VEBA Shortfalls And Rising Health Care Costs: A Recipe For Disaster

Derek Kreindler
by Derek Kreindler
veba shortfalls and rising health care costs a recipe for disaster

The Voluntary Employee Beneficiary Association, or VEBA, was initiated as a way to get retiree healthcare costs off the books of Detroit’s auto makers. While VEBA makes balance sheets look better, they are still an exorbitant legacy costs for the Big Three, and things are about to get a lot worse.

Reuters reports that a U.S. Department of Labor document shows that GM’s VEBA obligations were underfunded by 40 percent in 2o11, versus 26 percent in 2010. Ford didn’t fare much better, with a 37 percent deficit in 2011, up from 26 percent the previous year.

While VEBA was designed to safeguard the health benefits of 824,000 retirees if the Big Three’s fortunes go south, VEBA was forced to take payment in stock rather than cash, something the UAW was opposed to but ultimately complied with. The declining value of the shares is cited as a primary cause of the funding shortfall.

Increased health care costs are another giant disaster-in-waiting for the Big Three. As Reuters reports

“The GM VEBA trust said if the rate of health care cost increases moves up by 1 percent, its benefit obligation would increase by $6.4 billion. For the Ford trust, a 1 percent swing would increase the obligation by $3.8 billion.”

Given the rate of increases in health care costs in America, the automakers are in an extremely precarious position relative to their health care legacy costs – the very same costs that hurt them so badly in the first place, and the very same costs that were supposed to be shed post-bankruptcy.

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  • El scotto El scotto on Oct 19, 2012

    Has the CBO or GAO done a study of how much Obamacare will cost? When it was expediently sent/rammed through congress, no one could tell us the real cost. A friend of mine is a Physicians Assistant(PA) and I asked him if he would make more less money under Obamacare. He told me he didn't know. Can you get insurance in Canada other the state mandated insurance? I've recommended a military type triage system. You're sick or feel sore? Take this and come back in three days if you don't get better. Still sick or sore after three days? You get to see a Nurse Practitioner or a PA. Still sick or sore after a week? You get to see a real doctor, some contract, some military. People would riot in the streets if we tried this, too many demand a doctor for every visit.

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    • Pch101 Pch101 on Oct 19, 2012

      @danio3834 "The federal government should provide coverage for CATASTROPHIC illnesses or accidents" While I believe that a catastrophic approach would ultimately prove to be inadequate, that alternative would be vastly superior to either what we've had in the past or what we're about to have. We could control private insurance premiums if the insurer's maximum exposure was capped. One reason that health insurance is so costly is because it has to cover the worst case scenario. Combine that with the pooling benefit of having a couple of hundred million people having the same primary carrier (Uncle Sam), and you might actually be able to address aspects of the cost problem while still getting everyone covered.

  • Dolorean Dolorean on Oct 19, 2012

    What I find amazing about this issue is that 100 years ago, Ford had a lock on it. Old Henry made sure of three things: One, that his work force was paid well-enough to afford to buy a Ford vehicle. Two, that adequate housing and education systems were established to alleviate the worry and the commute. Third, to provide 100% health coverage to its full time work force at a locally subsidized hospital. All done IOT provide a happy worker who performed at a high level of enthusiasm and dare I say it? Esprit d' Corps. Something long lost on the rabid, profit mongering Executive class and board members lost in want of profits only in the short term.

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    • Geeber Geeber on Oct 19, 2012

      And yet, with all of that, the workers still chose to unionize. Henry Ford paid his workers more to reduce turnover, not ensure that they could buy a brand-new Ford, regardless of his public statements on the matter. He was faced with horrendous turnover, as workers had a very difficult time adjusting to the repetitive nature of work on the assembly line. Not all Ford workers automatically received the $5-a-day wage. They had to be supporting a family (either children or elderly parents) and had to pass muster with Ford's "Sociology Department" (no spending paychecks in saloons, gambling dens or brothels). Are people pining for the "good old days" ready to submit to that level of scrutiny by their employer? I highly doubt it.

  • Speedlaw Speedlaw on Oct 19, 2012

    This all comes down to "if you opt for no insurance, what happens when you are dropped by EMS at the front door of the Hospital with a real emergency ?" At one of the primary debates, this was put out clearly...and some folks cheered at the concept of grandma left at the door. This becomes a question of societal morality. I read about huge prices for cancer drugs recently, and the hospital admitted marking up $8000 worth of drugs to $45000, and they said they needed to do this to cover the uninsured/charity care. The patients had insurance so mostly it was a cross subsidy from the privately insured patients to charity care. This too makes no sense. I don't want to leave grandma on the steps...can we get back to cars ?

    • Danio3834 Danio3834 on Oct 19, 2012

      The Government shouldn't be in the business of morality. That's the business of society and the individual to decide for themselves. I would encourage anyone who wants to help grandma to actually do so. Get involved, give money to organizations that help people, volunteer. Of course this doesn't bode all to well with modern society's "can't someone else do it" attitude. I donate to worthy organizations that don't receive direct Government assistance, this year it is the United Way. If I was somehow able to keep more than 50% of my income from being consumed in taxes, I could certainly give more.

  • Geeber Geeber on Oct 19, 2012

    Of course people like the coverage they receive through Medicare...someone else is paying for it (their contributions through taxes don't come close to covering the cost of care they ultimately receive). They conveniently forget that Medicare is also rapidly going broke. Forget the alarms about Social Security...the real problem is Medicare.