A tale of two auto industry giants

Ground zero for the unemployment crisis is General Motors. For many years, GM had offered good wages, a quality pension plan, and health care not only for its employees but also for its retirees. Even during the downturn, a strong union kept the benefits intact.

The largest of Detroit's 'Big Three' carmakers has lost a total of $73 billion since 2004, which was the last year it turned a profit, and has watched its share price tumble by more than 90% in the last 12 months. GM employs around 123,000 line workers in the United States, but its demise would doom millions more. A conservative estimate suggests that if just one of the 'Big Three' were to fail, some 2.5 million additional jobs in the U.S. - parts manufacturers, auto sales personnel, repair shops - would be lost. GM is burning through its reserves rapidly, and without assistance, may have to shut down by early next year.

So how did it come to this? There was a perfect storm in the last few years of severe issues facing the auto giant, but what it boils down to is that the carmaker was too large to turn around rapidly, had too many outstanding obligations (to shareholders, to employees, and to retirees), resisted change that could have saved it (for instance, moving toward hybrids or electric cars earlier and not spending precious time fighting upgrades in emission standards) and finally, the cost of gasoline in the last couple of years created a nightmare scenario. The death knell may be the financial crisis, which is keeping most buyers out of the showrooms and restricting credit to only the most creditworthy.

GM's obligations to its employees and retirees add about $2,500 to the cost of each automobile sold. In part because of the high cost of these benefits, and in part because GM simply failed to read the market properly, GM manufactures and sells mostly large vehicles with large price tags. They also consume large amounts of fuel.

Toyota, on the other hand, benefits from a national health program and a retirement program in Japan, and in most of the countries where it manufactures its goods … Canada, and the countries of the European Union. So even though Toyota does buy insurance for its employees in Kentucky, the costs are more than offset by benefits it does not have to purchase for its employees in Kyoto. While GM's average car price tag includes $2,500 for benefits, Toyota's average car price tag includes about $300 for benefits.

As a result, GM can't compete with Toyota on a straight apples-to-apples cost comparison. A Camry-like vehicle, manufactured by GM, would be a couple of thousand dollars more expensive. GM would lose comparison shoppers in price. And Toyota has developed a well-earned reputation for reliability over the years, too.

So, to compensate, GM manufactures mostly big vehicles … trucks and SUVs, high-priced sporty vehicles, such as the Corvette, and luxury cars, like the Cadillac. And for a time, these vehicles were the vehicles of choice, due to a strategic and successful marketing campaign in the United States.

But then the price of gas went up and concerns about the environment also rose. And while Toyota adjusted quickly … spending its capital in R&D and getting its small hybrids out within just a few years, GM kept making its SUVs, large pickups, and gas-hungry sports and luxury cars, betting that the price of gas would go down and that buyers would choose to stay with the bigger vehicles. But they were going the way of the dinosaurs on whose ancient blood these vehicles feasted … simply put, no one could afford the gas. If a buyer didn't absolutely NEED a large pickup, he didn't buy one. Toyota, meanwhile, couldn't keep its Prius hybrids in stock. Even zero-interest car loans couldn't bring the buyers back to GM for long.

Realizing, at long last, that they had to retool to change their factories over to build vehicles people wanted to buy, GM and the other Detroit automakers asked for a $25 billion loan from the federal government, which was granted this year. (GM had also planned to buy out Chrysler, which had been taken private last year. That plan has been scrapped for now.) But no sooner was the ink dry on the agreement than the bottom fell out of the stock market. With a single five-dollar bill, an investor could buy a share of GM and Ford stock today. And even that would be a risky investment.

While it is true that the unions have stymied any plans to change the benefit packages their members enjoy, it is far too simplistic, as many would like to do, to blame the autoworkers themselves for the GM debacle. Toyota and its Japanese cousins started out with a benefit package that GM, Ford and Chrysler had to purchase themselves. In short, Toyota, Honda and Nissan had a government 'bailout' from day one in terms of health care and retirement pensions, and their savings got passed along to consumers, and were used for research and development.

So perhaps the better 'bailout' for Detroit should benefit all American businesses … a sound national health care and retirement policy.

Rethinking National Health - is single-payer a viable choice for the U.S.?

Currently, we have three single-payer type national health care plans run by the government. Medicare, Medicaid (MaineCare in our state) and the V.A. In all three systems, the overhead is relatively low.

Our country's private insurance model results in insurers eating up a great deal of their premium income in unproductive overhead costs. It is estimated that private insurers spend anywhere from 20% to 30% of their premium income on advertising, agent commissions, insurance administrative oversight costs, expensive claims and records tracking systems, taxes, profit, and dividends for shareholders. Government systems have none of these. There are administrative costs, such as payroll, for running the system itself, but that amounts to about 4% of the cost of the programs.

Indeed, the U.S. wastes more on health care bureaucracy through private insurers than it would cost to provide health care to all of the uninsured. Administrative expenses consumed at least $399.4 billion out of total health expenditures of $1,660.5 billion in 2003 (the last year of the study). Using the Canadian system as a model, it was shown in the New England Journal of Medicine (August 2003) that streamlining administrative overhead to Canadian levels would have saved approximately $286.0 billion in 2003, $6,940 for each of the 41.2 million Americans who were uninsured as of 2001. That was more than would have been needed to provide full health insurance during that year.

In the V.A., for example, modern medical practices are not only keeping costs down, but also offering better care. They do this by using electronic records, which track outcomes for medical conditions, weeding out expensive procedures that show no benefit, preventing duplication of medical tests, and preventing many hospital-based errors, especially drug interactions.

In addition to the impoverished (and many children under the SCHIP program), Medicaid is often the payer of most long-term hospitalization (nursing home care), regardless of the patient's initial assets. Nursing homes are so expensive that patients very quickly lose the ability to pay their own bills. Medicare, which serves individuals over the age of 65 and the disabled, has a similarly low overhead cost. Even assuming 'hidden costs' such as duplication of services and hard goods (providing multiple walkers or wheelchairs for instance), the private health care industry itself concluded in 2005 that the overhead cost for Medicare could be only 5.2% at the most.

Ourselves and our neighbor to the north

How would a single-payer program help GM and other companies? If we modeled our single-payer program like Canada's, we - and GM - would save over $2,000 per person per year, and everyone in the country would be covered. That would certainly bring the costs of GM cars down and make them more competitive in the global market.

This week, Canada announced that its health care costs had gone from a little less than $5,000 per year to $5,200 per year. In the U.S., last year, the per capita health care costs were $7,439, but over 15% (over 47 million people) of our population was not covered at all, or received care through emergency systems already overtaxed.

How can Canada do it for less? In short, economies of scale. In Canada, a single payer per province handles all claims. That payer also handles drug purchases, upgrades to hospital equipment, new dental chairs, and so on. Buying all these things in bulk saves millions, if not billions of dollars. And batching hundreds of thousands of payments to hospitals and doctors also saves millions.

What about rationing? Canada does have to put people on waiting lists for some elective surgeries (such as joint replacements) from time to time (usually within months of diagnosis, but in rare cases, a year or more). Would American patients accept such waits? That's unknown, but we can look at the Canadian experience.

Canadians have the option of purchasing insurance and seeing a private doctor in the United States at the moment, although not many are evidently taking advantage of that option. A 2002 paper in Health Affairs shows that fewer than 0.09% of Canadians leave the country for health care, primarily because they know that the health care won't be funded. So care that is taken in the U.S., or increasingly, in the third world, tends to be care that wouldn't be covered by the national health system anyway, such as elective cosmetic surgery, or is emergency care that is unplanned. Far more Americans (8%) visited Canada to purchase prescription drugs during the period when it was legal to do so, than did Canadians seek health care in the U.S.

What about the cost? Most of the cost for a universal care program is already in our health care system. The per capita cost (whether a person has health insurance or not) for health care in the United States is nearly $7,500. Some of this is paid by employers, some is paid by employees, and some is paid by the federal government through taxes. But if through greater efficiency, we could bring that number down to $5,200 per person (as Canada has), we could work out a cost-sharing agreement between employers, employees and government that would allow for portability and ensure that no American is ever left uninsured.

In the long run, availability of preventative care, economies of scale, and administrative efficiency would work to cap the rising cost of health care, since governments could work out deals with pharmaceutical companies, develop sensible malpractice procedures, and help with doctor-related costs such as medical school student loans.

What about retirement?

Our current default retirement plan is Social Security, but it prevents only abject poverty in old age. It is not enough to live on for most people, but provides a valuable baseline piece of the retirement puzzle. Until fairly recently, most large employers developed a pension plan, also called a defined benefit program, in which retirees would receive a regular, planned amount of money every month. A smaller amount would be granted to a widow or widower of a retiree. When they died, the pension ended. As people began to live longer, many companies realized that pension plans were not economically viable.

Within the last 30 years, companies started moving away from defined benefit programs and toward defined contribution programs, such as 401Ks. In a 401K, the company may or may not match part of the employee's contribution. The money is invested for the employee (often, the employee has some control over the funds it is invested in) and when the employee retires, he or she can take the funds and use them to live on. If the owner does not outlive the funds, the money is available to his or her heirs.

Most 401Ks are based heavily in the stock market, so when the market takes a hit, so does the retirement account, as many of us have learned to our sorrow.

So what can be done? What is our neighbor doing?

In Canada, there is a three-tiered system. The first is a guaranteed Social Security-like system called the Old Age Pension Plan. The second tier is an optional but strongly suggested worker-employer paid pension called the Canadian Pension Plan. Both of these are defined benefit plans, so the money taken in is generally placed in safe investments (such as treasury bills) and is carefully monitored so that at retirement, each person gets a specific amount, which varies from circumstance to circumstance.

Then, if individuals wish, they can participate in private plans. However, together, the Old Age Pension and the Canadian Pension Plan provide a typical family a steady and secure income throughout retirement.

Whether that type of dual system would work in the U.S. depends in large measure on whether most people would participate. In Canada, participation in the CPP is nearly universal. Twenty to thirty percent of people in the U.S. who could participate in an employer-sponsored 401K do not do so.

What does that mean for Maine?

Maine uses the federal programs for national health, including Medicare/Medicaid (MaineCare) and the V.A. Most seniors (and Maine has an aging population), veterans, and many children are covered under one of these plans. Our recent experience with Dirigo, a public/private cooperative, unfortunately demonstrated the worst of both public and private systems. Dirigo was and is too expensive for most purchasers, including the small businesses to whom they were trying to appeal. It required money from the state in the form of tax dollars or a curious kind of funding mechanism - savings offset payments - from other insurance companies under the assumption that Dirigo was saving them money by covering the uninsured who would otherwise be rolled into charity care and cost insurers dearly. This was true, however, most insurance companies objected strongly to the savings offset payment mechanism, and consequently, Dirigo funding has been tied up in court since its inception.

Since the passage of Question One, which would have collected money at the point of sale of beverages for Dirigo, it is hoped that the savings offset payments will continue, although the Chamber of Commerce has filed yet another lawsuit to try to overturn this funding mechanism. Dirigo is most likely doomed. And to be honest, it never lived up to expectations. Of Maine's 130,000 uninsured, only 8,000 or so were covered by Dirigo. Another 5,000 switched insurance from another plan, either a private plan or MaineCare.

Maine's future health insurance will probably be tied to whatever the federal government decides to do in the next administration.

In terms of retirement, Maine's citizens currently deal with a hodge-podge of private pension plans, 401Ks, and private savings. At this point, most citizens with retirement accounts are likely to be 401K participants, and many of those plans have taken a great hit in recent months, tied as they are to the stock and bond markets.

What would the new administration do?

President-elect Barack Obama has proposed a national insurance program to allow individuals and small businesses to buy affordable health care similar to that available to federal employees, funded by a tax on employers who don't provide coverage. Individuals would not lose coverage when they switch jobs.

He would lower premiums through a program that would reduce the exposure of employer health plans to costs of a catastrophic illness. Drug costs would be lowered by allowing patients to buy drugs from abroad and letting the government negotiate for lower prices.

For retirement, the President-elect opposes private retirement accounts through Social Security, something the Bush administration championed early. Affluent workers would pay more in taxes to ensure that Social Security is fully funded, perhaps by lifting the cap (currently set at $102,000) beyond which Social Security insurance is no longer collected, or by progressive funding (currently Social Security is 12.4 % of income, 6.2% paid by employers and 6.2% paid by employees). Obama would increase the amount people making $250,000 pay toward Social Security to stabilize it as Baby Boomers begin to retire.

Obama wants to automatically enroll workers in retirement plans to boost savings, though employees could opt out if they choose.

Obama on jobs is a little less concrete. Rather than trying to keep any given employer in operation, Obama proposes opening up new economies, for instance, he suggests that the U.S. can support five million 'green' jobs. He says he will provide small business with tax breaks to increase their workforces and help pay for the employer piece of health insurance. He is also in favor of developing loans for small businesses and start-ups, and wants to put money into research for job creation.

Obama is also in favor of helping the auto industry in some way, primarily because so many jobs are at risk if they fail. On CBS’s '60 Minutes' this weekend, the President-elect said that he would favor a bill to help the Big Three if strings were attached that would replace the current management and require the companies to move forward with energy efficient vehicles.

On Monday, the lame-duck Congress began to look at options to help GM and its cousins, but there is strong opposition from both Republicans and fiscally conservative Democrats, known as the 'Blue Dogs'. GM will run out of reserve funding by early in 2009 if nothing is done, and be forced to enter bankruptcy.

For many companies, this is not as serious of a problem as it is for a car company. Airlines, for instance, have reorganized numerous times over the last couple of decades, and most are still around. Recent polls have shown, however, that most people will not purchase an automobile from a company undergoing reorganization under Chapter 11, because a car is a long-term purchase and people need to feel confident that service and parts will continue to be available.

Whatever happens, there will be major changes to America's automobile manufacturing industry, and job losses are probably inevitable. As the pain trickles down from the car companies to their allied and dependent industries, Maine will undoubtedly face automobile-industry-related unemployment as well, even though we are far from Detroit. How deep and how long the recession will last will depend on the ability of both Washington and Detroit to move quickly to adjust to current realities and changing conditions. The days of the Big Three's association with Big Cars is likely to be over, whether fuel prices stay low or not.

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