Thursday, September 13, 2007

Will Auto Worker Health Care Costs Really Come Down?

The Detroit 3 (formerly called Big 3) are negotiating with the United Auto Workers to reduce the cost of health care. General Motors (GM)Ford (F) and Chrysler all need the same thing lower costs. The UAW needs to deliver lower costs or watch a round of financial distress, reorganizations and other strategies designed to blow of their membership.

Many commentators assume that the union will take on some kind of health care trust. This will remove the costs from the car makers. The numbers should look better once it all washes through.

Will this health care trust be financially solvent? If the health care costs are inadequately funded when held on the books of the car makers, how will they be adequately funded when held by the union? Will the actuaries sign off on the financial structure?

What you are doing is creating an major insurance company out of the blue. In addition to staffing problems how will a normally sober insurance regulator view this new structure? Insurance companies need capital, reserves, reinsurance and premium flows which are correctly priced. This cannot be constructed within the context of a tense labor-management contract negotiating session.

If management claims to have punted out the entire cost problem after this round of contract negotiations I would be highly skeptical. The modern day executive is more financial engineer that operation executive. The devil will be in the details. Who will ultimately stand behind the structure and pay the bills.

This may be the first major union contract that will need to be an SEC document so that investors will be able to scrutinize. Can you imagine executives going on conference calls and explaining to investors how the cost structure has been truly fixed. At the same time union leaders go to their membership and recommend ratification because the new deal still provides the same protection.

If both sides point to some shinny castle on the horizon we will all need a damn good open house for everyone to poke around. Ultimately if the union does not give something that will work it can kiss more jobs good-bye.