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Are VEBAs the Future of Employee Health Care

October 9, 2007
Related Topics: Benefit Design and Communication, Future Workplace, Workforce Planning, Featured Article, Compensation
What do a couple hundred employees who work for the city of Post Falls, Idaho, have to do with the retired United Auto Workers and their spouses—all 540,344 of them?

They share an acronym: VEBA. What they don’t share, not yet at least, is a track record of saving money on health care costs.

The contract negotiations between the United Auto Workers and Detroit’s Big Three automakers have brought health care trusts known as VEBAs—voluntary employees beneficiary associations—to national attention. But VEBAs have been used since the 1920s by both large and small employers to fund future health care obligations. Late last month, GM and the UAW came to a tentative agreement on creating a trust to relieve GM of its obligation to fund health care retirement costs. The plan calls for GM to pay about $30 billion into a VEBA trust and another $5.4 billion toward other retiree health care costs.

Some employers, like Post Falls, have used the flexibility offered by a VEBA to fund health reimbursement arrangements that have been used to reduce health care costs.

Michele Sandberg, former human resources director for Post Falls, believes what can work for a small city in the Northwest—population 23,000—can work for retired autoworkers.

"You see the [auto] employees panicking, feeling like they have no control," she says. "Our employees felt the same way, like the employer and the insurance company were out to get them."

By itself, a VEBA is nothing more than a way for an employer to contribute tax-free to a fund that can only be used to purchase health and welfare benefits. Many are simply lockboxes filled with cash that can only be withdrawn to pay for health care costs or other welfare benefits like life and disability insurance.

VEBAs are becoming more popular among municipalities struggling to meet new accounting rules that require governments to count future health care costs as a financial obligation. If they can’t pay for that cost—which, given the cost of health care and the rich benefits government workers receive, is enormous—then the money owed is listed as debt. This worsens a government’s bond rating and makes it harder to borrow money. Putting the money into a VEBA takes the cost off the books, says Jay Wettlaufer, manager of operations for Administration Resources Corp., a benefits administrator in Minneapolis.

For corporations, VEBAs offer a way to make a defined contribution toward health care costs, ridding themselves of any future health care obligations, says Mark Wilkerson, senior manager consultant at VEBA Service Group in Spokane, Washington.

Rather than have costs that fluctuate annually depending on the health of retirees, a VEBA gives Detroit’s Big Three a place where the companies can offload the $104 billion in future retiree health care costs that are estimated over the next 22 to 24 years, according to the Center for Automotive Research—a sum that threatens automakers with financial ruin. Should Ford and Chrysler strike a deal with the UAW similar to the one tendered by GM, the union’s VEBA trust could be worth as much as $70 billion.

And given the fact that 64 percent of GM’s 73,000-member workforce is eligible to retire in the next five years, there’s no time like the present to get out of paying for health care, says Kristin Dziczek, senior project manager at the Center for Automotive Research in Detroit.

"It will be interesting to see how the union manages the VEBA," she says.

Interesting, because there is nothing in a VEBA that guarantees that, once funded, a VEBA will remain solvent. The money in the VEBA can be invested and the earnings used to pay for health care costs tax free. But if health care costs grow at double-digit rates, as they did several years ago, the trust fund could run dry.

"Inevitably, it will run out of money or the benefits will be cut in the future," says Lance Wallach a leading authority on VEBAs.

So, how do you avoid that?

"Put more money in, which they’re never going to do," Wallach says. "Once it’s a deal, that’s the deal."

This is where Post Falls may have some lessons to offer, says Sandberg, who is now a benefits consultant.

About seven years ago, Post Falls was going though what many employers are experiencing today: Its health care premiums were increasing at astonishing rates—as much as 30 percent in some years.

The city decided to put the amount it spent on health care annually into a health care trust to be managed by a third party. Then the city chose a high-deductible health plan with a health reimbursement arrangement funded from money in the VEBA. This is known as a VEBA HRA and differs from other HRAs because the money is funded into accounts owned by the employee. Normally, HRAs are funded by an employer in name only. The company only parts with HRA money when an employee spends. In most cases, the employee does not own the money in the account.

Post Falls introduced the high-deductible plan and then told workers that it would contribute more than 100 percent of the deductible into the workers’ VEBA-funded HRAs. The HRA works more like a health savings account but without the restrictions common to HSAs—namely, that all medical expenses must first be paid out of pocket until the deductible is meet.

Post Falls was able to design its health plan so that prescription medicine could be purchased by employees with only a small co-pay. It allowed employees to get medicines for chronic illnesses without dipping into their HRAs.

What employees don’t use they keep. Last year, premiums dropped 15 percent. This year, they are up 2 percent.

"The way the city looks at it is the VEBA’s like profit-sharing," Sandberg says. "And [employees] value it. They feel they have control of their benefits. I’d love for the union members to feel that way over their benefits."

Such a radical retooling of health benefits would be a challenge for autoworkers, since they have never had to think about the cost of their health care, Wallach says.

Sandberg’s belief in the power of VEBA HRAs to reduce costs compelled her to make a phone call to Detroit during the UAW’s contract talks last month with GM, where she ended up talking to the Center for Automotive Research. She’s still trying to get in touch with the UAW to tell them the story of Post Falls, Idaho.

"Sometimes," she says, "answers come from small places."

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