Japan's health care gives Toyota edge; country picks up tab for automaker's retirees

Japan's health care gives Toyota edge; country picks up tab for automaker's retirees

JAMES B. TREECE | Automotive News
Posted Date: 4/1/05

Imagine how much stronger General Motors would be if it launched three additional new-model programs every year, each costing about $1 billion.

It could, if it didn't have to pay for its retirees' health care.

That is one of the most fundamental differences between GM and Toyota Motor Corp. GM pays for the health care of 339,000 retirees - and the number grows every year. In contrast, Toyota pays for fewer than 3,000 retirees' health care in Japan, a number that remains fairly stable.

That difference gives Toyota and other Japanese carmakers a massive advantage over their American rivals.

"The cost of health care in the U.S. is making American businesses extremely uncompetitive vs. our global counterparts," says GM CEO Rick Wagoner.

Toyota and other Japanese carmakers benefit from a national health care plan that reduces its obligations to retirees to almost nothing.

Wagoner and other U.S. auto industry executives are increasingly vocal in seeking government action to address this competitive disadvantage. But Wagoner stops short of seeking a national solution as comprehensive as Japan's.

Day and night

A close look at the numbers at GM and Toyota shows diametrically different conditions.

About 1,200 of Toyota's Japanese employees will retire this year. Within two years, each will switch from the company-backed health insurance scheme to the national health plan. At that point, Toyota's spending on its retiree's health care drops to zero.

Toyota pays health care costs for its employees in Japan in the form of premiums for medical insurance. But it does not continue to pay those costs for retirees. Former employees of Nissan Motor Co. and Honda Motor Co. also turn to the Japanese government for health care coverage.

The American Big 3 pay - and pay and pay - for their retirees' health care.

GM covers the health care costs of approximately 125,000 active employees and 339,000 retirees. Health care costs for those retirees amounted to approximately $3.6 billion last year.

That's more than two-thirds of the $5.2 billion GM spent on health care and medical-insurance premiums last year. GM also contributed about $9 billion in 2004 to a trust fund set up to pay for health care costs.

In 2004, Ford Motor Co. spent $2.0 billion on health care for U.S. retirees.

The Chrysler group last year spent $1.3 billion on retirees' health care.

$1,525 per vehicle

GM says that its payments for retirees' health care - more than what the company spent for steel - add about $1,525 to the cost of every vehicle the company sells.

In contrast, Toyota must contribute to health insurance payments for only about 64,500 active workers in Japan.

Toyota's health care costs are so negligible that they aren't even a line item in the company's financial statements. Toyota benefits both from the Japanese national health plan's coverage of retirees' medical needs and from the way that plan is structured.

Health care is paid for through a combination of mandatory payroll deductions from employees and employers. The cost is spread equally among various employers. That means older companies with large numbers of retirees are not at a disadvantage compared to companies with fewer retirees.

GM argues that it pays for more than its own employees and retirees. Indirectly, it pays for the approximately 45 million Americans who do not have health insurance. That's because medical providers charge higher fees to those who are covered by insurance to compensate for those who are not covered.

Toyota does not pay extra taxes to fund the government health care plan. Corporate income tax rates in Japan and the United States are virtually identical at just below 42 percent.

Perhaps sensitive to comparisons, Toyota declined to say whether its total health care spending in Japan amounted to more or less than $10 million a year.

The difference represents a huge competitive disadvantage for GM. Money that must be spent on retirees' health care cannot be spent on developing new models, upgrading factory equipment or hiring the most sought-after designers.

"The impact of the health care burden is particularly frustrating, because over the past decade GM has made huge improvements in our operational competitiveness," Wagoner says. "We have some of the most productive plants in North America, including four of the top five, and our quality has improved dramatically."

Wagoner's plan

Wagoner stops short of calling for a national health plan.

He wants industry, government and labor to cooperate to find ways to hold down spiraling costs.

"We need to encourage access to affordable health care coverage for all our citizens," he says. GM then wouldn't have to pay indirectly for the uninsured.

He also wants to address so-called catastrophic health care costs, which account for 30 percent of all medical costs. He calls for a "comprehensive insurance model to better share these catastrophic costs among all consumers."

Most of all, he wants Americans to be smarter consumers of health care, choosing less expensive yet comparable medicines whenever possible. But that's unlikely, as long as Americans believe that someone else, whether an insurance company or the government, is picking up the tab.

There is no evidence that Japanese consumers are any savvier in their health care spending than Americans. But in Japan, it's the government picking up the tab for retirees. In America, GM retirees pass the bill to GM.
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