Opportunities for Value Creation in Healthcare
IN OCTOBER 2005, General Motors and the United Auto Workers reached a compromise to reduce GM cash outlays on healthcare benefits for active and retired personnel by an estimated $1 billion. The agreement was hailed as a victory for both parties because it would lower the company’s costs while preserving jobs. But the seeds of GM’s demise had already been sown. In that same year, its annual report had warned investors that escalating healthcare costs were an existential threat:
Healthcare in the United States is one of our biggest competitive challenges, and if we do not make progress on structurally fixing this issue, it could be a long-term threat to our company. In 2005, GM was challenged with the compound impact of escalating healthcare cost rates and falling discount rates used to determine future healthcare liabilities. As a result of these factors, in 2005, GM’s U.S. other postretirement employee benefits (OPEB) expense, consisting of retiree healthcare and life insurance, increased to $5.3 billion, an increase of more than $1 billion from 2004.
Four years later, on June 1, 2009, GM filed for bankruptcy in the U.S., Canada and Ontario. In hindsight, it is clear that the structural issue of escalating healthcare costs had indeed set explained, “Every year, the cost of retired workers’ healthcare diverted billions of dollars from developing innovative new models and added $1,400 to the cost of each car compared with those made in Asian and European plants.” In other words, the company’s past success created obligations that eventually took it down.
