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Union-run VEBAs taking charge of corporate health benefits

As Big Three automakers shift administration of retiree health insurance to the industry's major union, doctors wonder what's in it for them.

By Emily Berry — Posted Dec. 3, 2007

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Physicians are trying to set up meetings with United Auto Workers officials to find out how the union's coming takeover of retiree health benefits from Ford, Chrysler and General Motors might affect them.

But 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.

"It's a huge change of mentality," said Matthew Holt, a health care consultant and vice president of research for Emeryville, Calif.-based Professional Service Solutions Inc. "Instead of saying, 'GM, you'd better give us this, this and this,' now [the union says], 'It's our money.' "

With Ford workers represented by the UAW ratifying their new contract on Nov. 14, the automakers will begin fulfilling their commitment to put $54.4 billion -- $32 billion from GM, $13.6 billion from Ford and $8.8 billion from Chrysler -- into the union's Voluntary Employees' Beneficiary Association, or VEBA.

Congress created VEBAs in 1928, and they served as the basis for company sick funds, a precursor to private health insurance. VEBAs are tax-exempt entities, and corporate contributions to VEBAs are also tax-exempt. A VEBA can be funded by more than one employer, but in any case it needs an IRS letter of determination to prove its tax-exempt status.

A VEBA's assets are protected from creditors, which is why physicians might be familiar with VEBAs through pitches from financial advisers to join or form one as an asset-protection tool. However, the abuse of VEBAs for the purpose of asset protection or tax avoidance has drawn IRS and Dept. of Justice scrutiny over the years.

VEBAs go mainstream

VEBAs have been used by state governments and public schools to handle retiree health costs, but in the last few years they started gaining popularity among large, industrial companies that faced large liabilities for retirees' health costs. Caterpillar, the Peoria, Ill.-based heavy equipment company, established one in 1998. Bankrupt or struggling steelmakers in the last two decades have contributed money to VEBAs to offload retiree health costs.

This year, the UAW had already received a commitment for $784 million in cash and stock from Dana Corp., a Toledo, Ohio-based auto parts company, for a VEBA. The United Steel Workers this year ended a 12-week strike against Goodyear Tire & Rubber Co., in part by agreeing to accept $1.7 billion from the Akron, Ohio-based manufacturer for a VEBA. In October, AK Steel agreed to set up a $663 million VEBA to help settle a lawsuit brought by retirees at its Middletown, Ohio, plant regarding future benefits.

The VEBA that the Big Three automakers are funding is scheduled to take effect Jan. 1, 2010. It's still unclear whether the union will hire a managed care company to act as third-party administrator, establish its own networks or pay a health plan to handle the whole thing.

"We don't have many details yet," said Greg Forzley, MD, board chair of the Michigan State Medical Society and medical director of informatics for St. Mary's Health Care in Grand Rapids, Mich.

Adam Jablonowski, executive director of the Wayne County Medical Society of Southeast Michigan, said the group's leaders plan to meet with UAW officials to talk about how the VEBA might change the health care landscape around Detroit.

"We believe that there will be some potential changes, particularly since Blue Cross Blue Shield [of Michigan] is the major source of funds for physicians from the automakers," he said. "That's not necessarily going to be the case with the unions."

Holt and other observers said it's likely that retiree benefits will be less expansive than when they were on the auto companies' dime. Dr. Forzley said physicians in auto-intensive Michigan are bracing for what might happen. "If you're a primary care physician in Flint or the Pontiac area of Detroit, you're going to notice it," Dr. Forzley said.

For example, an official of a VEBA set up for members of HERE (Hotel Employees and Restaurant Employees International Union) in Las Vegas said the VEBA has used data to identify waste from redundant medical tests and other inefficiencies. Jerry Reeves, MD, a former Humana executive who is chief medical officer of the Las Vegas VEBA, said there is no doubt that retired autoworkers' new health care arrangement will change their behavior around health care.

"But it's not going to be tomorrow morning at 10:30," he said. "It's going to be evolving over a period of time."

The UAW has an opportunity to save money without slashing reimbursements or benefits, said Brian Klepper, PhD, founding director of the Center for Practical Health Reform in Atlantic Beach, Fla.

"The UAW is actually in a position to start providing good care to their members at much lower cost than they were demanding it be done before,' he said. "The question is whether the UAW really understands the situation they're in."

The UAW has had difficulty sustaining VEBAs in the past. In January 2007, retired workers of Detroit Diesel filed suit against the company after a VEBA set up in 1993 and administered by the UAW, ran out of money in 2004. In May 2007, retired workers at Caterpillar filed suit against the Peoria, Ill.-based equipment maker after the UAW-run VEBA set up there in 1998 ran out of money, also in 2004. (Caterpillar then sued the UAW, saying it should have kept the company from being sued.) In both companies' cases, retirees unexpectedly saw hikes in their expected monthly contribution as a means to continue funding their health care.

However, analysts said one problem in those situations was that the VEBAs were underfunded. For example, Caterpillar's VEBA was established with $32 million, or less than 10% of future liabilities. The Big Three automakers are funding close to 60% of future liabilities.

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