Detroit 3 Automakers – UAW Bargaining Update
Healthcare Costs and Chronic Absenteeism – The Pareto Principle
According to Wikipedia, “The Pareto Principle (also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. ….”. Would you be surprised if I told you that for the Detroit 3 Automakers (and from what I understand many non-automotive companies), the Pareto principle applies to two of the top competitive challenges facing the companies today, namely rising healthcare costs and chronic absenteeism? Directionally, it is true, as it is my understanding that approximately 80% of the costs associated with healthcare and approximately 80% of chronic absenteeism incidents are generated by roughly 20% of the employees.
Where am I going with this? This phenomenon presents a unique opportunity for the automakers and the UAW to be creative in jointly crafting win-win solutions to address these two high profile competitiveness challenges. The 80/20 aspect should enable the parties to zero in on specifics such as utilization of certain high cost healthcare delivery models and/or certain high utilization individuals (i.e., the 20% of causes) in order to identify and tackle potential waste and/or abuse. Of course, it goes without saying that, privacy laws will have to be respected during the process. Neither the company, nor the union, will be interested in denying employees access to required healthcare services or time off related to the Family Medical Leave Act (FMLA) for legitimate reasons. The focus will clearly have to be on eliminating waste, as well as the blatant misuse of certain rights and benefits. In addition, the parties may be able to negotiate ways to promote employee consumerism in order to reduce healthcare costs. If done correctly, the companies and union should be able to grab the “low hanging fruit” in terms of cost savings opportunities while minimizing intrusiveness on the vast majority of UAW members. This would help improve overall competitiveness, and in the case of addressing absenteeism concerns, may provide some relief to the rank and file, as many of them are frustrated with those co-workers who are chronically absent from work. I will try to illustrate a few potential opportunities to address waste and/or abuse as well as introduce an example of an employee consumerism initiative.
- Mandatory Disease Management – employee healthcare costs related to chronic diseases such as heart disease and diabetes can be enormous, particularly if employees choose to ignore their doctor’s orders. In cases where employees are not adhering to treatment plans, the parties could agree that these employees must participate in a mandatory disease management program. This would probably not affect a significant number of union members but could potentially generate significant cost savings. Besides, it would be in everyone’s best interest to have a healthier employee.
- Emergency Room Visits – the emergency room typically represents one of the highest cost healthcare delivery models. I have heard horror stories of individuals affectionately known as “frequent flyers”, who visit the emergency room dozens of times a year, often for non-emergent care ailments such as migraine headaches. Many of these visits can be considered wasteful as employees could seek treatment at lower cost sites such as their primary care physician (if they even have one) or via telemedicine. In order to reduce costs, the parties could negotiate a mechanism to address these high cost “frequent flyers” who routinely utilize the emergency room for non-emergent care.
- Employee Consumerism Initiatives – there are a number of opportunities for employees to practice consumerism with respect to healthcare – one that probably comes to your mind is the utilization of generic drugs versus brand name drugs. Another intriguing opportunity that the parties could explore is Reference-Based Pricing. In general terms, the concept of Reference-Based Pricing is where the company and union establish a “reference price” for certain, normally “routine” procedures, where the quality of the healthcare service is basically consistent from one healthcare provider to another. Typical examples may include medical procedures or tests such as MRI’s and colonoscopies. Let’s assume that the cost of one of these medical procedures ranges from $1,000 to $2,000 at various healthcare providers in a certain labor market area. The union and company would need to negotiate a “reference price” for the procedure – let’s say it is set at $1,400 – this would be the maximum amount paid by the company for that procedure. This encourages employee consumerism as most employees will search for healthcare providers that will perform the procedure for $1,400 or less in order to avoid out-of-pocket costs, thus potentially leading to lower healthcare costs for the employer. From a union perspective, it still provides employees with a choice – they can still go to the $2,000 healthcare provider but the employee will be responsible to pay the extra $600. In theory, over time, the high cost providers ($2,000 cost) will likely reduce their prices towards the reference price of $1,400 in order to maintain their volumes. Again, this is just one illustrative example of the low-hanging fruit that is out there in terms of reducing healthcare costs and improving competitiveness, while minimizing intrusiveness on union members.
Healthcare Consortium – in my opinion, the topic of employee healthcare is one of the most emotionally-charged topics of discussion during bargaining as it is seen as somewhat of a “sacred cow” by the union and its members. As such, it is extremely difficult to come to an agreement on modifications to healthcare plan designs as there is really no single silver bullet available to achieve targeted savings in a manner that is satisfactory to both parties. In my experience, the lead company and the union typically “run out of runway” as there is rarely enough time in the bargaining cycle (mid-July to mid-September in this case) to obtain an agreement on healthcare issues before the strike deadline. If this is the case again this year, the parties may consider pushing any unresolved healthcare challenges and/or savings targets to a Healthcare Consortium team, similar to the one that was proposed in the first tentative agreement with FCA in 2015.
The Healthcare Consortium could be comprised of representatives (experts) from each of the Detroit 3 Automakers as well as the UAW Retiree Medical Benefits Trust (URMBT). Keep in mind that the URMBT has been managing healthcare for UAW retirees since 2010, as the automakers negotiated the spinoff of their multi-billion dollar retiree healthcare obligations during 2007 bargaining (I was actively involved in this process). According to the URMBT website at uawtrust.org, “When the Trust launched in January 2010, it became the largest non-governmental purchaser of retiree health care in the United States, covering over 860,000 members. Since then, the Trust has focused on retiree health care and making benefit changes to ensure the continuation of the funds.” Accordingly, I am convinced that the URMBT has either researched, or in some cases, already implemented some of the low-hanging fruit opportunities that are available to reduce healthcare costs. Any Consortium would be responsible for identifying and implementing healthcare cost savings initiatives. Just think of the potential cost savings opportunities that may be available due to economies of scale, if a consortium of this size decided to leverage their buy with hospitals or if they opened their own Detroit 3 - UAW healthcare facilities in large labor markets like the Detroit area.
So, what would it take for something like this to work? From a company perspective, the automakers would want to establish an agreement that has some real teeth in it. What does that mean? It means that there would have to be a clear timetable for cost reductions, with detailed targeted savings that are measurable, along with some sort of penalties or repercussions if the targeted savings are either not met or not met on time. For example, if targeted healthcare savings at GM were $55 million per year and they only achieved half of that, or $27.5 million, then the 46,000 UAW members at GM should expect to pay a premium of approximately $50 per month to make up the shortfall. If there are no teeth in the agreement and the parties just agree to talk about healthcare cost reduction initiatives, without formal targets and real repercussions, nothing will happen. It will be equivalent to hearing that the “check is in the mail”.
From a union perspective, the UAW (with the assistance of the URMBT) would have to educate their membership at the ratification meetings. The UAW leadership would need to give the rank and file an idea of whether or not they feel comfortable that there is enough low-hanging fruit available to achieve the healthcare cost reduction targets and if not, what are the downside risks? Perhaps, it is a $50 per month premium, or perhaps the parties can negotiate a cap on the monthly premium over the term of the agreement as a safety valve for the UAW. In addition, the UAW leadership would likely have to provide examples of potential modifications, illustrating that there would be minimal anticipated intrusiveness on the vast majority of members. Based upon their experience since 2010, the URMBT should be able to assist the UAW leadership in providing some credible examples along with insights relative to the probability of achieving certain levels of healthcare cost savings.
If properly crafted and executed, I do believe that this strategy will work and will offer a win/win solution to both parties. In addition, if something like this is negotiated, it will be important to provide UAW members with regular status updates on actual versus targeted savings so that there are no surprises at the end of the year.
Family Medical Leave Act (FMLA) – in speaking with numerous colleagues from various industries over the past few years, unplanned absences related to utilization of intermittent FMLA is on the rise. In addition, it is believed that there is a lot of abuse with respect to FMLA leaves, as evidenced by a plethora of memes on the internet about FMLA (e.g., Friday Monday Leave Act, etc.). The utilization of intermittent FMLA has become a significant challenge for the automakers, as it is extremely difficult to start up an assembly line at the beginning of a shift when there is significant unplanned absenteeism. In talking to UAW members, even they admit that there is a ton of abuse with FMLA. Many of them are frustrated that their co-workers are absent due to FMLA when they see these employees posting pictures of themselves on social media attending a sporting event that same day. It is my understanding that many employees see the utilization of FMLA as a low-risk opportunity to obtain more time off or as way to circumvent attendance discipline for being tardy or absent. Either way, it is a growing problem that affects the automaker’s competitiveness in a number of ways including impact on costs, quality, productivity and as noted above, morale. The 80/20 rule suggests that the parties can perhaps address this challenge without negatively affecting the vast majority of employees. Experts indicate that the best deterrent for FMLA misuse is to run FMLA leaves concurrent with Paid Time Off (PTO). In essence, if an employee utilizes a day of FMLA leave, they would also burn a day of their vacation entitlement. Accordingly, employees may be less inclined to utilize FMLA unless it was for a legitimate reason. One way or another, the parties simply need to address this challenge.
In a nutshell, applying the 80/20 rule in analyzing healthcare costs and absenteeism may provide the automakers and the UAW with a unique opportunity to address a couple of significant competitiveness challenges. Together, the parties may be able to improve competitiveness by eliminating waste and potential misuse, with minimal impact on the vast majority of union members. Remember, it only takes 50% plus one vote to ratify a contract. Another thing to remember is that cost reductions for the automakers are also a good thing for UAW members. In theory, their profit-sharing checks should increase and the companies should have more money to invest in future product, securing their future for years to come.
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