Transcript VEBA Accounts and Health Insurance Presented by: Phil Storm Overview • Healthcare affects on the automotive business – – – – US vs.

VEBA Accounts and Health
Insurance
Presented by:
Phil Storm
Overview
• Healthcare affects on the automotive business
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US vs. Japanese Automotive healthcare costs
GM VEBA solution
Laws and Contracts governing VEBA accounts
History of VEBA accounts and likely success
• US healthcare cost trends and coverage
– Rising healthcare costs
– Insured versus uninsured
– Universal healthcare plan in Massachusetts
US vs. Japanese healthcare costs
• Comparison of healthcare costs
– GM: $1528/vehicle (2004)1
– Toyota: $201/vehicle (2004)2
• Japan’s healthcare system
– Universal health coverage (compulsory)3
– Two groups: National Health Insurance or
Employee Health Insurance
– Premium is based on salary (~4%), half is
paid by employer.
GM VEBA background
• GM’s healthcare costs include an
unfunded liability of $64 Billion for 1.1
million employees, retirees and
dependants.4
• Toyota pays US active employees
healthcare, but not the huge retiree pool
GM is obligated to.
• GM inherited this huge liability from labor
negotiations decades ago.5
GM VEBA
• As a solution to the unfunded liability,
UAW and GM negotiated a Voluntary
Employees Beneficiary Association
(VEBA) contract.
• The VEBA will allow GM to transfer about
$50 Billion in retiree health care
obligations to an independent trust
managed by UAW.6
VEBA Contract Details
• The VEBA will administer retiree health care
benefits
• GM will initially pay $29.9 billion into VEBA
• Includes $4.37 billion GM convertible note7
• Healthcare co-payments limited to not more than
3%/yr increase through 2015 and after might
increase 4%/yr
• Active workers will see diversions in wage
increases to help fund VEBA8
• GM will pay $1.6 billion/year over 20 years
– As long as VEBA is anticipated to remain solvent9
What is a VEBA?
• VEBA is a tax-exempt trust whose funds
are used to pay eligible medical
expenses.10
• It exists to provide for the payment of life,
sick, accident or other benefits to
association members or their dependents.
• VEBA is a statutory creation found in IRS
Code Section 501(c)(9)11
VEBA legal criteria
• 26 CFR Sec. 1.501(c)(9) describes criteria that must be
met to qualify for VEBA tax-exempt status:
– a) Organization is employees association
– b) Membership is voluntary
– c) Organization provides for the payment of life, sick, accident, or
other benefits to its members or their dependents or designated
beneficiaries, and substantially all of its operations are in
furtherance of providing such benefits
– d) No part of the net earnings of the organization inures, other
than by payment of the benefits referred to in paragraph (c) of
this section, to the benefit of any private shareholder or
individual.
VEBA upsides
• GM
– Allows GM to remove uncertainty associated
with retiree health care costs and negotiations
– GM expected to pay $35 billion to get out of
$50 billion in obligations
– Makes GM look more profitable for stock
investors12
VEBA upsides
• UAW
– VEBA takes away uncertainty associated with
GM bankruptcy
– Before, if GM went bankrupt, retiree union
workers would get nothing. Now they at least
have the funded VEBA.
VEBA downsides
• UAW
– UAW is new to health care financing business
– VEBAs have failed before and many predict
its downfall13
– All responsibility is now on UAW shoulders to
provide retiree healthcare in face of rising
costs14
– Plan starts off under-funded (at 70%)
• money will have to grow to cover costs (difficult).
VEBA downsides
• GM
– Minimal since it is transferring all the liability
to UAW/VEBA15
– possible lawsuits if it fails?
VEBA history and concerns
• Traditional VEBAs date back to 192816
• VEBAs typically used by large unionized
companies
• New twist is that VEBA is being used
recently as a vehicle to transfer
management of liabilities to unions
– Other automakers are taking GMs lead in
adopting VEBA strategy (Ford, Chrysler)17
VEBA history and concerns
• VEBAs have been in decline recently31
VEBA history and concerns
• VEBA failures
– Caterpillar and Detroit Diesel VEBAs ran out
of cash18
– Federal class action lawsuit against
Caterpillar filed in May 2007
VEBA history and concerns
• Successful VEBAs
– Navistar VEBA set up in 1992 is still going
strong
– Goodyear and United Steelworkers of
America recently set up VEBAs
Rising Healthcare costs
• United States health care costs are
expensive and rising
– US spent over $2.3 trillion on health care in
200719
– 16% of GDP
– Approximately $7,500 per person20
– Japan: average of $1,759 per person, but with
4.5 years longer life expectancy21
Rising Healthcare costs
Total Expenditure
Rising Healthcare costs
Total Expenditure
• Health care costs are rising, on average,
2.4 percent faster than GDP since 1970.
• Projections show that by 2016, 20% of
GDP will be spent on healthcare.
Rising Healthcare costs
Employee expenses
• Employers are shifting health care costs onto
employees.
– Share of health premium was 14% in 1992 and 22.1%
in 200522
• Combined with the rapid growth in overall
premiums means workers are paying much
more than they used to.
• Average cost charged to employer for insurance
for family of four is $12,100 in 2007
– Workers contribute $3,300 of that, or 10% more than
in 2006.
Rising Healthcare costs
Employer costs per worker-hour
Rising Healthcare costs
Employer Costs
• Health insurance expenses are the fastest
growing cost component for employers23
• Premiums for employer-based health
insurance rose 6.7% in 2007.
• Since 2000, employment based health
insurance premiums have increased
100%, while inflation was 24% and wage
growth was 21%.
US Insured vs. uninsured
• There is a correlation between high health
care costs and uninsured citizens.
• In 2005, the census showed 15.3 percent
of the population (44.8 million) did not
have insurance24
US Insured vs. Uninsured
Insured vs. Uninsured
44800000
248,010,458
Uninsured in 2005
Insured in 2005
Massachusetts health care reform
• Massachusetts is attempting to legislate universal health
care25
– Mandate requires all adult residents to obtain health insurance26
• minimum credible coverage rules
– State offers subsidized health plans with eligibility requirements
• (poverty levels, other considerations)
– Employer contribution cannot discriminate based on pay
– Fair share contribution requires employers to be charged
$295/employee to state health care fund27
– Employers must have >25% of full time employees enrolled in
group plan or pay >33% of premium costs for all full time
employees.
Massachusetts health care reform
• It is important, because outcome could help decide how
to handle national health care.
• The plan is expected to cost $1.2 Billion over three years
– New funding will come from employer contributions and General
Fund revenues
– There is concern this is not enough money and could face gap of
$147 million this year28
– Because so many are signing up for subsidized care, costs are
projected to skyrocket $400 million in 200929
• However, although Romney touts it as a success from
his time as governor, it is still too early to tell.
– Plan went into effect July 1, 200730
Questions?
References
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Loomis, Carol. “The Tragedy of General Motors” 2006. CNNMoney.com. Retrieved April 1,2008
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Kiley, David. “With Healthcare behind it, GM Must now focus on a coherency plan”. September 2007. Business Week.
(http://www.businessweek.com)
Pilot, Kevin. “VEBAs Anyone?”. 1997. Registered Rep. (http://www.registeredrep.com)
“Health Care Marketplace | Local UAW Leaders Approve GM Contract”. 2007. Kaiser Daily Health Policy Report. Kaisernetwork.org.
(http://www.kaisernetwork.org)
Kelly, Susan. “New GM slogan? Viva the VEBA”. October 2007. Financial Week. (http://www.financialweek.com)
“Health Insurance Cost”. National Coalition on Health Care. (http://www.nchc.org)
“Trends in Health Care Costs and Spending”. September 2007. Kaiser Family Foundation. (http://www.kff.org)
Neergaard, Lauren. “United States Spends Most on Health, But France No. 1 in Treatment” June 2000. Associated Press
Mishel, Lawrence. “Employers shift health insurance costs onto workers” August 2006. Economic Policy Institute.
(http://www.epi.org)
“Employer Health Insurance Costs and Worker Compensation” March 2008. Kaiser Family Foundation. (http://www.kff.org)
Cymber, Ruth. “Census Bureau Revises 2004 and 2005 Health Insurance Coverage Estimates”. March 2007 U.S. Census Bureau
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