Biotechnology Healthcare - November/December 2008 - (Page 18) If market conditions or mismanagement lead a VEBA to become underfunded, unions may attempt to extract larger price concessions than employers did. In late 2007, General Motors, Ford, and Chrysler transferred financial responsibility for retiree health benefits to a VEBA to be set up and operated by the UAW. Each of the automakers agreed to make an enormous up-front contribution to the VEBA trust — between 56 and 62 percent of their total future health benefit obligations, depending on the company — in exchange for clearing these liabilities from their books. GM (which had faced a retiree health benefit obligation of about $50 billion) settled with the UAW for a $29.9 billion contribution to the VEBA. Ford (whose obligation had been about $23 billion) agreed to a $13.2 billion contribution, and Chrysler kicked in $8.8 billion on an $11 billion obligation. The union is counting on funds in the VEBA to grow through investments. The resulting UAW-run VEBA was funded to the tune of more than $50 billion, ranking it among the largest healthcare purchasers in the United States. It also becomes one of the top 20 investment vehicles in the country. The UAW is setting up an 11member board of trustees to oversee the VEBA trust, to set policies, and to select managers to invest and oversee the money. It is an enormous responsibility, because the union will have to make do with its funds; when the VEBA begins functioning on Jan. 1, 2010, the automakers are officially out of the business of retiree health benefits. PLUSES AND MINUSES On the surface, a union-run VEBA seems like a good deal for workers, in that once money is transferred from an employer to a VEBA, employees no longer have to worry about losing benefits in the event the company goes out of business or sustains adverse business conditions. A VEBA set up at Navistar in 1992, when the truck and engine manufacturer was in bankruptcy, is still going strong. The UAW/AllisChalmers VEBA, set up 19 years ago, has successfully served 6,000 retirees and dependents, even though it was funded with just 22 cents on every $1 of retiree health benefit obligations — far less than the UAW/Big Three plan. The fact that many VEBAs start out underfunded — the result of negotiations between employers and unions that allow the company to transfer less than 100 percent of the original obligation — is a concern. Given the current state of investment markets in the United States and around the world, initial loss of capital would be cause for VEBA investment managers to hold their breath. Another concern is that when VEBAs were originally conceived, retirees did not live as long as they do now — often with chronic disease — nor could it have been seen that healthcare costs would increase so significantly. These realities can put VEBAs at a disadvantage in trying to remain solvent. In fact, VEBAs at Caterpillar and Detroit Diesel actually ran out of cash. Six years after Caterpillar handed over control of a $32 million trust to the union as part of a 1998 agreement, the fund ran out of money. Since then, retirees have had to shoulder thousands of dollars of out-of-pocket costs. There is another challenge for unions: While workers are used to employers trying to negotiate reductions in benefits and expect their unions to fight back, unions may now be placed in the unenviable position of having to do the same thing they once fought against — cutting benefits, potentially incurring the wrath of their members. If a unionmanaged VEBA begins to run short of funds, the board cannot go back to the employer for additional funding. The union either would have to require higher cost sharing from its members, reduce benefits, or both. Unions, of course, anticipate this potential problem. And rather than risk angering their members, they may try to rein in costs by extracting larger price concessions from physicians, hospitals, and pharmaceutical companies — in other words, they may attempt to negotiate even more aggressively than employers. Since the UAW/Big Three agreement, physician and other medical organizations have sought to discuss strategies with the UAW. An article in the Dec. 3, 2007, issue of AMNews, published by the American Medical Association, noted that “If previous transfers from companies to unions are any indication, physicians should not expect the new managers of retiree benefits to be more generous than the old ones. In fact, a union’s takeover of benefits has sometimes resulted in even more aggressive cost-cutting efforts than when the benefits remained under corporate control.” Mark Gaffney, president of the 18 BIOTECHNOLOGY HEALTHCARE · NOVEMBER/DECEMBER 2008 CHARLES ORRICO
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