The Health Care CRISIS
By John D. Stoll Ward's AutoWorld, Feb 1, 2005 12:00 PM

On Jan. 17, Martin Luther King Jr.'s birthday, the online message board of a rogue website frequented by Ford Motor Co.'s blue-collar workers was abuzz with a nasty rumor.

“The word on the street is the Big Three are bringing flex benefits to the table this round of bargaining, just like the supervisors have,” a user identified as OAC707 reports. “The scary part is, National is looking at it.”

OAC707's advice: “Just say no.”

Hotrod01 replies, “They start with flex benefits and within a few years you have almost no benefits. I know this first hand!”

Flexible health-care benefits are designed to provide workers with self-managed spending accounts and, in most cases, offer some degree of reimbursement or tax break in exchange for their participation. They also have the potential to save automotive employers millions in health-care costs by encouraging smarter purchasing patterns.

The online discussion continues on for a few pages, with one writer finally concluding: “We should have the coverage there, and if we need it, great; if we don't, great.”

But is it really “great?”

After closing the gap with their foreign rivals in quality and productivity, Detroit's Big Three auto makers now stand face-to-face with yet another competitive disadvantage: Soaring health-care costs for current and retired workers now add as much as $1,500 to the cost of every car and truck they sell in North America — a cost foreign rivals don't share.

Toyota Motor Corp., by comparison, spent $186 per car built globally on pension and health care in 2003, says Morgan Stanley Dean Witter Managing Director Stephen Girsky. That number was down 3% vs. 2002.

Nationalized health-care systems shoulder most of the cost burden for auto makers in Japan and Europe, and foreign auto makers with plants in the U.S. have few, if any, retirees to support.

General Motors Corp., on the other hand, has two retired employees for every active one.

“It's not a stable situation,” Bob Lutz, GM vice chairman in charge of product development, says during a meeting with reporters in Los Angeles. “We're either going to bankrupt all of the American manufacturing industry or something's going to happen.”

Detroit may be paying $1 billion to $2 billion more annually for health care than it needs to, partly because of the old full-ride benefits theory that has long attracted good workers but saddled the industry with an unprecedented burden, Richard Kleinert, of Deloitte Consulting LLP Human Capital Practice, tells Ward's.

Everyone agrees health-care costs are getting out of control, but fixing them seems as daunting as curing cancer and as controversial as stem-cell research.

The United Auto Workers union tells members to oppose flex accounts of any kind and instead calls on government to bail out U.S. manufacturers that commit to offering premium coverage, in order to maintain union members' gold-plated benefits.

The issue will be hashed out in 2007, when the UAW and Big Three hit the bargaining table for the next round of contract negotiations. There is little hope of seeing major concessions before then.

For now, the auto industry's health-care supply chain has GM, Ford and DaimlerChrysler Corp. on their knees searching for relief.

“We're the only major manufacturing country (with this problem),” Gary Cowger, GM North America president, tells Ward's. “You look at Japan, Korea, China, any of the major Western European countries, Canada, Mexico; none of them have private payer health care, so health care automatically goes to the bottom line of the products.”

Detroit spent an estimated $11 billion on health care in 2004, in addition to the billions spent by the supply chain. Some 2% of Americans are covered by a Big Three OEM, pushing Detroit's burden to about 1% of the nation's entire health-care bill, according to the Ernst & Young Global Automotive Center Winter 2005 Traction Report.

Coverage continues to rise at double-digit rates, with conservative projections foretelling cost increases of between 9%-10% annually for the next eight years, according to the Kaiser Family Foundation.

The auto industry's burden likely will outpace the ominous projections being laid out for the next decade, says Mark Finucane, leader of Ernst & Young's Medical Center practice, part of the firm's Health Sciences Advisory unit.

Auto workers tend to consume more health care than other Americans because building cars is strenuous labor, and retirees make up a larger portion of the insured compared with other industries. That means the greatest portion of health-care consumers no longer contribute to the car manufacturers' bottom lines, Finucane says.

Big Three brass, more than any other group of executives in U.S. industry (and often against their own political views) have advocated a high level of government intervention, says Klienert. The UAW has backed government-financed programs aimed at cutting the nation's uninsured, and in 2004 the union supported an extensive list of federal initiatives targeted at relieving Detroit's burden.

Despite plenty of talk about covering the uninsured, who end up further taxing the corporate bank accounts, help only has trickled in from Washington. Well-meaning Democrats and Republicans have attempted to fix the problem, but the cost of privately funded managed care consistently has registered double-digit gains.

There have been signs of progress. During President George W. Bush's first term, Medicare legislation was passed that already has contributed hundreds of millions in health-care savings to Ford, GM and DC. But GM Chairman and CEO Rick Wagoner calls the action a “good first step.”

Wagoner, along with Chrysler Group CEO Dieter Zetsche and Ford Chairman and CEO Bill Ford, would like to see additional measures but stops short of suggesting socialized medicine. UAW President Ron Gettelfinger is promoting a single-payer system overseen by government in order to hold the health-care industry accountable.

Deloitte's Klienert says the vigilance among the auto industry's chieftains is unparalleled in other sectors of industry, most of which adopt a laissez faire approach. He says it is in the best interest to ask for government assistance, not full-scale intervention.

The auto industry also is waiting on widespread tort reform designed to crack down on so-called frivolous lawsuits that win plaintiffs millions of dollars for medical malpractice.

Many lawsuits are settled for far less than reported amounts, but critics say big money headlines encourage dubious suits.

Serious political action may be further away than rhetoric suggests. Lawyers are the No.1 political contributors, giving $147 million in 2004, mostly to Democrats (73%) often seen as friendly to trial lawyers, the Center for Responsive Politics reports.

While waiting for Washington to move, “the auto industry can play a key leadership role in reform, even though it finds itself split” on the role of government, Ernst & Young's Finucane says. He says the auto industry's buying power, combined with the exceptional burden it shoulders, plants it center stage in the unfolding drama.

Deloitte's Klienert declines to comment on the strategies of any one auto maker, but he says many other industries currently see the auto industry less as part of the solution and more as the root of the problem.

“I have to be careful here,” he says. “I guess my belief (when I look) across corporate America is the autos are not looked to as leaders in this area or as best practice. In fact, some segments of industry look at autos as worst practice when it comes to legacy programs and benefit costs.”

Domestic auto makers will remain at a serious disadvantage against foreign auto companies that have been building plants in the U.S. since the 1980s, Klienert says. While Japanese and European auto makers offer similar benefits for current U.S. blue-collar workers, they don't give the lifelong legacy benefit packages the Big Three started offering post-WWII and since has been strapped to continue.

In addition, the transplants have avoided union control of plant personnel, therefore affording them freedom to implement more severe cost-cutting and allowing them to pass on some of their increasing health-care costs, at which they have proven effective.

Eventually, the Big Three either will lead the rest of the nation to workable solutions, as Finucane suggests, or face the threat of being forced to play catch-up, as they had to do during the Japanese-led lean manufacturing revolution of recent decades.

“Health care is a crisis that this industry is going to have to deal with one way or another. I just hope it doesn't take a crisis to make this happen,” Girsky says, referring back to the late-1970s oil crisis.

Detroit has been working to curb costs where possible, Klienert says. He refers to various “buckets” auto makers have been carrying to bail themselves out.

The first is cost sharing, or the “ongoing efforts to balance between what portion should be borne by employees and what portion should be borne by the companies,” he says.

Flexible-spending accounts, funded by companies or paid for on a pre-tax basis by employees, make up part of this strategy.

Klienert says even if employees end up getting reimbursed for the high deductibles or co-pays demanded by cost-sharing programs, the fact that they have to spend money out of their pocket and feel the immediate impact of buying decisions, “rather than just putting down a plastic” insurance card and letting the employer worry about it, changes “the psychological approach” of employees when paying for various facets of health care.

In its official position on health care, provided to Ward's, the UAW criticizes defined-contribution systems and says auto makers should use their buying power to negotiate rather than leave it to individuals to make decisions on how to purchase.

“While consumers have a roll to play in helping to cut costs, defined-contribution plans are not the answer,” the UAW says. It also bemoans health savings accounts and encourages employees to “tell Congress to oppose any further expansion of health savings accounts or defined-contribution health plans.”

Nevertheless, attempts to creatively share the health-care burden with actual consumers “is receiving a lot of attention in the press and more promise in Washington,” and “that may hold the key to finally getting (our) hands around this,” Kleinert says.

He admits there is an initial pushback from employees when first introduced to such plans, “but it goes down particularly well with those who are generating most of your costs.” In other words, employees who are using the most health-care services.

Klienert says it is safe to assume the general rule of thumb that “20% of your people generate 80% of the cost.” The key, he says, is getting the 20% to buy into the program and take more responsibility through education and support tools.

Even if no cost is passed onto employees in coming years, the Big Three need to understand the entire system is based on a foreign business concept vs. traditional companies and need to get their employees to buy into a solution, Klienert insists.

“In what other consumption situation do you have Party A buying from Party B, the cost of which is paid by Party C?” Klienert asks. “It's a very unique phenomenon. In the insurance industry, it's called “moral hazard.”

“If you have fire insurance, you're probably not more likely to set your house on fire. Or if you have life insurance, you're probably not likely to go out and engage in life-hazardous activities. But if you have health insurance, you're more likely to use it. That's one element of it which is profound because of the psychology.”

In addition to being dysfunctional, Ford Chief Operating Officer Jim Padilla says the issue is “emotional,” and auto makers have to be sensitive as to what degree consumer-driven tactics are pushed on employees.

Rather than focus primarily on consumerism, the UAW suggests encouraging prescription drug companies to get generic drugs to market faster and to get pharmacies and doctors to stop trying to sell fad drugs or drugs made by a particular manufacturer.

Another bucket auto makers are carrying centers on driving efficiencies into the health-care supply chain. Even though auto makers say there is only so much they can do, Finucane insists the road to cleaning up dysfunction is ripe with opportunities.

“For example, just 2.2% of all revenue in the health-care industry is spent on technology and information systems today, compared to 6.5% in consumer services and 11.1% in financial services,” he says. “Auto industry leaders must demand a comparable infusion of technology into the health-care system.”

Former U.S. Treasury Secretary Paul O'Neill currently heads a consortium of businesses, hospitals and insurers aimed at improving health care and reducing costs called the Pittsburgh Regional Healthcare Initiative — which leads a 5-day training course based on adapting Toyota's lean production techniques to caring for patients.

Says Klienert: “The experts would say that 10%-20% of the utilization may be inappropriate, and if you can either eliminate it or redirect it to more appropriate, cost-efficient sites, that's significant dollar savings, and it can considerably reduce the rate at which future costs escalate.”

But industry leaders say it's not that easy. Whereas the traditional tiered supply base is captive to the buying whims of a few customers — the auto makers — the Big Three make up only a part of the health-care industry's overall buyer base.

“Leverage is much less because they're not as singularly focused,” Padilla says when asked why the auto maker, known for wringing every last penny out of component producers, can't put the brakes on the price of health care.

“When we're dealing with an automotive supplier, there's one consumer and it's called Ford Motor Co.,” he says. Ford has tried to crack down on health-care providers by implementing its Team Value Management strategy; GM and DC have implemented similar tactics, but “I think you can only take it to some limits,” Padilla concedes.

Says GM's Cowger: “I think our people have done a very effective job of looking at the efficiency of providers we have, and we do have remedies where we see an inefficiency with a provider.”

Both Ford and GM have shifted health-care buying to their purchasing departments in recent years.

Insiders suggest Ford will look at sidestepping the middle man in health-care buying, such as health maintenance organizations (HMOs), and seek ways to work directly with health-care providers, such as physical-therapy conglomerates, in order to save as much as 15% in coming years and better hold such groups accountable to efficient processes.

However, Padilla sees limited potential in self-coverage because “you have to understand the type of administration required to do that, and then you'd develop your own quality system and the like, and that gets you into another area. Frankly, we are not qualified to take that on.”

Padilla, often seen as the quality hound at Ford, preaching continuous improvement in the corridors of Ford's Glass House headquarters, says poor quality is a major problem in health care.

“I think what is lacking is a good fact-based assessment of the quality of various providers and the cost-effectiveness of the various providers. That would go a long way in giving us some realistic ability to give consumers a choice.”

Padilla suggests a J.D. Power and Associates type measurement of health-care providers and hospitals. J.D. Power actually does have such resources available online for public consumption.

In addition, Klienert says there “are provider-profiling reports that are shared among providers, so that they can see how they compare and rank in various dimensions to their peers.”

Finucane suggests Big Three brass need to stop talking and start driving health-care solutions such as those being volleyed between various organizations devoted to quality health care, including the National Committee for Quality Assurance (NCQA).

NCQA suggests more than $9 billion in lost productivity and nearly $2 billion in hospital costs could be avoided through consistent best practices. Its 60-page State of Healthcare Quality 2004 lays out myriad solutions toward that goal.

Despite the work left to do, Klienert says “the auto industry has done more in this area than any other industry in terms of proactively working back down the supply chain with providers, trying to educate them, pressure them, help them become more efficient.”

He says auto makers have taken initiative to begin relying on tiered networks of providers, which rewards top-performers on cost and quality with more business. The company often encourages employees to frequent centers of expertise by offering better coverage in return.

One bucket auto makers have half-heartedly carried is that of tiered benefits packages that offer different levels of benefits to employees based on years of service to the company.

“It's an issue that bubbles to the surface periodically, and a few employers have tried it, but it just hasn't gone mainstream in the auto industry,” Klienert says. “The unions are opposed to it. There's some tension there with people working next to each other on the line with different benefit programs. They like an egalitarian approach and don't like to differentiate and create caste systems.”

The UAW argues for more government help for American manufacturers that continue investing heavily in health care for all employees. “Much more needs to be done to establish a level playing field for manufacturers that will protect health-care benefits for active and retired workers,” the union says.

No matter how passionately the UAW fights to hang onto as much as it can, the union is beginning to feel pressure from smaller labor groups making concessions to top-tier suppliers, such as engine maker Cummins Inc.

In January, Cummins employees in Columbus, IN, began a new expense-sharing agreement that was forged by its union in October. It was one of the largest issues on the negotiating table last year, and plant officials say the measure will keep jobs from being shipped overseas for at least the balance of the decade.

More suppliers are expected to turn to similar programs in the future, analysts say, as part of a trend to offset the cost improvements consistently demanded by OEMs.

One area where the UAW deserves credit, says Cowger, is training employees to be more vigilant in taking care of themselves. Setting up gyms and educating workers on healthy lifestyles almost universally is hailed as effective.

However, auto makers can take educating employees to the next step, Finucane says, much like a Six-Sigma quality program or teaching principles of kaizen (continuous improvement).

“Although the approach is simple in theory, implementation (of efficiency programs) requires an understanding of what's driving costs in a corporate population,” he says. Once a company understands how their employees approach their health, the employer can facilitate “wellness programs” with informational campaigns.

Getting the word out shouldn't be too hard — auto executives need only hang out on the rogue message boards frequented by auto workers.

Deloitte Consulting's Richard Kleinert suggests six “buckets” that can keep costs from sinking auto makers

1. Cost-sharing Full-ride health care could be on the out.

2. Quality Control Industry vigilance could help drive $11 billion improvement.

3. Supply Chain Efficiencies As much as 20% of cost could be better invested.

4. Consumerism Employees need to shift from users to buyers.

5. Tiered Benefits Goes against UAW's egalitarianism; could save jobs.

6. Government Action The auto industry leads in seeking federal assistance.