The Spark That May Just Lead to Real Health Reform

By George Lightbourn

While the politicians in Madison and Washington continue their twenty-year-old debate on health care, a new model might be emerging that could revolutionize the way Americans buy health care.  And the model came about in Detroit of all places.

In the last week of September, after a brief, half-hearted strike, the UAW signed a labor agreement with General Motors.  One of the key components of that agreement was the creation of VEBA – a voluntary employee benefit association.  VEBA is a mechanism to manage the health care of retired GM workers.  Right now, GM is carrying a $55 billion liability for retiree health care and in one stroke they have moved that liability off of their books and onto the books of VEBA.  GM will be putting about 70% of what’s needed to fully fund the obligation.  The rest will come from future earnings from investments. 

What has the potential to be ground-breaking is that VEBA is to be managed by the union.  Responsibility for the future health care benefits for retirees was shifted from management to labor. 

On the surface it is evident that GM offloaded a huge obligation that had made it nearly impossible to compete with other car makers.  Hourly labor cost for GM had grown to $80 compared to $50 at Toyota.  (For those tempted to blame labor for this imbalance, don’t.  GM management either wasn’t thinking when it signed a series of lopsided labor contracts or they thought consumers would overpay for American made cars forever.)

But beyond economic necessity, the creation of the VEBA might hold the prospect of assigning responsibility for employee health care where it more properly belongs; with employees.  Think about it - employers are good at producing goods and services.  I have yet to meet a business executive who was drawn to their business by the prospect of managing health care costs.  While some companies are more enlightened than others when it comes to employee benefits, most simply see employee health care costs as an ancillary cost center that needs to be minimized. 

In the traditional employer-provided health care model, employees have a passive role to play.  The bulk of responsibility rests with management; management designs the benefit package, management negotiates with insurers and management writes the monthly premium check.  Increasingly, management is sharing this last responsibility with employees as a way to maintain benefits without sinking the business. 

By extension, responsibility for health care reform rests with management.  This is one of the obstacles standing in the path of true reform.  Remember, health care is outside of management’s core field of vision.  Management might understand the need to change insurers or to adjust co-pays or deductibles, but they will not quickly see the path to real health care reform.  Most employers are seeking is a path, not to reform health care, but to lower costs.

Therefore, while there is steady growth in the number of employers offering health savings accounts, HSAs still represent a tiny fraction of the market.  Making changes that will yield long-term, fundamental reform is not in the cards for many employers.  While they might see the wisdom in partnering with employees in encouraging lifestyle changes or in disease management, most still think such proactive measures crosses the line.  It is beyond what an employer is expected to do.

That is why VEBA holds the prospect of being the leading edge of fundamental change.  While VEBA only manages the health care for GM retirees, the model could be extended to currently active workers.  If the workers themselves were given some or all of the responsibility to manage their health care would they be more innovative than the current employer-driven model?  Of course we cannot know the answer to that, but it is safe to assume that employees are more likely to make decisions in the context of obtaining value for their health care dollar rather than simply obtaining a good economic deal.  The very reforms that could be seen as penurious or invasive if proposed by management would be seen as necessary changes if proposed by workers. 

I’m not suggesting setting aside the necessary work of consumer-driven health care reform, but the establishment of VEBA is worth watching.  From the crisis of competition in the auto industry might emerge a model to drive health care reform.