The first big crack in retiree health benefits occurred years ago, when steel companies and other “rust belt” companies reneged on their commitments to fund retirees’ health coverage, declaring bankruptcy in the face of intense competitive pressures. Now, the nation’s largest private provider of health benefits to employees and retirees, General Motors, has negotiated a deal with the UAW that significantly reduces GM’s future health care expenses.
For GM and the UAW, which has long resisted even discussing such a cut, it was a matter of mutual survival. GM’s future health care expenses which were estimated to be $77 billion for all retirees (free registration required), will be reduced by $15 billion; these changes will also enable GM to cut annual health care expenses thereby saving about a billion dollars in cash per year.
That’s the “good news”. The bad news is the bankruptcy of former GM subsidiary Delphi, announced earlier this month, will likely force GM to cough up an additional $12 billion to cover Delphi’s commitments to retirees for pension and health benefits.
GM has been hobbled not only by the nation’s most generous employee and retiree health benefits, but also by just plain dumb decisions to invest heavily in trucks and SUVs. My take is these results are related; they reflect a short-sighted approach to the company’s future, an approach predicated not on where do we need to be in 5 or 10 years, but on what do we need to do to generate returns today. With that mentality, strikes, tough labor negotiations, and big investments in efficiency and new technology are undesirable as they reduce cash flow and hurt the income statement.
Consider this – Toyota’s health care costs are estimated to be 1/3 of GMs on a per-vehicle basis. Costs are so low they are not even a line item in their financial reports. That means Toyota can sell a vehicle for $1000 less than GM and make the same amount of profit. Actually, Toyota has a lower cost structure, so margins are higher anyway, but the point is that health care alone accounts for $1000 of that lower cost structure.
Interestingly, retirees seem to be somewhat resigned to accepting the deal. That is encouraging, and perhaps reflects their knowledge that their benefits are still richer than anyone else they know.
What does this mean for you?
What’s good for GM is good for the country – Alfred Sloan’s oft-cited statement is certainly applicable in this instance. If we are to remain competitive in the global economy, we have to reduce the impact of health care costs on our products and services.

Revolution Health’s recent announcement of six acquisitions has been covered here in the past; now news is out regarding the management team that will lead the Revolution Health’s new company into the future. What puzzles me is the management team’s complete lack of provider, payer, or managed care experience. Heavy on internet start-up, tech, consulting, and experience “knitting together a variety of companies into cohesive operating units”, the team seems strikingly light in real world experience.
With Steve Case, Colin Powell, Jim Barksdale, Carly Fiorina, and Steve Wiggins (the only one with extensive health care experience in any sector) on the Board, one would have expected to see slightly more, or perhaps much more, real-world expertise to balance the lofty thoughts of the leadership with knowledge gained from time in the trenches.
Alas, such is not the case (no pun intended). Much attention is being paid to the consumerization of health care, with consumer-directed health plans, empowering consumers, getting consumers to take responsibility, etc. Now, the entity launched with the most fanfare looks like an amalgamation of second and third-tier companies overseen by a star-studded board and managed by folks with little experience in the actual real world of buying, delivering, or managing health care.
The CEO, John Pleasants, comes from the internet world, with extensive experience with Evite, Match.com, and CitySearch. The head of the Community Health Information division’s most recent experience is as boss of Wondir, a search engine for community health information. Don Hackett of the Information Portal Division worked with drkoop.com, and the ill-fated Physician Computer Network. The new head of research comes from Fannie Mae where she worked in the office of the Chair (who is now on the Board of RHG).
Surely the advocates of consumer-driven health care can come up with something better. Health care is an incredibly complex, multi-faceted industry that operates by a distinct set of rules and motivations, with extremely powerful and deeply entrenched stakeholders exerting control over the delivery, funding, operation, and regulation of the business.
What does this mean for you?
Likely not much.