H e a l t h I n R e v i e w

Opinion: Here's to the Health of Two Corporate Giants

By Clark Kendall



It is interesting to look at the rise in health insurance costs and how two of the largest employers in the United States, General Motors (GM) and Wal-Mart, are dealing with the problem differently.

GM, through the strong arm of labor unions, generously offers fully-funded health insurance to 1.1 million current and retired employees and their dependents. This has added more than $1,532 to the cost of every car and truck GM produces in North America.

Driven by giant increases in prescription-drug prices, GM medical costs jumped 8.5% in 2004 and are expected to leap another 10.5% this year. GM feels the pain more than its competitors, because after several decades of downsizing, it has 2.5 aged retirees for every active worker. High health insurance costs are crushing profits. GM employees don't pay a cent for their health insurance, nor do they pay any deductibles. When a GM employee visits the doctor, he makes only a tiny co-pay.

Is it any wonder that Detroit seems to have a denser concentration of chiropractors, podiatrists and psychologists than elsewhere in the western world? Or that GM's nickname around Detroit is "Generous Motors"? GM expects to lay out $5.6 billion for medical care this year, but is forecasting a profit in North America of just $500 million. With this in mind, GM's current bond rating is one notch away from being considered junk status.

The high assumption of health insurance has caused the collective big three auto makers to lose market share to foreign competition. The big three automakers, combined, have lost market share from more than 72% in 1990 to less than 58% for 2004.

In contrast, Wal-Mart, the largest chain retailer in the world, with revenues counting for approximately 2% of U.S. GDP and net earnings of $10 billion, offers health insurance to less than half of its employees. Sixty percent of them are forced to get health insurance coverage from the government, spousal plans or live without it. Wal-Mart's financial success is due, in part, to its ability to pass the cost of health care on to its employees, while Wal-Mart assumes a relatively very small percentage of the cost.

Wal-Mart has enjoyed tremendous financial success from gross revenue of $93 billion in 1995 to more than $316 billion last year. Wal-Mart's hourly net profit is $1,141,552, compared to GM's hourly net profits of only $57. Wal-Mart enjoys a gross profit margin of 24.6%, with a return on stockholders' equity of 21.5%, compared to GM's gross profit margin of 11.5% and a return on stockholders' equity of 4.5%.

This is not a union vs. non-union issue, but a marginal cost versus marginal revenue issue. The fact is, Wal-Mart has separated the two issues. Wal-Mart hires and pays each employee based upon the marginal revenue that individual can add to the firm. Wal-Mart, given its immense size, matches marginal cost versus marginal revenue. GM pays its employees benefits, their marginal cost, based upon a set standard determined by the union's negotiation power.

The question to society is, "Is the real cost of health insurance worth the cost?" The average family of four in the U.S. earns approximately $65,000 a year and the cost of good health insurance for that family is approximately $1,000 per month. Does our society want to spend over 18% of our earned income on health insurance to increase our quantity of life by 5-10%? Or does our society want to improve the quality of life with higher disposable income?

I think this economy is in the process of producing a two-tier health insurance system. One plan will provide individuals that can afford higher premiums the highest level of health care benefits. The second plan will increase an individual's disposable income with lower premium charges, but will also limit coverage for expensive health care-related costs.

During the past 20 years, this has already happened with corporate retirement plans. They have changed from corporate promise to pay defined benefit plans to defined contribution plans. Economics will force balanced and efficient matching between marginal costs and revenues regarding health insurance.



Clark Kendall, CFA, CFP, is president of Kendall Capital Management in Sandy Spring. He can be reached at 301-260-7935, 877-260-7935 and ckendall@kendall capital.com.





Health News

CMS Approves CareFirst Offer of New Medicare Prescription Product

The Centers for Medicare and Medicaid Services (CMS) have approved a contract enabling CareFirst BlueCross BlueShield to offer Medi-CareFirst Rx, a new Medicare Prescription Drug Plan product, to eligible residents of Maryland, Delaware and Washington, D.C., starting Jan. 1, 2006.

Medicare beneficiaries may enroll in the Medicare Prescription Drug programs during an open enrollment period that begins in November and extends through May 15, 2006. Coverage for those who enroll before Dec. 31, 2005, begins Jan. 1, 2006. Coverage for beneficiaries who enroll after the first of the year begins on the first day of the month following acceptance into the program.

People who are eligible for Medicare coverage but who do not enroll in a Medicare Prescription Drug Plan by May 15, 2006, will incur a 1% premium penalty for every month they delay enrollment, under CMS requirements.

Details of the benefit offerings will be available after Oct. 1. "We are pleased to be participating in this innovative program," said Gregory A. Devou, CareFirst executive vice president and chief marketing officer. "With the rising costs of prescription drugs, this plan will help make those medications more affordable for some of our most vulnerable fellow citizens."



Tai Sophia Workshop Offers Introspective New Views

Redefining Health, a two-day weekend seminar being offered at the Tai Sophia Institute in Laurel, will provide participants with skills to make positive changes in themselves, their workplaces and in their relationships with others.

Institute President Robert Duggan and Chancellor Dianne Connelly conduct the workshop based on principles of wellness and healing. Participants learn practical skills in such areas as teambuilding, personal communications, creating partnerships and conflict resolution.

The workshop is scheduled for 9 a.m.-5 p.m. on Saturday, Oct. 8 and 9:30 a.m.-4:30 p.m. on Sunday, Oct. 9. It takes place at the Institute, which is located at 7750

Montpelier Road in Laurel. The cost is $140. To register or to obtain more information, call 410-888-9048, ext. 6611.



Brandon, Emerson & Hammond Join St. Agnes OB/GYN Associates

St. Agnes Hospital has announced that it has expanded its network of OB/GYN physicians in Howard County with the addition of Brandon, Emerson & Hammond. The women's OB/GYN group will join St. Agnes Hospital, effective October 29. The practice, physicians and staff will remain at their current location.

The partnership doubles of the size of the current women's services practice at St. Agnes. The combined practices will operate under the name St. Agnes OB/GYN Associates and will include 16 physicians in offices in Baltimore City and Baltimore, Anne Arundel and Howard counties.

In addition to The Women's OB/GYN Group, St. Agnes OB/GYN Associates includes Dr. Andrew Pataki in Anne Arundel County, and Dr. Joyce Bonsu and Dr. Ishrat Rafi at St. Agnes Hospital and in Elkridge.

"The double-digit increases in medical malpractice premiums have threatened the ability of obstetricians to survive as private practices. Without the collaboration and intervention among hospitals like St. Agnes, doctors, patients and lawmakers, obstetrics will continue its attrition and patients will have limited access to care," said Dr. Carol Emerson, a principal partner of The Women's OB/GYN Group.



Nursing School Assistance Available

Applicants interested in going to nursing school are eligible to receive up to $4,000 of annual scholarship assistance and guaranteed future employment at any Dimensions Healthcare facility, including Laurel Regional Hospital.

To be eligible for scholarship assistance, applicants must have recently graduated from a Prince George's County High School or be accepted to, or currently enrolled full-time in, a program leading to a bachelor or associate degree in nursing. They must also be a U.S. citizen or legal resident and be willing and able to maintain employment at a Dimensions facility upon completion of a degree/licensing for a specified period. Call 240-568-2981 or 301-725-4300, ext. 72981, for an application. The deadline is Oct. 31.