A Turning Point for Health Care
By Chad Terhune and Laura Meckler
The Wall Street Journal
Thursday, September 27, 2007
The labor agreement reached by General Motors Corp. is the most
striking example of a bigger trend sweeping U.S. health-care:
employers renouncing their decades-old role as chief health-care
The auto maker's iconic status in American industry, and the
example it sets as one of the biggest U.S. employers, is likely
to speed this shift -- and drive discussion in the presidential
campaign about overhauling the health system. Polls find health
care is the top domestic issue for voters, as more Americans are
on the hook for getting their own coverage.
Maneuvers such as GM's are "driving greater insecurity among the
middle class, who are employed but feeling like their health
care is not secure," said John Rother, policy director for the
seniors group AARP, which favors government action to secure
universal health coverage.
The portion of firms offering health benefits fell to 60% this
year from 69% in 2000 because of small employers' retreat from
providing coverage, according to a survey released this month by
the Kaiser Family Foundation. Benefits packages are getting
stingier, too. Last year, 38% of workers had deductibles of
$500 or more, up from 14% in 2000, the foundation says.
The shift isn't only about dropping coverage or making workers
pay more of the bill. Like GM, many employers want to immunize
themselves from the risk of rising health costs. In many cases,
especially for retirees, this means shifting to plans in which
the employer provides a lump sum for health coverage and
employees have to figure out how to spend it. That way, the
employer knows ahead of time exactly how much it is spending.
In GM's case, an independent trust will assume the task of
providing health coverage to the company's unionized retirees
and spouses. GM will put money in the trust -- as much as $35
billion, according to people familiar with the deal -- to get it
going. But it's up to the trust to set and manage the benefits.
Offloading Health Care
Companies have several ways to offload responsibility for health
care. Kellogg Co. this month informed about 1,000
Medicare-eligible retirees from its Keebler unit that their
group coverage will cease at year end. Instead, they will
receive money under a health-reimbursement arrangement, or HRA,
that they can put toward health coverage to supplement Medicare.
The concept resembles 401(k) pension plans, in which employers
put a fixed amount of tax-deferred dollars into employees'
retirement accounts but it is up to the employees to manage the
Ford Motor Co. also will stop providing group insurance in
January to about 57,000 salaried retirees and their spouses who
are over 65 years old. Each person will receive $1,800 annually
in an HRA to help cover insurance premiums and other medical
expenses. Chrysler LLC began a similar plan this year for more
than 14,000 salaried retirees over 65.
Bill Haller, a 65-year-old Ford retiree, says the changes come
as a shock in part because the company fostered the belief that
it would take care of workers' health care when they retired.
He wonders whether the company contributions will still be there
in years to come. "The money could go away if times get tough,"
Shopping for Coverage
Some active workers also face the prospect of shopping for their
own coverage, partly using money supplied by their employer, as
federal and state officials grant employers more latitude.
Missouri passed a law earlier this year making it easier for
small employers to give workers money toward individual health
policies. The Internal Revenue Service has also endorsed the
idea of employers reimbursing workers for individual health
premiums, lifting a regulatory cloud.
Such trends explain why health care has become a big issue in
the presidential campaign. President Bush and the leading
Republican presidential candidates generally embrace the idea of
individuals shouldering more responsibility and risk for their
health care, albeit with help from employers or the government
where needed. Mr. Bush sees individual health accounts as one
pillar of an "ownership society."
However, such notions have proved a tough sell in Congress. Mr.
Bush's tax proposals to encourage a shift away from the
employer-based market never got off the ground. Currently,
people don't get a tax break when they use their own money to
buy insurance, and the federal tax system encourages
Shifting people to the individual market is problematic for
other reasons, at least under the current set-up. It is
difficult for people to understand what they're buying, and
those with existing illnesses have trouble finding any coverage.
The top Democratic presidential candidates have built their
health-care plans around bolstering employer-based insurance,
but they also envision more government action to help the
uninsured or underinsured. For example, several would impose
some kind of requirement on insurers to cover all comers.
In an interview last week, Sen. Hillary Rodham Clinton said
people aren't ready to cross employers out of the equation. "We
looked at every permutation of how you get to universal health
care," said the Democratic presidential candidate. "There's
great attachment to the employer-based system, even though it is
One question now is whether GM's move may spark consideration of
a more radical break with the current reliance on job-based
insurance. Cutting off health benefits entirely is still
unfathomable to most large employers that need to compete for
talent. Instead, more are embracing the middle ground of
offering a fixed contribution toward individual coverage.
The new trust for UAW retiree health benefits is likely to hear
pitches from consultants about such ideas. By disbursing fixed
amounts, and limiting increases, administrators of health-care
trusts can avoid running out of money.
Extend Health Inc., partly owned by America Online founder Steve
Case's Revolution Health Group, has built a team of 180
insurance agents and a sophisticated Web site to serve retirees
at Fortune 500 companies with individual health accounts.
Extend has signed six large clients, including Ford and
Chrysler, that will be offering retiree health accounts next
year. It aims to triple that number by 2009.
The chief executive at Extend Health, Bryce Williams, argues
that the paternalistic group model is broken and that companies
can't sustain a health-care safety net. "This is about making
corporate America competitive again," Mr. Williams says.
Ford estimates its change for salaried retirees will save the
auto maker about $80 million annually, and even more in future
accounting liabilities on its balance sheet. In 2006, Ford
spent $1.8 billion on retiree health care for hourly and
salaried workers, more than half its total $3.1 billion
health-care tab. Ford has estimated its U.S. health-care costs
will increase 6% this year and could level off to 5% growth by
2011 with some of the changes it is making now.
Marcey Evans, a Ford spokeswoman, said the new
health-reimbursement accounts for salaried retirees maintain
high-quality benefits in line with the company's competitors,
while providing a way to control costs.
Ford's Salaried Retirees
When asked about the health-care changes at an August meeting
with Ford salaried retirees, Ford Chief Executive Alan Mulally
noted that health costs averaged about $1,200 for each vehicle
the company manufactured last year. "We simply cannot add that
amount to a vehicle and remain competitive," Mr. Mulally told
retirees, according to internal company documents.
Jay Savan, a principal at Towers Perrin in St. Louis, says he is
working with a foreign-owned company with 17,000 U.S. employees
that is adopting an account-based plan. He says there will be
winners and losers depending on workers' annual health-care bill
but over time most people should be better off because they can
save up health-care dollars when they're healthy. "There is a
lot of activity going on with large employers in this area," Mr.
Tricia Neuman, director of the Medicare Policy Project at the
Kaiser Family Foundation, says this represents a "big change in
structure" for retiree health care. "While companies limit
their own financial liability, they may end up shifting costs to
retirees who may not be able to find comparable coverage on
their own," she says. That is particularly true when retirees
receive a one-time lump sum that they must stretch out over many
years, rather than an annual contribution from the company.
Advocates of this individual-market approach argue that many
employers overspend on one-size-fits-all health plans featuring
bells and whistles most workers don't need or want. They
contend workers then indulge in unnecessary medical care because
they are paying only a fraction of the total cost.
But turning individuals loose in the market carries risks.
Older consumers will pay considerably more for coverage and many
won't even qualify for a policy because of their medical
history. The individual market is also still plagued by
deceptive marketing of coverage limits, steep rate increases
after low introductory prices, insurers' efforts to deny
expensive claims and lax regulation in some states.
That is why retiree health care is the primary testing ground
for individual accounts, because Medicare shields most retirees
from crippling medical bills.
Ford estimates the average salaried retiree and spouse spend
about $2,900 in premiums now for Medicare and Ford's group
medical and dental plan. The auto maker says the average couple
should save about $500 on average under the new plan that gives
them $3,600 -- $1,800 per person -- in a health-reimbursement
Some retirees aren't so sure. Nunzio Curcuru, a 77-year-old
retired personnel supervisor at Ford's Dearborn, Mich., framing
plant, begins radiation treatment for prostate cancer next week
and worries about keeping his current doctors when he has to
switch Jan. 1 from the Ford group plan to a private Medicare
"Having $1,800 doesn't seem like much. A few hospital visits
can wipe that out," Mr. Curcuru says. "It is a very anxious
moment at my age."
Write to Chad Terhune at
firstname.lastname@example.org and Laura Meckler at