VEBA Accounts and Health Insurance Presented by: Phil Storm
Overview • Healthcare affects on the automotive business • 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 costsTotal 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 costsEmployee 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 costsEmployer 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
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
References • “GM vs. Toyota - the fast track challenge”.(2006, July 24). Way2Wealth(http://www.way2wealth.com) • Geng, Diane. “GM vs. Toyota: By the Numbers” 2005. National Public Radio. Retrieved April 1, 2008 (http://www.npr.org/news/specials/gmvstoyota) • “Health Care in Japan”. National Coalition on Health Care. (http://www.nchc.org) • Loomis, Carol. “The Tragedy of General Motors” 2006. CNNMoney.com. Retrieved April 1,2008 (http://money.cnn.com) • Appleby, Jule and Carty, Silke Sharon. “Ailing GM looks to scale back generous health benefits” USA Today. (http://usatoday.com) • White, Joseph B. and Stoll, John D. and McCracken, Jeffery. “GM labor deal ushers in new era for Auto Industry”. Sept. 27, 2007. The Wall Street Journal. (http://www.wsj.com) • O’Connor, Brian J. “Most call VEBA good deal for GM”. The Detroit News. September 27, 2007. (http://www.detnews.com) • White, Jerry. “Details of General Motors contract underscore UAW betrayal” 2007. World Socialist Website (http://www.wsws.org) • “GM Releases Details of New Contract with UAW”. 2007. Medical News Today. (http://www.medicalnewstoday.com) • Connolly, Daniel S. “VEBA: A Tax-Exempt Alternative for Reimbursement of Health Care Costs”. CPER Journal. No. 176 • Kutalik, Chris. “Auto Makers Push VEBA Solution for Industry Crisis” Labor Notes. (http://www.labornotes.org) • Cunningham, Lawrence. 2007. “The Radical Vogue in VEBAs”. Conglomerate Bog: Business, Law, Economics & Society. (http://www.theconglomerate.org) • Archambault, Dennis. “VEBA is shifting Michigan’s Health Care Gears”. Michigan Medicine. March 2008 • Schrade, Paul and Davis, Warren and Tucker, Jerry. “Former UAW Leaders’ Statement on Tentative GM Agreement”. Sept 26, 2007. Portside Archives. (http://lists.portside.org)
References • 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 News. (http://www.census.gov) • Anderson, Christopher. “Righting healthcare reform”. March 31, 2008. The Boston Globe. (http://www.boston.com) • “Massachusetts Health Care Reform Plan”. April 2006. Kaiser Family Foundation. (http://www.kff.org) • “Key Points of Massachusetts Health Care Reform”. October 2007. Northeast Business Trust (http://www.nbtgroup.com) • Dembner, Alice. “Success could put health plan in the red”. November 18, 2007. The Boston Globe. (http://www.boston.com) • Bansal, Monisha. “Massachusetts Healthcare Plan Costs Skyrocket”. January 25, 2008. CNSNews.com (http://cnsnews.com) • Belluck, Pam. “Massachusetts Universal Care Plan Faces Hurdles”. July 1, 2007. The New York Times (http://www.nytimes.com) • Schultz, Ellen and Francis, Theo. “What might GM trust fund mean for workers elsewhere?” The Wall Street Journal (http://www.wsj.com)