VEBA's--The New Growth Opportunity

With word that Ford workers have followed those at GM and Chrysler in ratifying their new labor contracts we may be at the cusp of the next big growth opportunity in the health plan business.

GM alone will transfer as much as $50 billion in long-term retiree health care liabilities to the Voluntary Employees Beneficiary's Association (VEBA) and Chrysler and Ford will also set up the structure over the next two years.

So, there is a new business opportunity for as much as $100 billion in long-term retiree liabilities that the UAW is going to have to figure out a way to manage. With the auto companies laying off their retiree health care risk for estimates as low as 70 cents on the dollar, the UAW needs to make their limited funds work for their members.

The business opportunity is for the big health plans to go to the union and do what they do best--carve out risk and limit the plan sponsor's liabilities.

With commercial market growth now coming only when you steal business from the other guy and the private Medicare market beginning to slow--and in danger of having its generous Medicare Advantage payments cut back to a par with the traditional Medicare plan--finding new areas of growth is critical to the health plan industry.

But the VEBA business will not be an easy risk to manage. The auto companies were no amateurs when it comes to health benefit management and they have reportedly laid off their risk at a pretty good discount. The union will be looking for guaranteed costs at levels well below where the auto companies were getting the job done. Competition will drive margins down on what will be a very risky business.

But the health plans need growth and they will have no choice but to enter this sector if they want to continue to satisfy Wall Street's expectations for growth.

VEBAs will be the subject of some pretty brisk competition in the coming years. But maintaining benefit levels for the unions at maybe 70% to 80% of what the auto companies were paying out won't be an easy business.

But done successfully, it will not only make the union and Wall Street happy, it can also show us the value that the private markets can deliver in managing health care costs.

Medicare Buy-In For Retirees--Private Options Make It an Even Better Idea

"We should act now to let companies and unions buy their early retirees into Medicare." That's the point of a Washington Post op-ed today by Democratic Congressman Rahm Emanuel and the president of the Democratic Leadership Council, Bruce Reed.

These two former Clinton aides are arguing that:

• "The troubles at GM and Chrysler--and Ford, which reached a tentative labor agreement this weekend -- underscore the enormous competitive burden that health-care costs impose on American companies."
• "In 2005, Americans ages 55 to 64 were the fastest-growing segment of the population to become uninsured.
• The average annual cost of covering a 30-year-old employee is $2,222. The average yearly cost for an employee who retires at 60 is $6,139."
• "A Medicare buy-in for retirees ages 55 to 64 won't cost taxpayers. Companies could pick up most of the cost; instead of GM contributing $30 billion to a VEBA, that money would go to Medicare. Retirees would have to pay higher premiums than traditional Medicare beneficiaries do to receive health care."

Clearly, the 55-64 age group is the most difficult portion of the uninsured to deal with. Age-rating and pre-existing condition provisions all but exclude a big chunk of this market--because they are sicker and older. Creating a Medicare buy-in would likely create an insurable pool constructed at an efficient level.

Emanuel and Reed have a good idea. This does not mean taxpayers would get stuck with the costs. Existing employer/union funding plus affordable contributions by beneficiaries ought to be able to pay the full bill. The UAW which now has taken on enormous health care liability for its retirees from the auto industry, for example, would be far better off with these obligations part of the broader and more efficient Medicare system.

This proposal does not have to be a matter of the government absorbing liabilities to the detriment of the private market. We can have the best of both worlds.

Let's take this good idea one step further and create a set of private Medicare options and bring the forces of the private market to bear as well. And, as those of you who read this blog on a regular basis know, I am not suggesting a private Medicare market paid 12% or 19% more.

Opening this idea up to the private market will make it more palatable to the private market side of the health care debate.

If you believe in the market, you will be optimistic the market will do well.

If you do not believe in the market, you have nothing to fear from private competition--on a level playing field. With the Democrats likely in charge of the Congress in the coming years, I doubt they will cut the market any breaks.

Now That The UAW Is On The Hot Seat to Manage Its Retiree Health Costs Will Their View of Health Care Management Change?

Brian Klepper joins us again today this time with an astute analysis of the UAW/GM deal. Now that the UAW owns their GM retiree plan will they look at health care management differently?

The Hot Seat
by Brian Klepper

I agree with Bob that the GM-UAW deal is a turning point for American health care. In a stroke – OK, it was a 456 page stroke – GM agreed to turn over as much as $35 billion, about 70 cents on the dollar, for a trust that will fund the union’s retiree health care benefits in the future. With the exception of modest additional requirements, the agreement effectively absolves GM of future financial liability for their retiree’s health benefits.

This deal is reverberating throughout a US business community that seeks to avoid continuing unpredictable and open-ended health costs, particularly for large numbers of retirees, which demand an ever-increasing percentage of total resources. Many of the articles covering the agreement have focused on the Voluntary Employees Beneficiary’s Associations (VEBAs), almost as a how-to for unionized employers who want to follow suit and stabilize their liabilities.

Some of my colleagues seem convinced that this agreement is another nail in the coffin of employer-sponsored coverage. I’m not so sure. While employers continue to be very concerned over health care costs, no mass exodus is occurring yet, nor is it likely to. Yes, smaller employers are being priced out of the coverage marketplace, but mid-sized and larger employers are between a rock and hard place when it comes to health benefits. They can pay the exorbitant increases, or they can reduce or drop coverage, watch their workers’ and families’ health decline, and suffer skyrocketing lost productivity costs. Until the nation has a workable universal coverage program capable of supplanting employer benefits, no business that sees the big picture wants to drop coverage and risk having an unhealthy, unproductive workforce.

Nor are employers confident that a government-driven cure won’t be worse than the illness. After all, Medicare’s inflation rate has matched the private sector’s for years (CBO: "Health Care Issues and Challenges for Reform, July 2007," chart 4) and there’s little reason to believe that cost growth will slow just because the government is involved. I’ve heard a good deal of concern that the tax burden for any new system could be greater than the current voluntary expenditures for health benefits.

Of course, for decades unionized employers have experienced a very different, and untenable, situation than non-unionized companies. Unionized firms trying to manage care and cost have faced the resistance of unions who, despite a wealth of evidence to the contrary, staunchly embraced the ideology that better quality care equates to unlimited access: first dollar coverage of any service by any provider. So when GM successfully transferred its retirees’ health risk to the UAW, it was a watershed moment.

There is a law of the universe that says that whoever owns the risk will come to have a different perspective about how it can most appropriately be managed. Now that UAW has responsibility for the solvency of the VEBA, the question is whether their view of health care management will change.

That’s certainly what happened when the Culinary Fund Health Plan in Las Vegas hired Jerry Reeves, MD to manage their health plan. The Plan collaborated with local hotels to provide coverage to about 320,000 lives. When Dr. Reeves, a former Humana national Chief Medical Officer (CMO) and former CEO for Worlddoc, an innovative patient decision support toolsuite, took on the assignment, their costs were through the roof.

Dr. Reeves profiled the doctors and hospitals, rewarded the high performers and discarded a few of the poor performers from the network. He instituted a range of management techniques that drove excess cost out of the system, ultimately saving so much money while improving quality that the union gave all its enrollees a 60 cent/hour raise. Dr. Reeves became a minor celebrity, taking on that union’s national Chief Medical officer position and working with groups around the country on cost and quality. Its one of the best health care stories I know.

In the Culinary Fund case, the union owned the risk and managed the health plan, and they had the good sense to ditch the conventional wisdom in favor of serious management approaches. And they’ve become a model for how unions can successfully address the problem.

The UAW may or may not be a different story. They have been entrenched in an entitlement mentality for a long time. The question now is whether they can bring themselves to manage the care process in a way that drives out unnecessary cost, and that averts financial insolvency for their own members down the very short road that lies ahead.

That, of course, will end up being the question for unions everywhere, as the GM-UAW agreement encourages employers around the country to offload their health risks to their union partners. And in this sense, the agreement is a watershed because it will force one of the last, most powerful holdouts for unmanaged, free-for-all health care (as long as somebody else is paying) to confront the realities of cost and quality.

The ONLY way to do this was to force unions to be in the same hot seat their employers have been in for years. Now that the moment has arrived, it can only be good for the whole of health care, because meaningful reform first requires everyone in power to agree that every patient can’t have everything, just because they decide they want it. Instead, we have to agree to pursue value and performance, a proposition that requires the implementation of an entirely new infrastructure: standards, evidence-base guidelines, transparency and performance-based reimbursement.

Not everyone believes the UAW can pull this off. One colleague said “I suspect the union really does not understand the tiger whose tail they just grabbed. Imagine the combination of entitlement mentality + older retirees + longstanding poor health choices + fixed budget + long life expectancy + the “bully pulpit” in the media. I think GM made out like a bandit.”

If I were in the union’s hot seat now, I might be inclined to give Dr. Reeves a call.

The GM-UAW Deal--If UAW Workers Can No Longer Count on Employer-Provided Health Care Then Neither Can Harry and Louise

I'm not the first one to suggest the GM-UAW deal to set up a VEBA is a watershed event. Most observers are focusing on the trend it will accelerate in the employee benefits market--and it will.

I will suggest another dramatic impact that it will have--on voters.

The polls already tell us that health care is by far the top domestic policy issue and second overall only to Iraq.

This deal is also going to make voters even more concerned about health care. The middle-class gets its terrific health care benefits at work. The UAW led that trend decades ago.

Now, the UAW is admitting that it cannot count on its employers to any longer provide these benefits.

The more important message: If UAW workers can't count on their employer for good health insurance benefits then neither can Harry and Louise.

This is one more important step on the journey of centrist voters in the U.S. toward a consensus that it is time for fundamental health care reform.

The Republican presidential candidates, that are not so far taking the health care issue seriously, had better pay attention.