How UAW's risky health care experiment became a success

A grand experiment that began eight years ago for the UAW to take over management of retiree health care for the Detroit Three is now viewed as a major success.

Retirees, analysts and executives involved in the contract of 2007 that created the UAW Retiree Medical Benefits Trust say it's working even better than originally expected.

With healthcare costs rising nationally, UAW President Dennis Williams wants to use the Trust, also called a VEBA, as a model for a new benefits pool that would oversee healthcare for the 141,000 hourly workers at General Motors, Ford and Fiat Chrysler Automobiles, and maybe even the automaker's salaried workforce.

Reducing healthcare expenses without increasing costs for UAW workers is one of Williams' top priorities in Detroit Three contract talks this year.

"I think if the companies fail on the healthcare, it’s a missed opportunity, and I think the medical community will agree with me on that," Williams told the Free Press on Monday.

The original VEBA concept was viewed as a major win for automakers, which off-loaded future risk and expense, and a huge risk for the UAW, which bet it could leverage lower because of its membership size.

The agreement freed the Detroit Three from about $88 billion of future health care liabilities for a one-time payment of $56.5 billion to cover about 750,000 retired autoworkers and their dependents.

Retirees and analysts at the time doubted the money would ever be enough and feared benefits would erode as the years wore on.

“I was really concerned about that,” said Al Churchill, a Ford retiree and president of a chapter of UAW retirees. “So far, it seems to be working out pretty well. … I get good service and the medical care I get from the VEBA is pretty good. I think it’s been a positive thing overall.”

When the Trust was launched in January 2010, it was the largest non-governmental purchaser of retiree health care in the United States. Many of the retirees it serves are also covered by Medicare, which reduces the trust's financial burden, and members pay monthly contributions.

With odds stacked against it, the Trust has emerged from a period of uncertainty and has earned praise and respect from the retirees it serves, health care experts and the investment community.

Today the Trust actually has increased it balance, ending 2013 with more $60.8 billion in net assets, according to a report filed with the IRS, the most recent year available.

Former Chrysler CEO Tom LaSorda, who helped negotiate the agreement, said the Trust was former UAW President Ron Gettefinger's "masterpiece." He said the UAW brought the idea to the bargaining table that year.

“I give all the credit to Ron Gettelfinger, who fought for this, because he had a vision beyond his years for what should happen to protect the retirees," LaSorda said. "I think this will go down in history as one of his biggest achievements as a union leader."

'A B+ or A-'

In 2010, the Trust fund did not include dental and vision benefits for retirees. But some of those benefits were reinstated for GM and Chrysler retirees in 2012, and the Trust began offering full benefits in January .

John Walker, a retired GM worker who lives in Flint, said he's often frustrated co-payments don't cover routine procedures. And he wishes the prescription drug benefits were more generous. But overall he's pleased with the coverage and how the Trust communicates with members.

“I’d give them a B+ or maybe an A-,” Walker said. “When I look around and see what’s happening with health care costs, I'm grateful to have what I have."

Early funding goes from bad to worse

The Trust got off to a rough start.

In 2009, Ford, GM and Chrysler forced the UAW to amend their agreements as part of their bankruptcies and financial restructurings to allow for some of the funds to be paid in stock rather than cash.

In the years that followed, Chrysler transformed itself from a public company into a private company controlled by Fiat as it emerged from Chapter 11 bankruptcy. GM, also emerging from bankruptcy, did not go public for more than a year until its initial public offering in November, 2010. And while Ford didn't declare bankruptcy, its stock price fell to a low of $1.26 in 2008.

The Trust's net assets dropped from $58.5 billion at the beginning of 2011 to $52.1 billion by the end of the year.

For its part, the UAW promised retirees the Trust would achieve a 9% annual return on investments -- a figure most investment experts said was optimistic -- and said it would be solvent for 80 years.

The Trust's annual rate of return between 2010 and 2013 was 8.3% for its GM account, 8.84% for its Ford account and 4% for its Chrysler account, according to summaries of annual reports the Trust provided to its members.

“At the beginning, I remember a couple years into it, they had to raise the rates and add to the co-pays and stuff like that," LaSorda said. "They’re on their own now. Their investment trustees made great investment decisions, and they’ve done extremely well.”

The Trust's future outlook is better now than it was several years ago because healthcare costs are not rising as fast as a decade ago. The Trust also has found ways to better manage health care of chronically ill members, and it has made smart investment decisions, said Kristin Dziczek, director of the labor and industry group for the Center for Automotive Research in Ann Arbor.

"It's much healthier now," Dziczek said.

Flexibility to change benefits

One advantage the Trust has that the automakers lacked is an ability to review and change the benefits it offers on an annual basis, instead of every four years during contract negotiations.

Joel Clark, president of Southfield-based J.S. Clark Agency Inc., said the Trust also has found ways to reduce health care expenditures by designing benefits that encourage retirees to make cost-saving choices.

For example, instead of having a single prescription drug co-pay, the Trust introduced a tiered prescription drug co-pay system that creates an incentive for retirees to opt for less expensive generic drugs. The Trust's prescription drug co-pays are $12 for generic drugs, $40 for "preferred brands" and $100 for non-preferred brands, according to the Trust's Web site.

"They understood that they had limited resources…and the goal and objective was to stretch those resources," Clark said.

Clark said the professionals that run the Trust and CEO Fran Parker would be well-positioned to manage a new co-op or pool of active workers if the UAW persuades the Detroit Three to create a new entity for its active workers.

"Adding 140,000 members to the existing 700,000 or so members may be the simplest route to pursue," Clark said.

Aggressive investment management

Those who watch the Trust closely say managers made the investment of funds a big priority, hiring a talented chief investment officer in Ken Frier. He was the highest paid VEBA employee in 2013, collecting $1.02 million in total compensation, according to the annual report filed with the IRS.

Under Frier, the Trust's net assets grew by $4.7 billion, or 8.3%, in 2013 to $60.8 billion compared with $56.15 billion at the start of the year.

The growth occurred even as the Trust disbursed $4.2 billion in direct payments to hospitals and doctors, as well as prescription drug and other direct patient care costs.

To be sure, the Trust fund's investment success has been helped by an automotive industry rebounding faster than expected along with gains in the overall stock market in recent years.

“I think that they have benefited very well from what has happened with the stock market over the last four years,” said Dick Danjin, 79, a GM retiree who also worked as a union representative.

Danjin, generally one of the UAW's harshest critics, has a positive view of the trust.

“I think the VEBA does provide good health care. … I’ve not heard anyone …who is saying it costs too much," Danjin said.

Oddly secretive

But for all of its success, the UAW Retiree Medical Benefits Trust is oddly secretive.

The organization operates out of the UAW-GM Center for Human Resources building at 200 Walker Street in Detroit and has an office for its investment team in Ann Arbor.

Patty McCarthy, a spokesperson for the organization, declined to say how many employees work for the Trust or say how many work in either location.

McCarthy also said CEO Parker would not be able to talk to the Free Press until after the UAW completes contract talks with the Detroit Three. The UAW's four-year contracts with the Detroit Three expires on Sept. 14 but could be extended if the union doesn't reach tentative agreements by the expiration.

McCarthy says the trust operates independently from the UAW even though evidence indicates there is a close relationship between the two organizations.

The Trust is governed by an 11-person committee, with six Independent members and five members appointed by the UAW. Those members include UAW President Dennis Williams, UAW Vice President Jimmy Settles, UAW Vice President Cindy Estrada and UAW Vice President Norwood Jewell.

Several outside board members contacted by the Free Press declined to comment or respond to voice mails and emails.

"For now, because the Trust is not involved in the auto negotiations or privy to any discussions, we are not granting interviews during this period," McCarthy said in an email.

Despite its lack of communication with the news media, the Trust appears to have won over retirees and health care experts.

The question now is whether Williams can use its success to convince the UAW's currently hourly workers to support a similar system to manage their healthcare.

Contact Brent Snavely: 313-222-6512 or bsnavely@freepress.com. Follow him on Twitter @BrentSnavely. Free Press columnist Tom Walsh contributed to this report.

A quick look at key facts about UAW contract talks

Sept. 14: The date that the UAW's four-year contract with Ford, General Motors and Fiat Chrysler Automobiles expires.

141,000: The number workers the UAW represents at the Detroit Three.

Entry-level wages: Winning increased pay for tier-two workers or potentially eliminating the two-tier wage structure was identified early on as a key issue.

Healthcare: Finding a way to reduce health care costs without cutting member benefits or raising costs to members has emerged as as a key goal set by UAW President Dennis Williams.

Jobs/product investments: As always, the UAW wants to win new jobs with commitments by the automakers to make new cars and trucks in the U.S.

A look at the UAW Retiree Medical Benefits Trust 11 member board of trustees

EDITORS NOTE: An earlier version neglected to include Robert Naftaly. He has been added below.

Joseph Ashton: A retired UAW vice president, Ashton joined the UAW in 1969 while working at ITE Circuit in Philadelphia. Ashton is executive vice president of the Pennsylvania AFL-CIO Executive Council, executive vice president of the New Jersey AFL-CIO and a former director of the Western New York Federal Reserve Bank.

Adam Blumenthal: Blumenthal is co-founder and managing partner of Blue Wolf Capital Partners LLC, a private equity firm that specializes in investments in middle-market companies. From 2002 to 2005, Mr. Blumenthal served as first deputy comptroller and CFO for the New York City comptroller.

Cindy Estrada: Estrada was elected to her second term as a UAW vice president in June 2014. The longtime union organizer and social activist was first elected as vice president in 2010 and is the first Latina elected to serve as an International officer.

Teresa Ghilarducci: Ghilarducci is a labor economist and nationally-recognized expert in retirement security. An economics professor at The New School, Teresa serves as the Bernard L. and Irene Schwartz Chair in economic policy analysis and director of SCEPA, the Schwartz Center for Economic Policy Analysis that focuses on economic policy research and outreach

Norwood Jewell: Jewell was elected a UAW vice president in June 2014. Previously, he served as director of UAW Region 1C after being elected in June 2010. A UAW Local 659 member since 1976, Jewell worked at the General Motors Co. Flint Metal Fabricating plant. He started on the production line before becoming active in the union in 1988.

David Baker Lewis: Lewis currently serves as Chairman of Lewis & Munday, a Detroit based law firm with offices in Lansing, New York, Washington and Seattle. Mr. Lewis has specialized in municipal finance since 1974 and has extensive experience in all aspects of municipal finance law.

Robert Naftaly: Naftaly is the chairman of the Trust's board. He also is the retired president and CEO of PPOM, an independent operating subsidiary of Blue Cross Blue Shield of Michigan, and a former executive vice president and COO for BCBSM. From 1983 to 1987, Mr. Naftaly served as the Director of the Department of Management and Budget of the State of Michigan.

Bill Patterson: Patterson is the Executive Director of the CtW Investment Group, which he established in 2006 under the auspices of Change to Win, a federation of North American unions representing five million members. CtW affiliates sponsor Taft Hartley pension and benefit funds with $200 billion in assets.

James Settles: Settles, a UAW vice president, is in charge of the union's Ford department. Settles began his career as a trade union activist in 1968, at Ford Motor Co.’s Dearborn Iron Foundry and Michigan Casting Center.

Dennis Williams: Williams was elected president of the UAW in June 2014. Previously, Williams served as the union's secretary-treasurer for four years. As secretary-treasurer, Williams was part of developing a long-term strategy for the union, supporting the membership and organizing the foreign-owned automakers in the U.S.

Douglas R. Woll: Woll is a physician and a Fellow of the American College of Physicians. After conducting an active medical practice in Michigan for several years, he served as the chief medical officer for several large health plans in Michigan including Maxicare’s Independence Health Plan, SelectCare and Blue Care Network of Michigan. He is currently the Chief Strategy Officer for Bencon , a health care consulting company,

A breakdown of the UAW Retiree Medical Benefits Trust's assets as of Dec. 31, 2013:

$60.8 billion: Net assets

$17.2 billion: Ford assets

$10.9 billion: Chrysler assets

$32 billion: GM assets

Sources: Form 990 filed with the Internal Revenue Service, summary of annual reports provided to members.

Breakdown of medical benefits and costs paid in 2013:

Total: $4.2 billion

Ford retirees: $1.07 billion

Chrysler retirees: $626 million

GM retirees: $2.5 billion

Source: Overview of annual reports provided to members