While the union preserved active worker benefits for the moment at GM, retirees took a a big hit. More health care cuts could be on the way.

The United Auto Workers Union in its revised contract with bankrupt General Motors is attempting to establish a lobbying organization funded by the automaker that would push for health care reform. Ford Motor Company and New Chrysler would contribute as well.

GM has agreed to provide funding of $3 million annually for five years to a “National Institute for Health Care Reform,” provided that Ford and Chrysler participate with proportionate funding.

GM CEO Fritz Henderson told TDB that, “We are committed to go ahead with the Institute,” even though he didn’t know the status of Ford and Chrysler contributions. “There has to be change in the health care system,” Henderson said.  Henderson disagreed with our lobbying designation, insisting  that the Institute is a research group.

The Institute  funding, of course, will be largely taxpayer supplied since the U.S. Treasury will hold majority stakes in GM and the Chrysler Group when they emerge from bankruptcy.

The new push comes at a time when the national debate on health care is heating up, as President Obama tries to fulfill his campaign promise to reform a system that spends more money and produces worse results when compared to any other industrialized nation. We are now facing skyrocketing costs, massive numbers of uninsured people and the ongoing problem of profit-driven decision-making on the delivery of health care.

Almost 47 million Americans are without health insurance, and the cost of providing medical services from a private, for-profit system is rising at an unsustainable rate. This  is forcing businesses to increasingly trim or eliminate benefits for workers with health care — precisely what is happening at the auto companies.

The revived union initiative is taking on new urgency since the UAW has now assumed enormous risks on behalf of its one million retirees and dependents whose health care will be financed by Voluntary Employee Beneficiary Associations (VEBA) run by the union, funded in part by automaker stock.  

When originally proposed in the 2007 contract with the “Big Three,” the VEBA was a piece of financial engineering that allowed Chrysler LLC, Ford Motor Company, and General Motors Corporation to remove almost $100 billion in costs from their balance sheets, thereby helping their credit ratings and lowering their cost of borrowing. Though risky at the time for UAW members, the controversial VEBAs, which were to receive from one-half to two-thirds of their liabilities from the automakers in about $49 billion in cash, seemed a reasonable bet since the funding levels were so high and the stock market was booming.

Chrysler and GM are now bankrupt with no way to pay for their previous promises the their VEBAs. Now the risk is much, much higher since the cash contributions have been trimmed way back with auto company stock substituted. The financial markets continue to be depressed with no upturn in sight putting existing VEBA investments at risk. The situation at the auto companies is a foretaste of the problem facing the nation as a whole.

The revised VEBA plan at GM sees its original contribution of $34 billion, now funded with a $2.5 billion note, payable in three installments ending in 2017, and $6.5 billion of perpetual preferred stock paying a 9% dividend. The GM VEBA will also receive 17.5% of the equity of New GM, with warrants to purchase an additional 2.5% of the company.

When originally proposed the VEBA at GM was facing liabilities of $57 billion. The GM VEBA currently has less than $10 billion in assets. Whether the UAW can continue to maintain health care at current levels is questionable at best. As of December 31, 2008, the hour rate plan was 84% funded, representing a $10.9 billion deficit. If the New GM doesn’t thrive, the UAW will be left without any way to provide health care benefits once the cash contributions and earnings from the fund run out. GM vice chairman Robert Lutz told the Automotive Press Association in Detroit last month that GM has spent more than $103 billion on health care in the past 15 years. At those rates, the GM VEBA could be insolvent well short of the 80 years of funding promised when it was proposed.

Offshore-based auto companies do not have to pay for health care in their home markets, contributing to a cost advantage amounting to more than a thousand of dollars per vehicle in an industry where pennies count. Their American factories do, however, incur health care liabilities, but since the work force is younger and non-unionized, these are tiny compared with Detroit automakers.

Even so, Nissan in the U.S. has wiped out entirely the retiree health care benefits of white collar workers at age 65, while dumping blue collar workers of the same age on Medicare roles with only a small annual stipend. Fear of union organizing gave Nissan’s factory workers this limited protection. Similar cuts are expected at other offshore owned plants in the U.S. as they too struggle with costs in depressed market.

At the UAW, further cost cutting doesn’t appear to be a viable option — if it is to maintain a reasonable health care plan by U.S. standards, even though its plan now falls far short of what other automaking countries provide in health care benefits for their citizens. The UAW has already made deep cuts to benefits for retirees, by going from virtually cost-free lifetime health care to charging about 25% of the cost of providing benefits and eliminating dental and eye care coverage. Many common prescription drugs are no longer covered at all. And going forward, the UAW will face further calls to reduce costs for active members from the car companies as it struggles to protect retiree  and surviving spouse benefits.

The same financing problem applies to UAW VEBAs at bankrupt Chrysler, and to a lesser degree Ford Motor Company, since it is still solvent and its stock is trading publicly at around $5 a share. Ford now has the option to settle up to 50% of its obligations to the VEBA in shares of common stock. That includes three separate payments of $610 million due in December 2009, June 2010 and June 2011. Under terms of the 2007 contract, Ford was expected to transfer $3.2 billion in cash to the VEBA in 2010.

In the case of Chrysler, health care obligations total an estimated $10.9 billion for 82,000 workers and retirees. Chrysler and the UAW now have a revised agreement that cuts cash payments to the VEBA from $7.1 billion to $4.6 billion, with only $300 million due next year.

Hence the new urgency for national health care reform that could shift the health care problem away from companies and the UAW to the U.S. government.

The idea for a National Institute for Health Care Reform Institute was first proposed in the UAW 2007 collective bargaining agreements with the Big Three, but apparently never got beyond the proposal stage. The Institute is intended to be a “premier research and educational health care reform ‘Think Tank’ dedicated to understanding, evaluating and developing thoughtful and innovative reform measures that would improve the financing and medical delivery systems in the U.S. and expand access to high quality, affordable and accountable health coverage for all Americans,” according to GM bankruptcy court filings intended to secure its funding.

The Institute will be authorized to:

• Engage economists, analysts, academics and others who are experts on the U.S. and other health care systems.
• Recommend public policies that would need to be changed to improve health care quality, affordability and accountability in the U.S.
• Conduct studies and analyses of the current system and alternative structures, including ways to provide more effective sources of coverage for early retirees, reduce prescription drug costs, ensure drug safety and better inform patients of appropriate drug choices.
• Operate as a clearinghouse for select best practices that should be employed throughout the medical delivery system to ensure that error-free, high quality health care is available throughout the U.S.
• Develop innovative policy solutions to improve the current health care system.
• Host forums for discussion and debate of public policies that would improve the health care system and facilitate the interaction of ideas among experts.
• Formulate wide-ranging communications materials that discuss and describe reform measures.

One great irony in the auto company health care struggle is that the current system was imposed on the UAW over the objections of its then head, Walter Reuther, by GM president “Engine Charlie” Wilson. Reuther wanted a national health care system so the car companies didn’t bear the costs.