The contract proposal, which was agreed upon September 26 and remains subject to court approval, will transfer from GM around $35 billion in cash and stock to the union to pay for retiree health care costs.

Should the United Auto Workers get a similar offer from Ford and Chrysler regarding retiree health care benefits, the union could have upwards of $70 billion to spend on more than 500,000 beneficiaries, making it among the largest health care purchasers in the United States.

But in health care, where costs have risen more than 70 percent in the past five years, even $70 billion can last only so long.

In the equation that produced health care costs that nearly sent GM into bankruptcy, costs must drop for the union, or the health care trust—known as a voluntary employees beneficiary association, or VEBA—will find itself bankrupt.

To avoid insolvency, the union will have to adjust the behavior of retirees. It would most likely have to change the benefits incentives that drive over-utilization of health care or reduce the amount the union pays health care providers.

UAW president Ron Gettelfinger promised workers the fund would remain solvent for 80 years without any reduction in benefits.

“The funding level we have negotiated is expected to allow the VEBA to continue to provide benefits without change for the lifetime of current and future retirees,” he wrote in a letter to members.

Those familiar with the union’s thinking say the UAW will address costs by utilizing the full force of its purchasing power, which will grow if Ford and Chrysler offload their liabilities into the VEBA.

The union could create networks of efficient lower-cost doctors, negotiate lower rates with hospitals, abandon brand-name drugs in favor of generics and make changes that General Motors never had the freedom to make.

“The trustees of this VEBA are going to aggressively manage this fund to protect and maintain health care for retirees similar or equal to what they currently have for as long as they possibly can,” says Kristin Dziczek, senior project manager at the Center for Automotive Research in Detroit.

Lance Wallach, a consultant on VEBAs, believes the union must change its benefit structure to encourage more responsible spending and healthier living, including among retirees responsible for the bulk of health care spending.

“The only way for this VEBA to work is for whoever is going to administer it to change the behavior of the workers,” Wallach says. “If they don’t do that, this absolutely won’t work.”

One escape valve for the union is to change the relationship between health insurance and employment. Toward that end, the union, with $15 million from GM, will establish the National Institute for Health Care Reform “to expand access to high-quality, affordable and accountable health care coverage for all Americans,” the union wrote.

“I don’t know where it ends up, but [the union-run VEBA] is certainly part of the transition away from employer-based health in the United States,” says Dave Andrea, vice president of industry analysis and economics for the Original Equipment Suppliers Association, the trade group for auto parts manufacturers.

—Jeremy Smerd