Why GM's New Health Care Deal Just Might Work
Mr. Murray, professor of economics at the University of Toledo, is the author of “Origins of American Health Insurance” (Yale University Press, 2007).
Recently concluded UAW-GM health care negotiations produced an otherworldly sounding acronym: VEBA. Voluntary Employee Beneficiary Associations are trusts set up to pay employee benefits, without earning profits for the sponsor. Despite their obscurity, VEBAs are the direct descendants of the earliest U. S. providers of health insurance: industrial sickness funds. Consideration of sickness funds in the past suggests what will determine the success or failure of new VEBAs.
Even before the first federal VEBA law of 1928, thousands of sickness funds covered millions of American workers. GM sponsored one of the earliest such funds, the Flint Vehicle Factories Mutual Benefit Association. It provided benefits to GM workers in Flint until 1928, when the company switched to group health insurance.
Sickness funds were remarkably stable and flexible institutions that grew in number and coverage from the Gilded Age into the Progressive Era. Sickness fund members paid weekly into their kitty and received sick pay benefits when they were too ill to work. Some funds sent their physician to examine members and order treatment—which could be surprisingly effective for industrial injuries. Others sent fellow members to check on claimants. This was a highly effective method of cutting down on unnecessary claims, but obviously one that would not work in our age of federal privacy restrictions. One outcome of visiting the sick in the past was that it knit fund members into a coherent whole. As a result, up to the 1920s membership in sickness funds grew faster than the labor force did.
These funds persisted in covering a good sized share of American workers until the later 1930s. As actuarial science developed, commercial insurers and Blue Cross underpriced the sickness funds while offering equally valuable benefits. From the later 1930s actuarially sound group health powered dramatic growth in medical and surgical insurance coverage.
Based on the history of industrial sickness funds, what are the prospects for VEBAs in Detroit? Their potential flexibility in accommodating an expanding work force is, alas, not much of an advantage in the U.S. auto industry. Historically, worker/member morale was critical to the survival of sickness funds. As mutuals, funds were operated by member/owners who were in daily contact with each other at work.
It will remain critical for the UAW to convince members—especially retirees without that daily contact at the plant—to buy in to the new arrangement. This may be trickier than it sounds, for large and bureaucratic VEBAs hardly resemble the mom-and-pop operations of the old days.
Finances differ as well. Most VEBAs today start with capital from the firm with little contribution from the workers, and one attraction for the firm is the tax deductibility of those payments. It is easy for a member to think that VEBAs run on somebody else’s money. But that impression will create problems. If retirees enter the VEBA feeling that they are covered by the company’s money, rather than the VEBA’s, they may be tempted to see the association as a zero sum game, in which every dollar they don’t spend on health care is a dollar lost. In that case, the outlook for survival of the VEBA would be grim. However, if they see that a dollar saved now will benefit their union brothers, themselves or their spouses during a long-lived retirement, they might draw down their VEBA benefits at a sustainable rate.
If VEBA members take ownership of their health care benefits, as did industrial sickness fund members, GM and the UAW will have produced a remarkably creative solution to a seemingly intractable problem. They could well be at the beginning of a VEBA revival in which smaller firms that currently do not offer health insurance will establish VEBAs and expand coverage. The result could be yet another postponement of national health insurance proposals—if Detroit can show that VEBAs are viable.
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