December 9, 2005
By Nina Owcharenko and Derek Hunter
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 of the
automakers 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
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 allows workers the freedom to choose the health
plan they think is 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. The competition for these consumers
could drive premiums lower, as tends to happen in a free market,
while allowing individuals the freedom they have in all other
aspects of insurance: choice.
General Motors is a special case, because it has more retirees than
workers and buys health care for all of them. In 2004, GM spent
$5.2 billion on health care, with that amount expected to top $6
billion for 2005. Not only does GM offer health-care coverage to
retirees, but it's very generous coverage. The United Auto Workers
negotiated health insurance for retirees that required no
out-of-pocket premium payments from beneficiaries -- an arrangement
that's 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 in order 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 an increase in co-payments for
While retirees, many of whom are on a fixed income, are
understandably unhappy at the prospect of having to pay a portion
of their premiums, it is better than losing coverage altogether.
These changes are expected to save GM $1 billion annually.
Rep. Tom Price, R-Ga., has introduced a resolution recognizing the
limitations and distortions for the current employer-based
health-care system, and he recommends restructuring the system to
one that is patient-centered. As Price points out, one of the major
benefits to changing to a defined-contribution system would be
giving patients more control and greater involvement in their
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
senior health policy analyst in the Center for Health Policy
Studies and Derek Hunter is a researcher in the Center for
Health Policy studies at The Heritage Foundation
Distributed nationally on the Knight-Ridder Tribune wire
Long-term promises almost always turn into long-term problems. Just ask Detroit.
Director, Center for Health Policy Studies and Preston A. Wells, Jr. Fellow
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