DETROIT (Reuters) - Worried about its rising healthcare costs, General Motors Co tried several years ago to buy a bar adjacent to its Janesville, Wisconsin assembly plant so it could eliminate a source of junk food and alcohol.
The No. 1 U.S. automaker grew alarmed at the number of plant workers who frequented the bar, drinking beer and dining on pork rinds between shift changes.
“GM actually tried to, when I was there, buy that guy’s business to close down the bar and he never did sell,” said Peter Bible, GM’s former chief accounting officer.
That offer may seem strange, but it emphasizes how GM, Ford Motor Co and Chrysler Group LLC explore every avenue to slash their healthcare costs.
One big target for the three U.S. automakers in talks beginning this week with the United Auto Workers for new labor agreements will be the $1.54 billion collectively spent by the companies last year on healthcare for union members and their families.
For UAW members -- who for many years paid nothing out-of-pocket for their healthcare and still pay only modest amounts -- an increase in their share of the costs would be a bitter reminder of the union’s decline in power.
Despite all three now being profitable, the U.S. automakers are eager to cut labor costs and one way to do that is attacking the companies’ inefficient healthcare systems, people familiar with the talks said.
“It’s pretty big,” said a person familiar with the upcoming negotiations who asked not to be identified in reference to the companies’ share of the healthcare costs. “There’s a lot of ways you can change that.”
UAW: ‘NO CONCESSIONS’
In the talks, the automakers aim to align their labor costs with those of foreign rivals, expand the use of entry-level workers who earn half the pay of their veteran peers, and base total compensation more on bonuses linked to company performance.
The UAW has signaled a willingness to work with the automakers to reduce costs. However, UAW President Bob King warned he won’t allow further cuts in wages and benefits after the UAW agreed to so many in negotiations in 2007 with all three and in 2009 with GM and Chrysler before they filed for bankruptcy.
“There will be no concessions, no sacrifices by our members, no cutting wages or benefits,” King said last week in an interview. “It’s not justified given how well the companies are doing.”
In the first quarter, all three of Detroit’s automakers posted profits, with Ford reporting its best first-quarter profit in 13 years.
Mike Smith, a labor historian, said it is important for the UAW to defend the health benefits because of the physically demanding nature of the jobs.
“It’s physically demanding compared to sitting in front of a desk or working in a retail store,” he said. “At the very least, they have to stay even with what they have.”
The union, though, has signaled it is prepared to work with the company on lowering overall costs of healthcare shouldered by the company and workers. Better practices can help cut costs without reducing coverage, King said.
“Just like every day we’re focused on improving productivity and quality because that makes the end cost per unit less, the same thing is true in healthcare,” he said.
The union and automakers reached an agreement in 2007 that created a Voluntary Employee Beneficiary Association, or VEBA, to take over retiree healthcare liabilities. Since the creation of the VEBA, the union has had a “different perspective” on how automakers have struggled with these costs, King said.
THE ‘MOTHERLOAD’ ISSUE
Union members pay far less of their healthcare costs than most Americans or even their salaried counterparts.
Ford’s UAW workers cover 5 percent of their healthcare costs. At GM, they pay between 5 percent and 7 percent, while at Chrysler it is between 7 percent and 8 percent.
Salaried employees at the companies pay in the range of 30 percent to 35 percent of those costs. At companies with 500 or more employees, the average American worker with a family covered 31 percent, according to consulting firm Mercer.
The automakers want relief from carrying the majority of the costs. Last year GM spent $665 million, Ford about $533 million and Chrysler about $339 million for their UAW-represented workers and families.
“Who picks up what percentage of that cost pool? That’s where the negotiation starts. That is always the motherload issue,” said former GM executive Bible, who helped GM negotiate healthcare deals with the UAW in the past. He is now head of accounting firm EisnerAmper’s public companies practice.
He said given the UAW’s desire for jobs, one possibility would be a deal whereby the union accepts higher healthcare costs in return for a guarantee by the automakers for increased production and new products in the United States.
The UAW and the automakers might be able to find common ground by improving the existing system. Chrysler wants more compensation to be based on company performance and reductions in health spending are one way to make room for that, a person familiar with the talks said.
Mercer consultant Jerry Konal said savings could come from a combination of increased efficiency, improved customer service, adoption of a pharmacy plan that forces employees toward less-costly generic drugs or medicines sold at lower prices, and increased emphasis on preventive healthcare.
Other answers might not be so obvious. Bible recalls GM holding classes at some plants to train workers, many of whom were avid hunters, how to properly drag deer they killed in the field. This method reduced the risk of heart attack, he said.
The UAW is scheduled to open talks for new four-year labor deals with Fiat -controlled Chrysler on Monday morning, followed by GM on Wednesday and Ford on Friday.