Driving Forces: Motown's Medical Bill

There was a time when the United Auto Workers union not only set the gold standard for factory workers, but for all of us. In postwar America, the goodies gained by the powerful UAW trickled up and down the economic ladder. Many of the pension and health-care benefits we enjoy today were first pounded out across a bargaining table in Detroit when the American auto industry owned the road and rolled in dough. Somewhere along the way, though, our paths diverged. As medical costs soared, most workers were forced to shoulder more of the cost of keeping themselves and their families well. But the UAW and Detroit's automakers, as if in some strange time warp, kept right on going down that golden highway, where workers don't pay a penny out of their paycheck for health care, and co-pays and deductibles are relatively modest. Today, with benefits similar to what some might recall fondly from the 1980s, UAW workers at Detroit automakers cover about 7 percent of their health-care costs. The rest of us are on the hook for 35 percent, according to auto industry sources and independent analysts.

The joy ride, though, may soon be over. This week and next, critical contract talks open between the UAW and General Motors, Ford Motor Co. and Chrysler. And before the current contract expires on Sept. 15, America's ailing automakers are intent on finding an Rx for the industry's health-care burden, which they say adds $1,500 to the cost of every car it builds. That's more than the cost of steel ($600) in each model. Detroit's $10 billion annual tab for health care goes a long way toward explaining why America's automakers combined to lose more than $16 billion last year. (Though an equally compelling explanation is that Detroit doesn't build enough gas sippers that car buyers crave.) Motown's medical bill is a significant part of the $25-an-hour labor-cost gap between the Detroit Three and the Japanese Three—Toyota, Honda and Nissan. A Toyota worker in Georgetown, Ky., earns about $45 an hour, when you include the cost of benefits, while down the road in Louisville, a Ford factory worker makes about $70 an hour. "We can either address that gap," said one Detroit exec, who asked not to be named because of the sensitivity of contract talks, "or we can continue to shift our investment dollars" overseas.

Or America's automakers can go out of business. The fact is, this is do-or-die time in Detroit. "This is desperation city," says veteran auto analyst David Cole of the Center for Automotive Research in Ann Arbor, Mich. "If one of these companies goes down, that could kill the union. This is a very tenuous situation."

That's why there is much talk in this town of the need for a "transformational contract," which is a nice way of saying the union needs to agree to big concessions. It's also why Detroit's automakers are having a huge garage sale right now. They're rapidly unloading assets—including, possibly, Ford selling Volvo—as a way of financing a deal with the union, analysts say. Wall Street seems convinced that a big deal is coming. It believes the union is ready to reverse a half-century of gains and junk their Cadillac of health-care and pension benefits. GM "shares will rise as expectations grow for sizable concessions out of this year's UAW talks," Goldman Sachs analyst Robert Barry recently wrote to investors, concluding that such give-backs are "highly probable." Don't try telling that to the union's steely president, Ron Gettelfinger. "We're not going into negotiations in a concessionary mode, I'll tell you that," Gettelfinger told reporters after delivering a fiery speech to the NAACP in Detroit last week that ended with him nearly losing his voice as he shouted, "Solidarity! Solidarity! Solidarity forever!"

Away from the microphones and cheering crowds, Gettelfinger has proven more pliant. In 2005, with bankruptcy banging at Detroit's door, he granted GM and Ford a break on health care that drove up costs for UAW retirees, but saved the automakers billions (and possibly rescued them from the grim reaper). More recently, he agreed to cut wages nearly in half at bankrupt auto supplier Delphi (though only after GM provided a $7 billion bailout to its former parts division that softened the blow on Delphi's workers). Gettelfinger, who has a bachelor's degree in business from Indiana University, even hired the Wall Street investment-banking firm Lazard Ltd. to go over the automakers' books to gain a deeper understanding of Detroit's dilemma. "Wall Street is working closely with the union," says Cole. "The union is deeply connected to the financial side of the business." Now that's something you would have never heard in past contract talks.

Gettelfinger's biggest breakthrough, though, just helped save Dana Corp., another bankrupt auto supplier. The union this month agreed to take over management of Dana's health-care plan through a special trust fund set up by the company. Dana kicked in $780 million to establish the fund, which will be managed by investment bankers the union hires. Proceeds from the fund, known as a voluntary employees' beneficiary association, or VEBA, pay for workers' health benefits, which will be managed by the union, rather than the company.

The Dana deal, which is similar to one Goodyear adopted last year, provides a roadmap for Detroit to get out from under its crushing medical costs. The stakes, though, are considerably higher for the Detroit Three, which have health-care obligations of more than $100 billion, according to Goldman's Barry. By some estimates, GM, Ford and Chrysler would have to kick in $60 billion to $70 billion to fund such a trust. While the savings down the road would be huge, coming up with that kind of scratch now will be tough for downtrodden Detroit.

That's where this big garage sale comes in. GM just sold its profitable Allison Transmission business for $5.6 billion and last year sold a controlling stake in its lucrative finance arm, GMAC, for $14 billion. (The buyers have mostly been private-equity players, like Cerberus Capital Management and the Carlyle Group, who see Detroit eventually turning the corner.) Ford appears on the verge of selling Jaguar, Land Rover and possibly even Volvo for as much as $16 billion. And Chrysler is about to receive a life-saving $7.4 billion cash transfusion from its new owner, Cerberus. All that cash—along with lines of credit Detroit has mortgaged its future to secure—just might give America's automakers the money they need to offload their health-care plans onto their union.

The benefit to the UAW of such an arrangement is two-fold: members' health-care benefits would be protected if any of Detroit's automakers slip into bankruptcy. And auto bosses will no longer come after the union to give back health-care benefits.

On the other hand, if the union takes the wheel of its members' medical coverage, it might want to take a hard look at those benefits from a bygone age. According to the health-care cost comparison commission by NEWSWEEK, the average American family now pays $1,500 to $2,000 in deductibles to its PPO. But UAW members at Chrysler, for example, pay $200 to $1,000 for their family PPO coverage. That is unless they take the standard Blue Cross plan (remember that?)—which has no deductibles, but requires employees to cover routine office visits. (Hospital stays and surgeries, though, are fully covered.) And then there are those prescription co-pays, which can really add up for most of us. The average American family pays $10 for generics and up to $70 for brand-name drugs. But at GM, Ford and Chrysler, it's just $5 for generics, $10 for brand names and $15 for Viagra and other erectile- dysfunction drugs, which have proven popular among aging autoworkers. If the union starts dispensing those med plans, though, autoworkers might find it more difficult—and expensive—to feel the love.