VEBAs: Autoworkers' union shares the risk of rising healthcare costs

October 10, 2007

The tentative contract agreement that assigned a role to the United Auto Workers in managing the healthcare costs of its General Motors members was a turning point in the relationship between business and labor -- and a sign of things to come in a global economy.

Someday soon, VEBAs -- Voluntary Employee Beneficiary Associations -- may become as familiar as the acronym COLAs -- Cost of Living Adjustments -- did in the 1960s and 1970s. Under a VEBA, the company turns over a certain amount of financing, then the union has the responsibility for managing the fund and for determining benefits that will be paid.

It is all about risk-sharing. And, the advent of VEBAs to secure healthcare for current workers and future union retirees through creation of company-financed, union-managed benefit trusts will most likely make declining U.S. manufacturing industries more competitive. VEBAs may do little to reverse sagging U.S. union participation, however, according to experts at the W. P. Carey School of Business.

The $35 billion GM-UAW VEBA agreed to Sept. 26 after a two-day strike allows GM to get out from under an estimated $50 billion in unfunded retiree healthcare liabilities; it constitutes a $15 billion advantage for the company.

The GM-UAW VEBA comes on the heels of one established in 2006 between Goodyear and the United Steel Workers that created a $1 billion-plus VEBA. At the same time, the company committed itself to increase its investment at USW-represented factories threefold, to $550 (cq) million. The Goodyear workers also won continuation of COLA payments.

An earlier VEBA, between the UAW and Caterpillar, has been so overstrained that retirees have had to shoulder, out of pocket, thousands of dollars in unexpected annual healthcare protection costs.

VEBA also loomed large in negotiations between Chrysler and the UAW. Chrysler workers walked off the job for a few hours Wednesday (October 10) before the company and the union reached a tentative agreement. Terms were not immediately released.

Under a microscope

The GM-UAW VEBA will be closely watched, as were the earlier VEBA healthcare deals.

"GM executives had indicated in public comments that they had been examining the Goodyear-USW VEBA agreement even before negotiations started with the UAW," says Bradford Kirkman-Liff, a professor of health management and policy at the W. P. Carey School. "It will help in GM's efforts to return to profitability. It will remove the contentious issue of retiree health benefits from labor negotiations. It will also force the UAW to realize how difficult healthcare cost containment is, as they struggle to meet the needs of their members with that fixed endowment."

Daniel Brooks, a professor of supply chain management at the W. P. Carey School, viewed the contract from a broad perspective of risk.

"My take on this strike had more to do with the risk-sharing shift that it marks in the auto industry -- the change in the UAW's appetite for risk in confrontation today is markedly different from what is was in the early '90s, let alone the 20 years before that," Brooks says. "Though the shift wasn't unexpected, the results of the strike -- both the size and quickness of the settlement -- surprised many."

Union membership, as high as 35 percent of the U.S. workforce 50 years ago, now is around 7.5 percent of non-governmental workers. The UAW's "Big Three" membership is down by about 40 percent since 2003, when the last national contract was forged. At GM, the union had about 250,000 members in 1994, but it is down to about 75,000 now.

A boost up or breaking the fall?

Observers wonder if this VEBA arrangement will work, or whether it just will slow GM's decline as it competes against non-union car companies.

"I think it will work in terms of removing the burden of these costs from GM," Kirkman-Liff says. "GM is in the process of making a number of other strategic changes that should help it compete against other manufacturers. Will it be able to compete against the new manufacturers in China and elsewhere? Maybe."

Brooks adds that "a key focus of these negotiations was the allocation of future health care costs between the union and GM."

"The union targeted GM because they have some cash," Brooks says. "On the other hand, GM also famously spends over $1,600 per vehicle on the healthcare costs of current and retired U.S. workers while Toyota pays about $200 per vehicle. Although GM also pays about another $1,000 per vehicle on holiday pay, work rules, plant-shutdown-pay and line-relief to UAW workers -- expenses Toyota, for example, does not have -- these costs were not as much the focus of these negotiations."

Kirkman-Liff warns against viewing the GM-UAW accord as a union concession or as a GM victory.

"Both sides came to a negotiated agreement to change to a mutually beneficial new arrangement," he says.

Brooks agrees: "The union settled for taking existing health-related resources with certainty -- along with the risk of future health cost increases -- rather than bear the uncertainty of waiting into the future to negotiate health coverage."

Union power waning?

Brooks described the waning power of unions and its manifestation in the UAW-GM settlement in a recent entry on the Knowledge@W.P. Carey Blog:

"One result of this decline is a shift in the relative share of the risk associated with future healthcare costs borne by corporations versus their unions. The results of this negotiation between the UAW and GM may foreshadow more contests on this front in the future as healthcare costs continue to rise and the first stages of baby-boomer retirements predicted to start in earnest in 2008 begin to occur," he wrote.

The United States' percentage (7.5) of unionized non-government workers is lower than that in most developed nations, all of which have seen some erosion in unionism. Why is this the case, and will VEBAs aid or hinder a union comeback?

"After World War II, 'right-to-work' laws in most states have made it very difficult to organize unions compared to other industrialized nations," Kirkman-Liff, himself a former union worker, explains. "Compared to Europe, employers in the U.S. have much greater flexibility to close a unionized factory in one state, move to a new state, and open a non-union factory there. Large numbers of manufacturing jobs moved from the Northeast (New York, Pennsylvania, Connecticut) to the Middle South (North Carolina, Georgia, Tennessee, Kentucky) starting in the 1960s and 1970s."

Kirkman-Liff says union corruption -- including organized crime -- soured many workers on unionism, as did conservative white male dominance of union leadership. Lockstep support for the Vietnam War by many segments of organized labor also harmed the union cause.

"I do not think VEBAs will help or hinder a union resurgence," Kirkman-Liff says. "Unless they change their tactics and their image, I do not see how unions can be effective in an era of global outsourcing."

With the wealth of GM and the health of aging unionists less certain than in years past, workers in the diminishing union are more focused on healthcare costs than on increasing wages, Brooks says.

"The loss of union ability to inflict pain, the increasing role of government and other programs that cover issues formerly addressed through union contracts and, therefore, some reduction in benefits from striking, together with uncertainty about the future economic performance of American auto manufacturers, appear to have resulted in a shift in risk-bearing," Brooks says. "This contest was less about increases in current benefits than it was about decreases in future cost-bearing. When you're smaller, weaker, older and negotiations are over the splitting of a smaller -- and perhaps shrinking -- pie, risk aversion makes some sense: better to take your piece now to put toward those future days when times might be even leaner."

Addressing an employer-based system

Kirkman-Liff says it is time to address "fundamental problems of the instability of the employer-based private health insurance system." He calls it "the proverbial $67 billion dollar question."

"Honestly, I think that we have to get all of the major players in a room and have a kind of an 'emperor's-new-clothes' conversation about the current medical care financing system in the U.S.A.," Kirkman-Liff says.

"The decision to not tax employer-provided health benefits was taken during World War II as a temporary measure. It was intended to be repealed after the war with the creation of some sort of National Health Insurance -- a sort of Medicare for Everyone program," he explained. "Private health insurers would administer a standard benefit, with deductibles and co-payments and limits, and people would go to whatever private doctors and hospitals they wanted to. If people wanted more generous coverage, they could buy additional private health insurance. But the Truman proposal for this was defeated -- and so we have been stuck with this 'temporary' measure ever since."

Kirkman-Liff says the system has dreadful incentives.

"It is voluntary -- so some employers don't provide coverage," he says. "As each firm buys its own coverage, insurers do experience rating -- so employers have incentives to hire younger, healthy workers and discriminate against older, sicker workers. The administrative costs per employee are higher when there are fewer workers in the plan, so small employers pay much more than large employers, even if their workers are the same age. If people buy coverage on their own -- if they are self-employed or their employer does not provide health coverage -- they do not get the tax savings."

He notes that Medicare and Medicaid were added in 1965 to cover the old and the

"But there is a group of people who make too much for Medicaid and work for employers who do no provide coverage. Those are the uninsured," he says. "Some argue that every time Medicaid is expanded to try to cover some of the uninsured, more small employers drop coverage. Others argue that small employers drop coverage because of the constantly increasing costs, and Medicaid expansions are simply an effort to fill in the gap caused by employers dropping coverage."

Kirkman-Liff says we need to change the entire system, to replace the tax exclusion of health benefits with a refundable, "advancable" age-and-illness-adjusted tax credit.

"That would allow people to go into the marketplace and buy private insurance on their own," Kirkman-Liff says. "This would take the employer totally out of the system. There would have to be reforms in the regulation of the individual market for insurance: Make it a national market rather than 50 state markets."

Kirkman-Liff advocates the assuring of portability and coverage, the banning of exclusions or denials of coverage, and the requiring of community rating by age that matches the age adjustments in the tax credits.

"The Netherlands and Israel have done these kinds of reforms, and they seem to be working," Kirkman-Liff says. "In a sense it is a voucher model -- the kind that Nixon proposed back in 1972. Some of the Republican candidates seem to be considering similar proposals. Most of the Democrats are still trying to keep the current voluntary employer-sponsored system on life support."

Kirkman-Liff says he expects many large unionized companies that have large liabilities for retiree health benefits to move to VEBAs.

"One important issue will be the adequacy of their funding," he says. "A second issue will be the willingness of the unions to become involved in managing the care of their retired members. If they do not take an active role, then the VEBAs will exhaust their funds.

"I suspect that VEBAs are another temporary patch on the slowly crumbling voluntary employer-based private health insurance system. VEBAs will help it limp along for another decade. The fundamental problems of the instability of the system will have to be addressed sooner or later."

Bottom Line:

  • The advent of VEBAs -- Voluntary Employee Beneficiary Associations – is evidence that U.S. corporations and unions are mutually aware that they are up against tough international competition and must cooperate to survive.
  • VEBAs will help manufacturers and unions in the short term, but the jury is out as to how long the fix will last.
  • A big question is how well unions will administer the healthcare funding that corporations provide and whether they will wisely handle the determination of benefits.
  • The revamping of the U.S. healthcare and health insurance system remains long overdue.