Friday, November 25, 2005

Another price for not having a national healthcare plan

Last week, General Motors Corporation announced massive layoffs and restructuring, with its intention to close or significantly downsize seventeen plants (fourteen in the United States) and lay off over 30,000 workers. GM cited a slump in sales combined with the rapidly increasing cost of providing healthcare under a union negotiated contract for employees and their families, as well as the cost of the company pension fund which pays retirees under another union negotiated contract.

Critics on both the right and the left have missed the point though.

Critics on the left have criticized GM for stupid planning. Even as late as this fall, as fuel prices soared and GM sales, particularly of SUV's, fell through the floor, GM executives were talking at trade shows about building bigger SUV's. They can't take a hint from the fact that Toyota sales have skyrocketed during the same time period. Toyota, with some justification, is considered to build more fuel efficient vehicles. Now, this is somewhat of an exaggeration as well, since Toyotas are definitely better than comparable American cars for fuel mileage, but not by a huge amount, and Toyota is still building its own mammoth gas guzzling SUV, the Sequoia. Toyota executives read the changing market much better though and began cutting back on production of the Sequoia last year and produced more of their smaller, more fuel efficient vehicles. Toyota also has a well deserved reputation for quality (which I can attest to, having owned two Toyotas which I collectively drove for nearly half a million miles). However, of American cars, GM vehicles hold their own in quality compared to Fords and Chryslers, and again aren't that far below Toyotas. So while these criticisms of GM are justified, there is something more.

Critics on the right are quick to point fingers at the union contracts negotiated between GM and the United Auto Workers (UAW), and claim that the union contracts tied GM's hands, cost it billions of dollars at a time when GM could ill afford the expense, and have forced it to make this decision. And it is true, that under the terms of the contracts, even when they do close the plants, part of the contract says that GM will still continue to pay the laid off workers a large portion of their salaries. And it is true that health care costs have risen as much for GM workers as they have nationally, at a double digit rate of increase yearly for over a decade. At the same time, the UAW is right to point out that they have worked with GM on this problem. In fact, only two weeks ago, UAW workers ratified a contract over health care benefits that involved substantial givebacks (especially in the area of retiree healthcare). The union negotiated this in good faith with the belief it would protect the jobs of workers, and it is hard to believe that GM (which will now benefit from the newly ratified agreement even while it closes the plants) didn't know two weeks ago what they knew one week ago about the financial problems that would lead them to make this week's announcement. Quite plainly, GM knew they were going to shut the plants down anyway and they negotiated this contract in bad faith. Also, the UAW is right to criticize the 'golden parachute' payments given to executives when they are cutting employee benefits. For example, GM's major parts supplier, Delphi, recently declared bankrupcty in order to try and end their employee pension plan and spend the money that has been deposited into it to pay creditors (which worked for United Airlines, so now everyone is trying to do it). But before filing bankrupcty, Delphi found the money to pay some of its top executives millions of dollars in bonuses.

So if the left doesn't have the whole story, and the right doesn't have the whole story, then why IS General Motors in such dire straights, especially compared to foreign auto makers (not just Toyota)? For that matter, Ford is limping along as well, hamstrung in similar ways, and Chrysler has had a mild resurgence, and that only since being absorbed by Daimler-Benz, a German company.

It doesn't take a big look to figure that out. Remember back about fifteen years ago when the complaint was that foreign governments were 'subsidizing' their auto manufacturers? At the time, people were using it as an excuse for everything from tariffs to taking a hard line in union negotiations. Well, it turns out that the 'subsidies' that these people were talking about were 1) the national health care systems in those countries (meaning that employers there don't have to provide health insurance), and 2) the national retirement systems there (unlike Social Security, the retirement systems in many industrialized countries is designed to directly pay retirees 100% of their retirement benefits, meaning there is no corporate pension plan). True, companies make contributions towards both the national health plan and the national retirement plan. But with other countries much more successful with their regulated approach than we have been with our 'laissez-faire' approach to holding down healthcare costs, (as reflected in the link, we spent 15.3% of our GDP on health care in 2003 with a high rate of growth, while countries with national health care systems spend 10% or less with low growth rates) the total in taxes they pay for this is far less than what employers and workers collectively pay in America (plus we still pay taxes for Medicare and Medicaid, to cover a couple of high risk groups which in those countries are just part of the same system as everyone else). Those who exclusively blame either GM management OR the unions (or even both together) are missing the point, that they are fighting over how to allocate costs that their competition, simply put, doesn't have to pay. I read somewhere that health care costs add $1,500 to the price of every new GM vehicle (that may or may not be an accurate number, but the point is made). Manufacturers in other industrialized countries have to deal with unions, too, but negotiations are a lot simpler if health care and retirement aren't even on the table to be negotiated. Plus, they don't have to hire anyone to administer the plans. So, if GM prices its vehicles competitively with other manufacturers who make their vehicles elsewhere, then that is money that comes directly out of their profit margin when they do sell a vehicle.

What this means, is that American corporations are at a competitive disadvantage precisely because we DON'T have a national health care system. And corporate pension plans, as we now see, have become simply sand castles, to be built up and then washed away when a big wave of red ink hits. And until we figure this out, then it is certain that we will continue to lose sales to foreign competitors (to say nothing of jobs; GM and other companies have moved some factories to Canada, Korea and other countries where they get to take advantage of those countries national healthcare systems-- and their American plants took the brunt of GM's announcment last week; No operations outside of North America were impacted, and the impact in Canada was limited to the effects that the Oshawa #1 plant will be reduced from three shifts to two in 2006 and the Oshawa #2 plant will cease production two years later, as well as a parts manufacturer in St. Catherines).


Barbi said...

Excellent analysis on the health care issue, Eli. That is a huge part of it. Your insights help so much. I also wonder (as I commented earlier to Lizzy on her 'oil change' post):

I just can't figure out where the auto companies brains have been all these years. And can't figure out where they are now: Wm. Ford says Congress should give 'corporate welfare' to the auto companies, so they can strengthen American jobs here, while FoMoCo (as one example) is cutting jobs and shutting down plants in the USA...and investing millions in foreign plants.

Girl on the Blog said...

A lot of these companies base their thoughts on #'s. #'s look great on paper but in the long run it's a bunch of crap. The big picture is what they want to focus on... a lot of time you just need to sit back and look at the "small" picture and go with the flow of the economy. Greedy people will always fail.

Healthcare is an issue that needs to be demanded attention. In TN we have what is called TennCare. 1000's of people are on this lower income healthcare. Now they are taking it away from 1000's due to some who have abused it. Every night there is heart-breaking stories on the local news of those who are being denied TennCare that really need it.

I fear for my future regarding "healthcare". When I am old and gray... I don't want to die because I don't have health insurance or my health insurance isn't good enough... this is unjust and morally wrong!

There have been 3 industries in my hometown that have closed up shop and moved to Mexico... THREE in the past 2 years... this should not be allowed. Something needs to be done!

dorsano said...

We have esentially three models of health care in the country (not counting veterans care):

1). The Medicare fee for service model
2). The Managed Care (HMO) model.
3). The High deductible/High Risk "Personal Health Savings Account" model.

Medicare costs 1%-3% to administer. That means that 97% of all the money collected goes directly into health care. Medicare is similar in many respects to the fee for service/self insurance programs of large pools such as labor unions.

Managed Care Plans cost anywhere from 20%-35% to administer. These plans are generally what companies like GM contribute to.

Option 3 is Bush's "vision" for the country.

Both options 2 and 3 are based on the notion of "moral hazard" or overconsumption. The idea is that people need incentives, like co-payments and high deductibles and such, so they don't "over use" the health care system.

The problem is that we don't consume health care in the same way that we consume other consumer goods.

No one goes to see a doctor for the hell of it - they go because they are sick.

If anyone doubts this, just look at wealthy people. Rich people have essentially unlimited acess to health care.

They don't spend their time in the doctor's office - they spend it on the golf course or some place else.

What we need is Medicare for eneryone.

Steve said...

This was a good analysis of the situation, the only thing I want to stress is that even here in the UK where we do have nationalised health/pensions the big corporations still manage to get away with the kind of bad faith negotiations and massive executive payouts that you describe GM doing. Sadly, if the UK government's recent proposals and actions are a sign of the times it looks like the international playing field may be levelled by other countries losing this national provision of welfare, not the US gaining it. Sad, but just another example of unfettered market economics increasing the gap between rich and poor.

Eli Blake said...


It is sad that these companies figure they can jerk around the Federal Gov. that way. Unfortunately, under Bush, corporate welfare has grown explosively, they have seen the oil companies and pharmaceutical companies getting their share, so now the car companies want a hand in the till too.

Girl on the Blog:

I know about what is going on with TennCare, and to be honest I am disappointed in your Democratic governor (Breseden) for going along with it. And I doubt if the Republicans will put up anyone who is a friend of the people who need it. But at least the good news is that all the stories you mention are getting on the news, it might make people think twice.


What we have now is a direct consequence of the health insurance industry's victory in the battle over a national health care plan in 1994. This is the system they wanted, and don't let anyone forget that.


Of course having nationalized health care won't prevent companies from negotiating in bad faith or misbehaving in other ways.
And I had a few things to say about the British retirement system back a few months ago (this was before I had this blog but I distributed it locally and to other blogs) when we were all talking about the Social Security system. In particular, about how Margaret Thatcher privatized the British Pensions system, and the only ones who have benefitted from it have been the private funds managers. The decrease in benefits has been a big reason why despite divisions in the Labor Party over the Iraq war and other issues, voters haven't come close to letting the Conservative Party within a whiff of power. I do pay attention to British politics because often what happens there foretells what happens here.

dorsano said...

What we have now is a direct consequence of the health insurance industry's victory in the battle over a national health care plan in 1994. This is the system they wanted, and don't let anyone forget that.

It's also a direct consequence of the events surronding the 1973 HMO act when Paul Ellwood convinced Richard Nixon and a Democratic congress, including Ted Kennedy, that the rising cost of health care was due to over consumption.

Eli Blake said...


True, unfortunately.

But if we had 'Hillarycare' then that would be a footnote to history. Of course, Hillary botched it, holding all those closed door hearings and then trying to explain them. She should have done it like Cheney's energy task force-- you know, hold closed door hearings and stonewall.

dorsano said...

Hillary botched it

It might have been too early no matter how it was handled - who knows

things may have to go to hell some more even before something gets fixed.

dorsano said...

The MN DFL (Democratic) State Senator in my district is sitting on two univerisal health care bills right now and won't let them out of committee.

These are exploratory bills, not actual implementations. They're meant as a serious effort to flesh out the costs to MN of providing universal coverage to all residents in the state.

Both bills do away with the administrative costs incurred by the HMO's.

I've talked with her a number of times about health care and the conclusion I've come to is that she's worked so long with the HMO model that she's reluctant to consider anything else at this point.

fotu said...

Truely National Healthcare would be a step in the right direction.

Blue Cross of California said...

I agree national health care can be a major improvement to our health care system. There are too many which lack coverage and the problem needs to be solved.