Health Care Costs a Line to Watch at GM

It's no secret that GM's huge pension and health care liabilities weigh heavily on the company's balance sheet. But little has been said about a recent change to projected health care costs that could boost earnings in 2002.

In a financial filing made Feb. 25, GM said that health care costs were expected to rise 6% in 2002. Compare that with its 2000 annual report, in which it said the growth rate of health care costs would drop to 8% in 2002, from 8.5% in 2001.

A seemingly small drop in a seemingly obscure number, it would appear. However, that adjustment will allow GM to avoid $100 million to $120 million in 2002 costs, according to a calculation by Eric Feldstein, GM's treasurer. That's not an irrelevant sum for a company that had net income of $1.5 billion in 2001. Total health care expense in 2002 is projected at $3.9 billion, says Feldstein.

Shouldn't investors applaud this development, since GM managers are supposed to be reining in costs?

Of course. But the drop in the growth rate seems too good to be true. That's because health care costs are currently soaring. Even in these times of relatively low inflation, price indices consistently show medical care costs are going up much faster than those of other goods and services.

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GM explains the drop in the growth rate by noting the tough measures it's taking. The February filing said health costs would drop this year because of "various initiatives put in place in 2001 to lower 2002 claims experience." When asked, company spokeswoman Toni Simonetti listed the initiatives: weeding out certain health plans and inappropriate care, reducing waste, boosting use of generic drugs, and using technology to "provide information and improve patient safety."

One frequently cited obstacle to reducing health care costs is union opposition. But Simonetti says these initiatives "do not require renegotiation with our unions."

Feldstein argues that GM isn't being aggressive in taking down the rate. He points out that the company recognizes that some of the initiatives will be one-off in nature and thus expects the growth rate to rise in 2003 to 7.3%. In addition, he notes that GM's aim of tripling earnings to $10 a share by 2005 does not factor in the assumption that health care cost growth will be down to 6% by 2006. In other words, investors need not fear that the bullish $10 target is based on GM-projected cost savings that some might think hard to achieve.

But GM's task is still a hard one. As the economy picks up, so will inflation, possibly offsetting many of the cost-cutting initiatives.