Ford Expects Health-Care Costs to Top $1 Billion in 2020

(Bloomberg) -- Ford Motor Co. expects the cost of health insurance for its 56,000 hourly workers in the U.S. to top $1 billion for the first time next year, according to a person familiar with the situation, highlighting a growing expense for automakers even as car sales slow.

Those mounting health-care costs represent a potential sticking point in this year’s contract talks between the United Auto Workers and the three U.S. automakers that tried and failed four years ago to address an expanding outlay that threatens profits and jobs. At Ford, General Motors Co. and Fiat Chrysler Automobiles NV, the tab for health insurance topped $2 billion in 2015 and has only grown since.

Bargaining negotiations get underway this summer on contracts that expire in September with each of the three automakers. Some experts say divisive issues including cost-sharing for health care benefits may lead to striking.

The UAW must balance its protection of benefits with the need to keep workers on the job at a time when GM is shuttering five North American factories and Ford is slashing shifts and cutting jobs as part of an $11 billion restructuring. Although the three automakers remain profitable, they are bracing for a slowdown that could become a recession while spending billions to prepare for a future dominated by electric and self-driving cars.

Ford shares rose 0.7 percent to $8.67 at 9:44 a.m. in New York. The automaker’s stock is up more than 13 percent this year falling almost 39 percent last year.

Hard-Won Benefit

Nationwide, health expenditures are projected to grow by 5.5 percent annually from 2018 to 2027, more than twice the rate of inflation, according to a new study by the Centers for Medicare and Medicaid Services. But unionized auto workers enjoy some of the most generous medical coverage plans in the country and have been spared premium increases.

The UAW sees that as a hard-won benefit that helps make up for concessions to automakers in other areas. But automakers view these gold-plated worker plans as a growing burden that puts them at a disadvantage against rivals with non-unionized factories.

“We’re returning to major concession negotiations in the auto industry,” said Gary Chaison, professor emeritus of industrial relations at Clark University in Worcester, Massachusetts. “The major manufacturers are saying: Give us a reason for why we should expand in the U.S. as opposed to China or India or somewhere else.”

Thin Contributions

With little or no co-pays or deductibles, UAW members contribute just 3 percent to their health-care coverage, compared with 30 percent by Ford’s salaried workers, said the person familiar with the matter, who asked not to be identified revealing internal data. Without changes, the growth in health-care costs over the life of the next contract would be the equivalent of a $3 hourly wage increase, the person said.

In the U.S., workers with health insurance contribute an average of 18 percent of the premium for single coverage and 29 percent of the premium for family coverage, according to a study last year by the Kaiser Family Foundation.

Health-care coverage has been sacrosanct at the UAW, which gave up wages and jobs in 2009 to help keep the automakers afloat but didn’t give back medical benefits. “The union has fought hard in the darkest of economic times to ensure its members remain protected,” said Harley Shaiken, labor relations professor at the University of California at Berkeley. “It’s not a rhetorical commitment. It is a substantive commitment at the bargaining table.”

In 2015, when then-UAW President Dennis Williams proposed creating a health care co-op that leveraged the buying power of almost 140,000 UAW members working for Detroit automakers, workers soundly rejected it, fearing it would erode their benefits. That’s why labor analysts expect health care to be a flashpoint in negotiations for the contracts.

‘Cadillac’ Tax

As the union gathers in Detroit this week to map out its bargaining strategy for this summer’s contract talks, it has made retaining and expanding health-care benefits a top priority. The union said it will seek to eliminate disparities in coverage, which have left newer workers with less-generous coverage than veterans. It also is looking to reduce co-pays on prescription drugs and avoid any “cost shifting” from companies, according to the bargaining resolutions prepared for the convention.

Looming over the talks is a provision in the Affordable Care Act -- also known as Obamacare -- that will tax so-called “Cadillac” health care plans like the UAW’s at 40 percent starting in 2022. That cost would be crippling for the automakers and its workers, both sides say. But finding a way around that will be tricky.

Labor experts say neither side is eager to make concessions, which could bode ill for the negotiations.

“I don’t think any of the Big Three can absorb that cost, so they’re going to want more cost sharing,” said Arthur Wheaton, director of the Worker Institute at Cornell University. “But I can see the UAW saying, we’ve given up so much money on other things and we’ve tried to claw back some of that, and now you’re saying we need to make up for a 40 percent hit on health care. I think you’re talking strike.”

To contact the reporter on this story: Keith Naughton in Southfield, Michigan at knaughton3@bloomberg.net

To contact the editors responsible for this story: Craig Trudell at ctrudell1@bloomberg.net, Chester Dawson, Kevin Miller

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