Auto M.D.

Health-Care lessons of GM and Chrysler.

By Hanns Kuttner
Monday, May 11, 2009

A large share of both GM and Chrysler may wind up owned by a trust that pays for their retired workers’ health benefits. These two behemoth automakers made health-benefit promises that have proven impossible to fulfill.

The troubles that led to this startling result are not unique to the auto industry: Medicare covers almost all Americans once they reach the age of 65. So the health-benefit costs that drove GM and Chrysler over the cliff threaten all of us — as current or future Medicare enrollees, and as taxpayers who foot the bill. Health-care costs are on an impossible road.

This unsustainable trend emerged in the generation of prosperity that followed World War II. Unions pushed for both higher wages and new fringe benefits. No union seemed to push harder and get more than the United Auto Workers (UAW). Health benefits were high on the UAW’s list, both for its members and as a matter of public policy.

UAW members got what seemed to be gold-plated health-insurance coverage. No contributions were deducted from workers’ paychecks. Many services were free to workers and their dependents. Retirees obtained the same benefits as workers.

Medicare was the fruit of the labor movement’s push for national health insurance. It did not provide the same level of coverage that UAW members received, but it offered the elderly protection against hospital and doctor bills. Over time the program grew, most recently by adding a prescription-drug benefit.

The rise in health coverage, through both the workplace and Medicare, came at a time when modern medicine had less to offer and costs were lower. In 1965 — when Medicare became law — health care was 5 percent of the economy. Today, that figure has more than tripled.

Factors peculiar to the auto industry added to the problem. Money was not being put aside each year to pay for future health benefits, turning these benefits into something of a Ponzi scheme — which would perhaps have been workable if employment had remained stable. But it did not. The Big Three shrank, and the ratio of current workers to retirees fell.

Unlike the auto industry, America will not reach a point where there are more retirees than active workers. The burden of Medicare’s growing cost will not mean national bankruptcy, as long as the government can find buyers for its debt. But we are on a path to health costs that are higher and make up an even larger share of the economy The public-sector version of Chrysler’s demise will come in the form of opportunities foregone.

The cost of federal health programs today is about 4 percent of the economy, and, if present policy does not change, in 25 years that figure will rise to more than 9 percent. That will amount to about half of federal-government revenue — assuming government’s share of the economy stays the same. Either everything else government does will have to shrink to make room, or taxes will have to increase.

The auto industry was long a leader in health benefits. Now that we see where that path leads, let us not follow. Health-care reform is on President Obama’s agenda. Be wary of reformers who do not first explain how they will get us off our current road to ruin.