Tuesday, September 26, 2006
THE GENERAL AND THE BEAST
How General Motors and the nation are losing an epic battle to tame the health care beast
Ron French / The Detroit News
The monsters of Bruce Bradley's youth and of today sometimes mingle in his mind.
Bradley grew up in the 1950s, when seemingly every week in darkened movie houses another giant spider or fire-breathing lizard threatened the world. The Army would fire its heaviest weapons at the beast as it approached town. Then, through a cloud of smoke, the creature would emerge unharmed, and every kid in the audience knew that there was no stopping the monster.
Today, the 61-year-old wages his own war behind a set of unmarked locked doors in a Pontiac office building. There, some of General Motors Corp.'s best minds fight a losing battle against the bills for Nexium prescriptions, heart bypass surgeries and CT scans that flood in at a rate of $10,000 a minute.
Bradley gets a cup of coffee, and GM has spent $50,000 on health care. He goes to lunch, and $600,000 is gone. He takes a three-day weekend on his sailboat and returns to $43 million in medical bills.
For 12 years, Bradley, GM's director of health care policy, and the corporate soldiers in the automaker's health care war room have waged an unprecedented battle against health care costs, throwing more money, time and energy into the issue than any company in history. GM has used its size to strong-arm doctors and bully drug companies. It built the largest wellness education program in the country, convinced workers to pay more for medical care and cajoled hospitals to incorporate assembly-line efficiencies into emergency rooms.
"We've thrown everything at the monster," Bradley said.
But those efforts have barely slowed the staggering surge in medical bills that many analysts believe is a bigger threat to GM than is Toyota.
The world's largest automaker is being driven deep into financial trouble not only by the cars of a competitor, but also by the medical bills of its own workers and retirees.
Last year, GM spent $5.3 billion on health care -- enough to buy a GMC Yukon for each of its U.S. employees. By 2008, General Motors will likely spend more on health care in the United States than on its hourly-worker payroll.
The economics have become so upside-down that Warren Buffett calls GM "a health and benefits company with an auto company attached."
Bradley has heard that joke before, and it always makes him squirm. He knows health care bills are crippling the company. He also is painfully aware of what that means for the rest of the country.
The profits of U.S. businesses are being eaten away by rising health care costs -- a financial burden not borne by their competitors based in other countries. An estimated 46 million Americans have no health insurance at all, and those with insurance are paying more for less coverage.
Because of its aging work force and army of retirees, GM has reached a health care crisis before the rest of the country. But GM's battle with the health care beast may well be a preview of what America will be facing in coming years.
GM has staked its future on an unlikely crusade against the most expensive and sloppy medical system in the industrialized world.
The fact that in 12 years those efforts have scarcely helped prompts a frightening question:
If health care costs are driving one of the most powerful companies in the world deep into financial difficulty, how bad will the health care crisis be for the rest of us?
At his desk in the war room, Bradley can look at the data and see prescription trends and demographic projections. When he looks long enough, he can see the monster emerging from the smoke.
Program is massive
Every second of every day, GM pays for a medical procedure; every two seconds, it pays for a prescription. Last year it wrote checks to 500,000 doctors, 35,000 pharmacies, 5,000 hospitals, 120 HMOs and 80 insurance companies.
One out of every 87 Americans over the age of 65 has their medical bills paid by GM, as does one out of every 279 Americans of all ages.
So large is the program that someone has a GM health card in virtually every ZIP code in the United States. So costly is the program that the automaker's health care spending alone is more than the total revenue of 121 companies on the Fortune 500 list.
GM is the largest private buyer of health care in the world. Most companies pay an insurance company to assume the financial risk for health care claims. GM, on the other hand, is self-insured, meaning the cost of every mammogram and Viagra prescription comes straight out of the auto giant's pocket.
The 2005 health care tab -- the most any company has paid in history -- may be just the tip of the iceberg.
In a recent congressional hearing, CEO Rick Wagoner projected his company's spending would surpass $7 billion by 2009 and keep rising after that.
In a later interview with The Detroit News, Wagoner offered a grim elaboration. "Get a calculator and punch in (nearly) double-digit health care inflation for five, 10, 15 years, and you have a problem," he said. "If you keep paying more and more for health care it robs our ability to invest in future products and future technology, which impacts our ability to employ people. And it's not (a change occurring over) years; it's a faster and faster time frame."
Cost deferred for decades
In 1962, half the cars sold in America were made by General Motors.
Flush with money, GM offered generous health coverage and deferred benefits (retiree health benefits and pensions) instead of higher wages. That choice made sense because health care was inexpensive, and the future medical bills of retirees didn't have to be charged against revenue until they occurred.
In essence, GM was buying health care on credit.
By deferring the cost for decades, the company assumed that its market share and profitability would remain at 1960s levels or higher.
By the early 1990s, that assumption was in tatters. Its share of the U.S. auto market had dropped from 50 percent to 33 percent. Health care costs were rising at three times the rate of inflation. Facing fierce competition from Japanese automakers, GM couldn't raise its car prices to cover the increased cost of health care as it had in the past. Instead, the company turned to its suppliers, squeezing price cuts out of parts manufacturers that were struggling to pay their own health care expenses.
By 1994, the company nicknamed "Generous Motors" was suffocating under its own liberal employee benefits. That year, Harry J. Pearce, executive vice president and general counsel for GM at the time, asked James Cubbin, a longtime lawyer with the automaker, to assemble a team to put a lid on health care costs before they permanently scarred the company.
Cubbin's creation, Health Care Initiatives, set out to do nothing less than diagnose and cure the problems of the U.S. medical industry. It was an audacious plan, akin to Blue Cross Blue Shield trying to reinvent the way cars are designed, manufactured and sold.
From GM's perspective, it was a matter of survival.
"There was a tremendous amount of anxiousness among the senior leadership" about growing health care costs, Bradley recalled. "And that anxiousness has been steadily increasing."
The storm clouds hanging over GM in 1994 have become an economic hurricane. GM's market share dropped to 27 percent in 2005. Shrinking market share and the bankruptcy of Delphi played major roles in an overall loss of $10.6 billion, but Wagoner need only look at two figures to see the disastrous impact of health care costs on the company:
GM lost $8.2 billion in North America in 2005. And its health care tab amounted to nearly two-thirds of that number.
Effects felt across U.S.
Health care costs are crippling not just GM, but also businesses across the United States, the only country where health care is primarily paid by employers. In other industrialized nations, it is paid for by the government. Companies may pay a health care tax in other nations, but that cost is far lower than the insurance premiums most U.S. companies pay.
Since 2000, premiums for employer-sponsored family health coverage have jumped 73 percent, while wages have gone up only 15 percent, according to a Kaiser Family Foundation survey.
The average cost of annual premiums for family coverage is now $10,880 -- more than the $10,712 in gross earnings a full-time minimum wage worker would make in a year.
The share of U.S. companies offering health insurance dropped 13 percent between 2000 and 2005. Citing increased costs, only 60 percent of U.S. companies now offer health insurance.
"When insurance was 2 percent of payroll, no one cared," said Richard Matthews, benefits expert for Desjardins Matthews & Tatangelo in Sterling Heights. "Now that it approaches 33 percent, everybody cares."
Employers who continue to provide health insurance pay an average of 82 percent of the cost, according to a study by the Robert Wood Johnson Foundation. With insurance premiums for a family of four now averaging almost $900 a month, companies are bearing a huge expense that their foreign competitors do not.
For example, the price tag of every vehicle GM builds in the United States includes about $1,525 just for the medical care of the nearly 1.1 million Americans the automaker insures. Toyota's health care tab for each vehicle it builds in Japan is $97; it's $400 to $425 in the United States.
DaimlerChrysler's health care cost amounts to $1,400 per vehicle; Ford, $1,100.
Those costs have to be made up somewhere. At GM, health care has diverted money and manpower from innovation at a time when the company desperately needed fresh ideas, and that played a major role in the layoffs of thousands of workers.
"If it's one year, you deal with it. If it's two years, you manage," Wagoner told The News. "But if it's a chronic $4 billion or $5 billion cost difference with your prime competitor, over time it does impact what you would like to do in things like research and development."
GM spent $8 billion last year on research and development compared to $10 billion by Toyota. The numbers seem fairly comparable, until you consider that Toyota is splitting its $10 billion over 18 vehicle models, while GM spreads its $8 billion over at least 57 models.
"Being outspent every year by $2 billion a year? Over 10 years, that's a $20 billion difference in R&D, and that's huge," said Steven Szakaly, an economist at the Center for Automotive Research in Ann Arbor. "Eventually, your technology becomes obsolete."
GM's $1.9 billion annual tab for prescription medicine alone would be enough to launch two new vehicles from drawing board to showroom. GM spends more for health care in 10 weeks than it has spent on fuel cell technology in eight years.
While GM was downsizing many vehicle-related departments to cut costs, it increased the size of Health Care Initiatives. Today, 70 people work in Pontiac, poring over medical data looking for ways to cut costs and improve the health of workers, retirees and their families.
Whether they're winning or losing the health care battle depends on your perspective. In 2005, GM spent less per person on health care ($5,000) than DaimlerChrysler ($5,444) or Ford ($6,363). If GM paid what Ford does per person for health care, it would cost the automaker an additional $1.4 billion.
On the other hand, GM's medical bills continue to spiral upward in a period when the automaker has had to cut the price of many of its vehicles.
This year, the automaker will save almost $1 billion from health care concessions made by the UAW and another $250 million from the federal government for opting out of the Medicare prescription medicine plan.
That $1.25 billion in savings will cut health care costs this year, but those savings are like "throwing a deck chair off the Queen Mary," said Sharon Baldwin, GM's health care communications manager.
Medical bills are projected to continue their rise next year.
Getting less for its money
And what is GM getting for all that money? Despite having the Cadillac of health coverage plans, GM employees don't live any longer than other U.S. blue-collar workers, according to GM data.
Americans die younger, have fewer doctors and hospital beds, and live a greater share of their lives in pain than residents of other industrialized nations, according to statistics by the Organization of Economic Cooperation and Development. In one study of quantifiable medical outcomes, the United States ranked 12 out of 13 industrialized nations.
For GM, a company whose fortunes rise and fall with the quality of its products, the health care system didn't make sense. GM -- and America -- was paying for a Hummer and getting a Chevette.
GM's future seemed to hinge on the problems of another industry.
"This is a national issue and needs to be addressed in that light," Wagoner told The News. "At the same time, we can't bet the company on somebody stepping up to address this in Washington. We're going after it ourselves."
If GM wanted to keep making cars, it was going to have to learn how to run hospitals. It was a frightening thought.
But the alternative was more frightening.
You can reach Ron French at (313) 222-2175 or email@example.com.
© Copyright 2006 The Detroit News. All rights reserved.
© Copyright 2006 The Detroit News. All rights reserved.