Kaiser Daily Health Policy Report

Wednesday, February 08, 2006

Health Care Marketplace

      General Motors on Tuesday announced it will cap its health care spending for salaried retirees at 2006 levels, leaving retirees to fund future health care cost increases, the Washington Post reports. The cap is part of an overall cost-cutting effort by the company that includes reducing its stock dividend by half and cutting executive compensation. GM said starting in 2007 it will cap how much it contributes to health care coverage for salaried retirees at 2006 levels. After the limit is reached, retirees will face higher monthly premiums, larger deductibles and higher prescription drug bills as costs increase, according to GM (Freeman, Washington Post, 2/8). About 100,000 salaried retirees and 26,000 current employees hired before 1993 will be affected by the announced cap. Salaried employees hired after 1993 are not eligible for retiree health coverage. GM said the move will reduce future health care liabilities by $4.8 billion and save $900 million in annual administrative expenses (Merx, Detroit Free Press, 2/8). Cash savings will reach about $200 million within five years, according to GM (Runk, AP/South Florida Sun-Sentinel, 2/8). In total, the cuts announced on Tuesday will result in about $1.7 billion in immediate savings, according to the New York Post (Tharp, New York Post, 2/8). According to the Wall Street Journal, GM's announcement "follows an agreement last year with the United Auto Workers to pare union workers' health benefits" (Wessel et al., Wall Street Journal, 2/8). The company, which reported an $8.6 billion loss in 2005, said health care costs and prescription drug expenses for its 1.1 million employees, retirees and dependants cost about $5.4 billion in 2005 (Merx, Detroit Free Press, 2/8).

Wagoner's Comments
GM Chair and CEO Rick Wagoner said, "Most of the companies we compete with ... have a different benefits structure. A significantly greater portion of their retirement (cost) is funded by a national system" (Wall Street Journal, 2/8). He added that many U.S. businesses are facing similar difficulties providing health benefits to employees and retirees, noting, "It's really beginning to affect the competitiveness of the companies, and whether that is in the auto sector (or) in the tech sector, you can't find an area where it's not playing out." Wagoner said, "It's clear to me what we need to do, but it's also hard because it affects a lot of people. I don't take these actions lightly, and I don't take them without considering the impact on every single person affected" (Washington Post, 2/8). He also said GM will continue to talk with UAW about cutting areas where GM is not competitive.

Reaction
UAW President Ron Gettelfinger said GM's announcement will not convince the union to agree to additional concessions on workers' benefits, adding, "They're not going to come back to us. I don't think you'll see that happen" (Ellis, Detroit Free Press, 2/8). Bruce Clark, auto analyst with Moody's Investor Service, said GM's efforts are "all positive steps. They all help to preserve cash, but the company has a lot of other issues that have to be addressed" (Washington Post, 2/8). David Cole, chair of the Center for Automotive Research, said, "GM ran into what I'd call the 'perfect storm.' Americans suddenly had three times the rate of inflation in health care costs, along with explosive growth in the price of materials" (Jedlicka, Chicago Sun-Times, 2/8). Alicia Munnell, director of Boston College's Center for Retirement Research, said, "Our employer-based social-welfare system is collapsing," adding, "GM itself is not a big deal. It's GM on top of Verizon and IBM, and then there's everything that's happening in weak companies like airlines" (Wall Street Journal, 2/8).