SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 2417 words

COMMITTEE: HOUSE EDUCATION AND THE WORKFORCE

SUBCOMMITTEE: EMPLOYER-EMPLOYEE RELATIONS

HEADLINE: RESIDUAL COSTS OF RETIREES HEALTH CARE

TESTIMONY-BY: DR. VINCENT E. KERR, MD, DIRECTOR OF HEALTHCARE MANAGEMENT

AFFILIATION: FORD MOTOR COMPANY

BODY:
Statement of Dr. Vincent E. Kerr, MD Director of Healthcare Management, Ford Motor Company

Committee on House Education and the Workforce Subcommittee on Employer-Employee Relations

May 16, 2002

Good morning, Chairman Johnson, Ranking Member Andrews, and Members of the Committee. It is my pleasure to be here today to discuss Ford Motor Company's retiree health care coverage - I am Dr. Vincent Kerr, Director of Healthcare Management for Ford Motor Company. In this position, I am responsible for all aspects of Ford's health care programs, including occupational health & safety, worker's compensation, and health care benefits for employees, retirees, and their dependents around the world.

First of all, I commend the chairman and the members of this Subcommittee for addressing this very important subject. In my statement before you today, I'd like to discuss Ford's experience in providing health care benefits to our retirees and the challenges we face in continuing to provide this coverage, in order to assist Congress to better understand the state of employer sponsored retiree health care benefits and why we believe this is such an important issue. Ford Health Care Costs

In the United States alone, Ford provides health care coverage for over 560,000 employees, retirees and their dependents, located in all 50 states. In 2001 Ford's total cost, including the FAS 106 liability, was $2.5 billion. The 2001 cost represents a 25% increase over 2000. Of the $2.5 billion cost, retiree health care was $1.6 billion. These numbers reflect the spin-off of our Visteon automotive supply division. Although the UAW Visteon workers remain Ford employees and Ford procures their health care, their costs are paid by Visteon and are not reported in Ford's financial results. Therefore, for our purposes today, Ford UAW employees at Visteon Corporation will not be included in our discussion.

At Ford, the retirees and their dependents account for approximately 246,000 people. Although the retiree population represents less than half of the total population (44%), their health care cost accounted for 66% of the total cost in 2001.

One of the key factors driving Ford health care costs, particularly among our retirees, is prescription drugs. Several factors have contributed to this steady growth in our pharmacy costs:

- First, the utilization of prescription drugs has increased. Our retirees are taking more prescription drugs, and often for chronic conditions, which require the medication for life.

- Second, the cost of prescription drugs has increased. Drugs that are new to the market are typically more expensive, and quickly replace older, less expensive drugs. Some new drugs have proved to have substantial benefits, while others have offered little improvement over the existing prescription drugs in the same category currently in the market place, and have only served to increase costs.

Pharmacy costs have been rising at an alarming rate with a 14% increase in 2000, a 15% increase in 2001 and a projected 15% increase in 2002. The 2002 forecast for pharmacy cash costs in Ford's traditional medical plans is $358 million, $310 million of that forecasted for our retirees, both salaried and hourly. This figure does not include the drug cost included in premiums paid for managed care plans (71% of active and 25% of retirees subscribe to such plans). Therefore, including costs of drugs paid by managed care plans, one can project that Ford will spend approximately $550 million on prescription drugs this year. The relatively small increase (15%) compared to the national average reported in the news media (18 to 20% increase) is due to a change in benefits for salaried employees and retirees, which I will describe in a moment.

One additional thought on pharmacy costs - A recent CBO study projected that drug spending per person would increase 10.1% every year for the next ten years. That is a truly sobering prospect. If this occurs, Ford's pharmacy costs of $550 million would double by 2009.

Ford Retiree Coverage

Ford Motor Company presently provides comprehensive retiree health care benefits. Eligibility is based on age and years of service. Our present health care plans generally provide that an employee who retires under our pension plans with 30 years of service at any age, or at 55 years of age with 10 years of service, receives retiree health care benefits. There are some exceptions to these guidelines, such as retirement based on total and permanent disability. Spouses and other eligible dependents of retirees are also eligible to receive health care coverage.

Ford offers retirees a variety of health care options, including traditional (fee-for-service) plans, Preferred Provider Organizations (PPOs), and Health Maintenance Organizations (HMOs). Ford Motor Company self-insures our traditional plans and those plans are administered by Blue Cross Blue Shield and UNICARE.

Ford health care coverage is the primary coverage for our younger retirees who are not eligible for Medicare. The health care benefits are comprehensive, and include a prescription drug benefit, with no annual cap. For the most part, the health care transition from active employment to retirement is seamless, with no difference in health care coverage. When our retirees reach Medicare eligibility, Ford's coverage becomes secondary. We reimburse the Part B premium for our retirees, and cover certain benefits not included in Medicare, such as prescription drugs, again with no annual cap. In certain areas of the country where we have approved Medicare+Choice plans, some of our retirees began to enroll in these plans in 1999, but the penetration into our population has been limited.

Ford Initiatives

Faced with many challenges in the delivery of health care benefits to our employees, retirees, and their dependents, Ford has undertaken a variety of initiatives to both improve quality and control costs. I would like to emphasize that we are equally concerned about quality improvement and managing costs.

We use several methods to evaluate the quality of care provided by individual providers, hospitals, and health plans, including requiring all Ford offered HMOs to be certified by the National Committee for Quality Assurance (NCQA), and all PPOs to be accredited by the NCQA or the Utilization Review Accreditation Commission (URAC).

We also are significantly increasing our efforts in measuring and reporting the quality of services by comparing patient satisfaction among individual hospitals and health plans, and by comparing hospital performance in terms of quality and cost for specific diseases. For example:

- Hospital Profiles - in partnership with the UAW, GM, Daimler- Chrysler, and other businesses, we evaluate the quality of hospitals in six major metropolitan areas in the U.S.

- Patient Safety - we are a key member of the Leapfrog Group, which is an organization of leading Fortune 500 companies created to reduce preventable medical errors by requiring hospitals to report information on their specified safety metrics.

In addition, we continuously communicate our expectations to our major health care suppliers, through conferences and individual meetings. We have met with the senior leadership of virtually all of Ford's health care suppliers and major providers (hospitals and physicians) to convey the urgency of improving efficiency and safety.

We are equally dedicated to providing health care education to employees and retirees. We provide an online benefit comparison guide with educational information, which includes quality ratings of health plans, prescription drug information and links to important health care information websites. The quality ratings result from a health plan report card that was developed in partnership with DaimlerChrysler, General Motors, the State of Michigan and other employers. Ford also has provided an online tool that allows employees to evaluate their own health risks, and record and track their individual and family health improvement efforts.

In addition to our e-health efforts, we have developed educational campaigns that focus on subjects of importance to the Ford population. We have used electronic, print media and face-to face seminars to educate employees, retirees and their families on the use of generic drugs, breast cancer detection and treatment, encouraging organ donation, Hepatitis C awareness and other subjects.

Now I'd like to discuss specific initiatives we have undertaken to manage the cost increases:

Cost Sharing

We recently announced the following changes to the salaried retiree health care benefits:

- Salaried employees and present retirees hired before June 1, 2001 are required to make monthly contributions for their health care coverage throughout retirement. Early retirees not yet enrolled in Medicare make contributions approximately equal to the contributions paid by active employees - up to $150 per month depending on the size of family covered. The premiums will be approximately 20% less for those enrolled in Medicare.

- For salaried employees hired after June 1, 2001, the Company intends to make monthly contributions for the cost of health care coverage that will cover about 75% of the cost for an eligible retired employee and 50% of the cost for their eligible spouse and dependent child(ren) under the Ford Medical Plan (FMP). We also are in the process of establishing an employee pay-all VEBA Trust so that eligible employees may contribute, and invest, after-tax dollars to be used for retiree medical premiums and other qualified medical expenditures as defined under the IRS code.

Prescription Drug

Within my Healthcare Management Department, we have a pharmacy team headed by a medical doctor charged with managing our pharmacy programs in terms of quality assurance and cost management. Some of the programs implemented by the team include the following:

- Effective June 1, 2001, we changed the tiered co-pay for prescription drugs, in an effort to more strongly encourage the use of generic drugs for salaried employees and retirees.

- We also encourage the use of mail-order prescription drugs by employees and retirees which allows them to receive up to 90-day supply and waiving one of three co-pays associated with 90-day supply.

- We have implemented a dosage optimization program where we communicate to health care providers of the opportunity to simplify dosage regimen (one pill instead of two per day, for example).

- To reinforce these and other quality assurance programs, we are undertaking a pilot program called Academic Detailing Report Physician Prescription pilot, in conjunction with Blue Cross-Blue Shield of Michigan, where physicians at participating hospitals are provided financial incentives for promoting dose optimization, use of generic drugs, and appropriate use of antibiotics.

Closing

I hope this helps you better understand the challenges that employers face in providing health care coverage to retirees. The domestic automotive industry is facing an intensively competitive international market, exacerbated by a weak yen. In partnership with the UAW, it is encumbent on us together, to come up with a viable business model that ensures competitive success while simultaneously continuing to provide a cost-effective, quality health care to all of our employees and retirees. I'd like to once again thank you for the invitation to share our experiences with you and commend you for examining this very critical issue.

At this point time, we do not have any specific recommendations as to how to address the issue of accounting for retiree health care obligations; however, we believe it is in all stakeholders' interest -- our employees and retirees, the investor community, dealers, and the consumer -- to ensure that there is full and fair disclosure of any liabilities facing the Company, including our health care obligations to retirees.

Finally, while I understand some of them may fall under jurisdictions of other committees, I'd like to leave you with a few suggestions on how Congress could assist employers in managing the financial burden of offering retiree health care benefits:

- Medicare Reform, including prescription drug coverage:

-Medicare's current eligibility age should be maintained since raising it fails to address underlying cost drivers.

-Employers who voluntarily establish or maintain retiree health coverage should not be discouraged from doing so (through increased pay-roll taxes, for example).

-Broad-based financing for Medicare reforms should be adopted, instead of "quick-fix" solutions.

-Prescription drug coverage must go hand-in-hand with the modernization of Medicare. Furthermore, it should be universal; meaningful and affordable to both beneficiaries and taxpayers; must be oriented to achieve positive medical outcomes and value; and should provide incentives for employers who are already offering the coverage to continue to do so (by allowing them to wrap-around the benefit, for example).

- Promote the use of generic drugs: Congress should carefully examine the existing patent process for prescription drugs and close any "loopholes" which may prevent generics from reaching the market. Our analysis indicates that Ford Motor Company saves $1.7 million for every one percentage point increase in the use of generic drugs. Any legislative action in this area, however, should avoid discouraging research and development for future innovation.

- Reject benefit mandates: Legislation that discourages employers from offering health benefits to their employees and retirees should be rejected. Legislation that imposes mandates on employer sponsored health care or that creates unlimited liability for routine coverage and administrative decisions will ultimately reduce the availability of health coverage and is likely to adversely affect retiree health first.

- Promote health care education: Finally, we believe that the government must re-double its efforts to promote evidence-based health care delivery. We are in the middle of an explosion of knowledge and technology in the field of health care. Ultimately, we can only succeed in our roles as health care sponsors and purchasers by being even smarter about what works best and by putting our research and coverage dollars behind proven practices.



LOAD-DATE: May 22, 2002