Long-term promises almost always turn into long-term problems. Just ask Detroit.
The Big Three automakers (General Motors, Ford and Daimler Chrysler) are suffering record losses and lagging sales. They’ve been here before, in the late 1970s, and managed to pull through. However, there is one significant difference between then and now: rising health-care costs, especially for retirees. Unless those costs are addressed correctly and quickly, at least one automaker could go out of business.
None of the Big Three has been hit harder than GM. The world’s largest corporation has already lost $4.5 billion this year and faces a long-term liability of $15 billion for retiree health care.
While GM can’t legally change its agreement with retirees and current workers without broaching the subject when their contract with the United Auto Workers expires, there is an option the company and the UAW should consider to protect against future unmet promises while offering greater choice to workers: a “defined contribution” program.
Instead of mandating a certain health plan (as in a “defined benefit” program), an employer would provide a set dollar amount to each employee and allow workers to choose the health plan they think best for themselves or their family.
There’s another advantage. A defined-contribution model would create a new market that would include hundreds of thousands, if not millions, of new consumers. Competition could drive premiums lower, as happens in a free market, while allowing individuals the choice they have in all other types of insurance.
General Motors is a special case, because it has more retirees than workers and buys health care for them all. In 2004, GM spent $5.2 billion on health care, with that expected to top $6 billion for 2005. GM not only offers health-care coverage to retirees, it’s very generous coverage. The United Auto Workers negotiated retiree health insurance with no out-of-pocket payments from beneficiaries — which is hardly sustainable.
This year GM, because it can’t change its labor contract without union consent, asked the UAW to make concessions for retiree health benefits. The UAW, knowing a compromise was needed to keep GM afloat, agreed. Some 61 percent of UAW members recently voted, for the first time, to pay a small premium for coverage. The costs would be $370 for an individual plan and a maximum of $752 for family coverage. They also would see higher co-payments for prescription drugs.
While retirees, many on a fixed income, are understandably unhappy at having to pay part of their premiums, it is better than losing coverage altogether. These changes are expected to save GM $1 billion annually.
Rep. Tom Price, Georgia Republican, has introduced a resolution recognizing the limitations and distortions for the current employer-based health-care system. He recommends restructuring to a patient-centered system. As Mr. Price notes, a major benefit to changing to a defined-contribution system would be greater control and involvement on the part of patients in their health decisions.
In light of the rising health-care costs facing employer-based coverage, it also may better serve employers to ditch one-size-fits-all plans, whose promises can’t be met, for a defined-contribution system. That way, they can help their employees — and their bottom line — at the same time.
Nina Owcharenko is a policy analyst and Derek Hunter is a researcher in the Center for Health Policy studies at the Heritage Foundation.