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Reason Foundation

The Wall Street Journal

Health Care Costs Imperil Big Three

The UAW's health care dreams

Shikha Dalmia
July 27, 2007

It is not within the power of United Auto Workers President Ron Gettelfinger to save GM, Ford and Chrysler. But it is certainly within his power to kill them. Whether he chooses to do so will soon become clear. What are arguably the most critical contract negotiations in the history of Motown's auto industry began this week.

America's former Big Three auto makers are teetering on the brink of bankruptcy -- Ford's second-quarter profit notwithstanding. And one big reason for their dire state, apart from collective amnesia over how to make hit cars, is their ever-escalating health-care expenses. Every car they produce, they plaintively assert, contains $1,500 in health costs that their Japanese competitors don't face.

But Mr. Gettelfinger has already declared that he is not in a "concessionary mood." UAW workers at Ford and GM agreed to a health-care cost-sharing deal during an unusual round of mid-contract negotiations in 2005. Closing the competition gap with Japanese auto makers now, Mr. Gettelfinger insists, requires not more concessions by auto workers -- but a Japanese-style government health-care system for all workers.

"We pay more, but get less," he thundered to roaring applause at a recent NAACP luncheon.

Doubtless, some of Mr. Gettelfinger's tough talk is posturing, calculated to extract the best possible deal from auto companies. Yet his perennial calls for a national health-care system -- echoed by leading Democratic presidential candidates -- affect the dynamics at the bargaining table: By feeding the notion that Japanese workers are getting a better health-care deal than UAW workers, they make it harder for Mr. Gettelfinger to make reasonable compromises and sell them to his rank-and-file.

But do Japanese workers really live in some single-payer, health-care heaven where all their medical needs are covered by general taxpayers with no cost to them? Hardly.

The Japanese system comprises three basic insurance plans: one for the self-employed and the unemployed, including retirees under 70; one for the elderly over 70; and one for all private- and public-sector employees. The employee plan is not just completely self-financed, with no taxpayer support. It actually subsidizes the other two, an arrangement that is becoming increasingly unsustainable as Japan's population ages. (Both Toyota and Honda declined to give an estimate of their current or future health-care premium burden.)

The employee plan requires a premium equal to 9.5% of a worker's annual income. Employees themselves pay about 45% of the premiums from their paychecks, their employers the rest. This works out to $1,557 for an employee with an annual income of $36,500 -- average wages for a blue-collar Japanese auto worker -- according to figures provided by the Japanese Ministry of Health and Labor Welfare.

But that's not all Japanese workers are on the hook for. Working families also face a 30% co-pay -- capped at $677 per month for a mid-income family -- for medical expenses such as in-patient and out-patient hospital charges, drugs, doctor's visits and diagnostic tests. Because these services are exceedingly cheap, thanks to massive price controls, in practice the average Japanese family pays only about $720 a year in co-pays. This adds up to total out-of-pocket annual expenses of about $2,300 for every Japanese household, which is comparable to what active UAW workers pay after the 2005 deal in absolute dollars. But relative to their income, Japanese workers bear a far bigger burden than UAW workers.

Even that isn't the full story. In the event of a catastrophic or chronic illness requiring prolonged hospitalization, a UAW worker faces no further expenses. A Japanese worker who hits his co-pay cap each month would be out of pocket up to $10,000 a year -- about 25% of his annual pay-check and five times more than a UAW worker under similar circumstances. This puts a huge strain on some Japanese families, forcing them to default on their hospital bills. Asahi Shimbun, Japan's respected national daily, reported that Japanese hospitals lost $180 million in unpaid patient bills in 2004.

UAW workers get a better deal not only than Japanese workers, but other American workers as well.

Before the 2005 "givebacks," the Detroit Three companies picked up the entire health-care tab for all their hourly workers -- active, retired, dependents and, incredibly, even laid-off workers till they found other jobs. Workers were not required to pay any premiums, deductibles or co-pays-except for routine physical exams and prescription drugs. The 2005 deal left these benefits virtually untouched for retirees with pension incomes below $8,000. But for the first time ever it began requiring more well-off retirees to cough up $252 in annual premiums for family coverage and another $500 in total annual deductibles. In short, for a grand total of $752 in out-of-pocket annual costs, UAW retirees and their spouses get full medical coverage for life. Given the huge retiree population that the Big Three support -- GM has three times more retirees than active workers -- this has saddled them with a combined unfunded health-care liability exceeding $100 billion.

By contrast, 90% of retirees in other American companies don't get any employer-provided coverage after 65, when they become Medicare-eligible. Such couples, according to an analysis by Fidelity Investments last year, are typically on the hook for $10,000 in out-of-pocket annual costs for Medicare co-pays and other expenses not covered by the program, or 10 times more than UAW couples.

Meanwhile, the only concession that active UAW workers made in 2005 was to defer $1 an hour of their 2006 pay raise toward a UAW-controlled Voluntary Employees' Beneficiary Association (VEBA) fund. On average, this translates into roughly $2,000 in VEBA contributions per UAW worker per year. Some of the returns from the fund's investments subsidize the coverage of current retirees. But the rest are tucked away for the workers' own retirement coverage. In other words, by setting aside about 4% of their current wages annually, UAW workers secure not just all their medical needs now, but for life. In comparison, salaried workers with families contribute more than twice as much as UAW workers -- $2,500 in premiums and another $1,600 in deductibles and co-pays -- for just their current health care needs, according to two separate surveys conducted by Kaiser Foundation and Hewitt Associates last year.

What all of this shows is that the so-called competition gap that Motown auto makers and the UAW complain about is created by the lavish health-care and pension deals they wrote themselves -- not by Japan's nationalized health care system. Indeed, it is often overlooked that Japanese auto makers import less than 45% of the cars they sell in the U.S., and the percentage will likely drop further, as Toyota plans to expand its share of U.S.-made cars to two-thirds of all vehicles sold in America in the next three years.

Active hourly workers at Japanese "transplants" face out-of-pocket costs not much higher than their UAW counterparts. The big difference, however, is that upon retirement they don't get limitless medical coverage. Instead, they get a fixed amount of money to buy supplemental Medicare coverage.

American auto makers too are hoping to cap their health-care liability to retirees by convincing Mr. Gettelfinger to accept a deal under which they would put a lump sum of money into a fund that the UAW would use to buy coverage for its members. Mr. Gettelfinger signed off on a similar arrangement with Dana, a large auto supplier, when it went into bankruptcy last year, but is reportedly not convinced that this would be advantageous for Big Three retirees.

UAW workers still enjoy a health-care deal that no one else in America or Japan -- or quite possibly the planet -- does. Yet Mr. Gettelfinger said last week that the 2005 health-care givebacks were the toughest decision he ever made in his entire career. This is a startling admission that reflects the depth of the UAW's entitlement mentality, and its detachment from the world that its fellow Americans inhabit. But such lavish expectations are unsustainable under any system -- American or Japanese. This is a reality that Mr. Gettelfinger must accept. Otherwise, he may well push U.S. auto makers over the cliff -- and his comrades with them.


Shikha Dalmia is Senior Analyst


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