GM CEO, Rick Wagoner presented a written testimony on healthcare costs to a special US Senate Committee last week.
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Healthcare costs are borne by employers in the US, and the automotive industry, amongst others, is concerned that this is affecting its global competitiveness. Any cost savings that can be achieved here could have a significant impact on GM’s bottom line.
To put the cost of healthcare into context, Wagoner said in his testimony that GM is the largest private purchaser of health care in the United States, paying the health care costs of 1.1m employees, retirees and dependents. Of those, approximately 530,000 are age 60 and over, representing over 1% of the US population over 60.
In 2005, General Motors spent $US5.3bn for health care, more than it spent on steel.
One of the company’s recent concerns is the increase in spending on prescription drugs, which as risen more than 300% in the last 12 years to $1.9bn in 2005.
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By GlobalDataBut what can GM do to reduce costs in this area?
There is not likely to be any real change in the current system, but GM is calling on the government to make more information available on healthcare providers to be able to identify which are most effective and cost-efficient, and help look after the health of employees to prevent disease. In short, Wagoner wants a more efficient healthcare system, hence the political involvement.
At present GM is conducting many of its own initiatives in-house to help keep healthcare costs down. In Wagoner’s statement he says that GM is leading over 30 initiatives throughout communities to teach disease prevention and give more information on effective treatments – a role that is not necessarily best suited to a car manufacturer.
In terms of encouraging employees to be healthy, GM has some in-house fitness centres and offers discounts to membership clubs. It has a programme called ‘Lifesteps’ launched in 1996, to help individuals identify health risks and modify lifestyles accordingly. It also has disease-specific programmes that include its own cancer research foundation and diabetes workshops.
Some GM programmes have delivered realisable cost savings. By educating employees about the effectiveness of generic drugs, compared to higher cost branded drugs, GM has been able to encourage around 90% of people to switch to generic drugs, saving around $4m a year.
In terms of delivering a more efficient healthcare system, GM hopes to be able to offer some lessons from the automotive industry. It regularly conducts lessons in the GM Production System at hospital. “GM has found that approximately 80% of a process, regardless of the industry, is comprised of waste and non-value added activities,” wrote Wagoner. In Michigan, GM is working on an initiative to link payment to hospitals to performance and efficiency.
There are some things the government can do. GM is calling for a more competitive prescription drug market with more access to generic drugs. It hopes that this will be helped by future policies that give more information on the effectiveness of different drugs and treatments. GM is also calling for the disclosure of information on the cost and quality of physicians and hospitals.
In short, GM cannot radically overhaul the current system, but it can apply its management and procurement experience to help reduce costs. Whether this will be enough to stop healthcare being a burden on GM’s balance sheet in the long-term remains highly questionable. The fact remains that its competitors, particularly the new US assemblers such as Toyota and Honda, do not have to look after hundreds of thousands of retirees, some with very hefty healthcare requirements. Their starting point in the US is with a smaller, leaner and younger workforce. Even when workers do start to retire, there will not be so many of them.
