or less for prescriptions or visits to the
doctor. Everything else is covered. As
a result, many analysts think that the domestic auto industry is in a bind
similar to the one that crippled the domestic steel industry. Both feature
shrinking companies burdened with health and pension obligations to armies
of retirees, as well as labor contracts originating in a time of much less
global competition. Uwe
Reinhardt, a Princeton University health care economist, calls the Big
Three "a social insurance system that sells cars to finance
itself." "It's insane
to think that a company embedded in a fierce global competition can
function as a social insurance system," he said. "It is a crazy,
anachronistic idea. It's an idea that worked in the 60's, but lost its
validity beginning in the 70's when the car market became global." The Big Three and
their major suppliers spend some $9,000 and up per active worker annually,
according to Mercer Human Resource Consulting, compared with $5,758 at the
average large company. That rises to about $15,000 for retirees not
covered by Medicare, including benefits for dependents, and $3,500 to
$4,000 for retirees eligible for Medicare. For G.M., the
problem is most acute. The company has 2.5 retirees for each active worker
in the United States, a function of its domestic market share shrinking to
less than 30 percent today from 60 percent in 1960. Ford has one retiree
for each active worker in this country. Last year, G.M.
had medical expenses of $5 billion and Ford $2.8 billion. Drug costs
reached $1.4 billion for G.M. and $800 million for Ford. Both Toyota and
Honda declined to provide similar breakdowns of their health costs, but no
one disputes that they are far lower. Seventy percent of Ford's $2.8
billion health bill went to retirees, a burden foreign automakers have yet
to contend with in this country. Many Big Three
retirees opt for expensive traditional plans that let them choose any
doctor. Last year, 72 percent of Ford's blue-collar retirees were enrolled
in traditional plans, compared with 23 percent of its active workers. At large
companies nationwide, 6 percent of active workers pick such plans,
according to Mercer, and Toyota said its North American factory workers
were in line with that figure. G.M.'s medical
cost is equivalent to about $1,200 a car in this country. So what could G.M.
do with that money? A substantial job "dramatically upgrading the
appearance and the feature portfolio," said Joseph Phillippi, an
analyst at Auto Trends Consulting in Short Hills, N.J. Start with a
sunroof, which costs a few hundred dollars, Mr. Phillippi said. Or,
"$1,200 would buy you the top-of-the-line navigation system," he
said, adding that such a feature generally costs a consumer $2,500
"and they could give it to you for free." "Or it could
be used to dramatically improve the overall level of the powertrain of the
vehicle," he went on "or you could pour a lot of that money into
sharply upgrading the interior. You could go from vinyl to leather." But how do you
ask factory workers who perform grinding physical labor to retreat from
hard-won health benefits? More difficult, how do you ask retirees? "It's a
killing job," Mr. Fraser, the former union president, said of the
stresses and strains of auto work. "What an auto worker wants is
peace of mind and security, and health care is security." Gregory Stack,
46, a union member who is a car designer for Chrysler and once was a G.M.
factory worker, said the problem was with the health system itself —
runaway drug costs, malpractice suits, unnecessary surgery. "Once we do
give up some aspect of our benefits," he said, "it will continue
to escalate. We're the highest of all industrialized nations on health
care spending. It is not a sustainable model, but it won't be solved by
being placed on the back of the U.A.W. rank and file." For many
analysts, the health care problem is emblematic of the Big Three's broad
problems and also an incentive for auto manufacturing to shift to
countries like China, where hourly wages can be counted in pennies, or
even Canada, which has a nationalized health care system and far lower
costs. "When the
industry lived in a cocoon and could price to reflect its cost, these were
not issues," said Maryann Keller, a longtime auto analyst. "But
now, the union has to be worried what the cost of production is in China
because that's what's relevant to the ability of G.M. to support its
benefit structure 10 years from now." Health care is
only one piece of the competitive puzzle. G.M. recently undertook one of
the largest sales of corporate bonds, worth $17.5 billion, and used the
bulk of the proceeds to offset a $19 billion pension deficit. Toyota and Honda
also benefit from currency and quality advantages. And while G.M. has been
making significant advances in quality, it takes years for consumer
perceptions to catch up. Ms. Keller said, "If G.M., Ford and Chrysler can't find a way to make huge margins on some of their production, like they did with sport utilities in the late 90's, there is absolutely no way they can afford to pay these benefits." Copyright
© 2002 Global Action on Aging
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