GM on a crash course with health care costs

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12-year struggle a bad omen for the nation

By Ron French
The San Jose Mercury News
Published Sunday, Oct. 01, 2006

Bruce Bradley grew up in the 1950s. He remembers when every week in darkened movie houses another giant spider or fire-breathing lizard would threaten the world. Despite the best efforts of the military and bright minds, every kid in the audience knew there was no stopping the monster.

Today, the 61-year-old wages his own war on a monster in a Pontiac, Mich., office building. There, some of General Motors’ 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, persuaded 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 any rival automaker.

The world’s largest automaker is being driven deep into financial trouble not only by the cars of its competitors, 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 probably 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 workforce and army of retirees, GM has reached a health care crisis before the rest of the country. But GM’s battle with the beast may well be a preview of what the United States as a whole 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 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, Bradley can look at the data and see prescription trends and demographic projections. When he looks long enough, he can see the monster emerging.

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 of every 87 Americans over the age of 65 have their medical bills paid by GM, as do one of every 279 Americans of all ages.

So large is the program that someone has a GM health card in nearly 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, GM Chief Executive 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 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.”
In 1962, half the cars sold in the United States were made by General Motors.
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.

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. GM’s share of the U.S. auto market had dropped from 50 percent to 33 percent. Health 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 struggling to pay their own health expenses.

By 1994, the company nicknamed “Generous Motors” was suffocating under its own liberal employee benefits. That year, Harry J. Pearce, GM’s executive vice president and general counsel at the time, asked James Cubbin, a longtime lawyer with the automaker, to assemble a team to put a lid on health 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 parts maker 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 amount.

Health 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 87 percent, according to a Kaiser Family Foundation survey. The average cost of annual premiums for family coverage is now $11,480 — more than the $10,712 in gross earnings a full-time minimum wage worker would make in a year.