A revolution in health care

DETROIT - On Sept. 26, something happened that is likely to wreck Ben Carter's time-honored health-care business model.

That is the day the United Auto Workers and General Motors Corp. settled on a revolutionary contract that shifts $46.7 billion worth of retiree health-care costs from the company to the union.

As chief operating officer of the Detroit Medical Center, Carter sees the deal as a major change in the way health care is priced and delivered. He and others see it as a catalyst for change in a business that costs employers millions and rises in price by double the rate of inflation almost every year.

"We're viewing it as an opportunity to work with the union leadership and their retired members to design a better mousetrap that keeps them healthier, have a better standard of living, and reduces the cost of providing that," Carter said.

The UAW worked similar deals this year with Ford Motor Co. and Chrysler L.L.C., turning the labor union into one of the largest health-care consumers in the nation.

In early 2010, the union will become responsible for the health-care bills of 540,000 retirees and their spouses, a population equal to that of Portland, Ore.

The numbers give the UAW bulk buying power and enough clout to bring costs down, according to some experts. Retirees, now on the same team as the entity paying their bills, will have incentives to live healthier and limit their health-care use. Some observers also say the move will lead the union to step up its lobbying efforts for a national health-care system.

If the union is successful in its cost-cutting efforts, those changes likely would spread to companies and other health-care consumers similar to the way health maintenance organizations led to cost cuts decades ago, said J.B. Silvers, a professor of health systems management at Case Western Reserve University in Cleveland.

"If they come up with better models for how to provide health care, that will diffuse across the system probably pretty fast," he said. "In that sense, everybody's going to benefit."

In the contracts, GM, Ford and Chrysler agreed to put billions into union-run trusts that will pay bills for all retirees and spouses and for active workers and spouses after they retire. GM will put about $26.5 billion toward the total obligation; while Ford will pay about $13.2 billion on a $23.7 billion liability; and Chrysler, about $9.9 billion on a $16 billion liability.

The companies are paying 56 percent to 62 percent of the obligations into the trusts, called voluntary employee beneficiary associations, or VEBAs.

The VEBAs have other funding sources, including wage contributions from active workers and increased payments from GM and Chrysler retirees who will get corresponding pension increases from the companies.

For the VEBAs to work, experts say the union must invest wisely and make more money than the rate of health-care inflation, which generally runs at 6 percent to 8 percent a year. But they also must control costs with bulk buying, perhaps negotiating directly with health-care providers.

The UAW could hold down costs by encouraging its members to exercise, take their medicines, and limit unnecessary doctor or hospital visits, experts said.

"They all go down together if it doesn't work. They've got organizational cohesiveness on their side where they didn't have it before," Silvers said.