President &
CEO, Lance
Wallach
CEO, Lance
Wallach
- Member of the
AICPA faculty of
teaching
professionals. - AICPA author,
instructor &
national speaker. - National Society of
Accountants
Speaker of the
Year. - Writes financial
articles for over 50
national
publications.
 |
 |
 |
BIOTECHNOLOGY HEALTHCARE
• NOVEMBER/DECEMBER 2008
VEBAs
EMPLOYERS TO UNIONS:
Faced with staggering healthcare costs, some large companies have transferred those
liabilities to a voluntary employee beneficiary association. Eager to control employee
and retiree benefits, unions gladly have taken on the challenge of running a VEBA.
But success in this field is hard won, and to earn it, some unions may be forced to take
a harder line with health care professionals and manufacturers than employers did.
BY WILLIAM ATKINSON
As employers have become more influential in managing healthcare financing and
access, so too have unions begun to arise as entities with the power to manage
access to care. Many unions offer supplemental benefits to their members. Some have
taken an even bolder step —negotiating with employers for complete access to retiree
health benefit management by establishing voluntary employee beneficiary
associations, or VEBAs.
Healthcare providers have always been advocates for providing broad access to
treatments for people enrolled in employer-sponsored health plans. But the trend
toward greater union control creates several concerns—especially with respect to costly
modalities, such as biologic therapies and diagnostics.
One concern lies in understanding the different ways that employers and unions look at
healthcare benefits. Most employers view benefits as a recruitment tool. Some forward-
looking employers have begun to think about benefit designs that dovetail with
productivity and profit goals. Unions, however, tend to have different goals in mind. They
want access to products and services that will keep workers on the assembly line or
behind the wheel of a truck.
For unions that want control of benefits through a VEBA, that presents a formidable
challenge: the learning curve. While employers have had years of experience learning
how to manage benefits, union leadership is relatively new to the game.
Fundamentally, VEBAs are not unlike health reimbursement arrangements (HRAs) or
other consumer-directed plan offerings, where helping employees understand how to
spend their healthcare dollars wisely becomes important. Unions in heavy
manufacturing and transportation, for example, experience high rates of disability, and
depending on how a traditional health benefit plan is structured, workers for whom high-
cost therapies may help to reduce or eliminate absenteeism or presenteeism could
blow through their benefits very quickly.
This puts a heavy educational burden on unions, which have fought hard for access to
biologics and other top-shelf healthcare interventions. Without some sort of educational
effort combining prevention, health maintenance, and smart use of healthcare
resources, though, those victories could be rendered hollow because of less-than-
optimal clinical outcomes and a poor return on the investment (ROI) of healthcare
dollars. Worse, in efficient management of those dollars could put the union at risk of
running out of money to fund members’ healthcare needs. Ultimately, this may force
unions to be even more aggressive than employers in managing healthcare costs.
Now, pit all of this against the backdrop of fast-rising healthcare costs and a darkening
economy, and it becomes clear that VEBAs represent a mine field for employees,
providers, and even biopharmaceutical manufacturers to negotiate.
WHAT IS A VEBA?
It is virtually certain that, in time, employees and healthcare providers will become more
familiar with VEBAs. “Over the next 5 to 10 years, as employers continue to face
unrelenting pressures to control costs, these types of strategic responses—whether it
be a VEBA or some other vehicle — will continue,” says Alan Lyles, ScD, MPH, PhD, the
Henry A. Rosenberg Pro- fessor of Public, Private, and Non-Profit Partnerships at the
University of Baltimore.
Internal Revenue Code section 501(c)(9) enables an employer or union to make
contributions into a VEBA — a tax-exempt trust account on behalf of covered workers or
retirees. Dollars in a VEBA grow tax-free and the earnings are not taxed when used to
pay for eligible out-of-pocket healthcare expenditures and insurance premiums. A
VEBA is an individual trust that replaces the employer as a guarantor of healthcare
coverage. As such, it is not a health benefit plan, but rather a funding vehicle to pay for
one’s healthcare costs.
VEBAs were first codified by the IRS in 1928. In 1976, 6,000 VEBAs were in existence.
That number increased steadily until 1993, when it reached 15,000. After 1993, the
number decreased because of changes in the tax code, bottoming out at 12,000 two
years ago. Now, their number is on the rise again, thanks to more favorable tax laws,
union interest in gaining control of healthcare benefits, and corporate understanding
that relieving themselves of large liabilities makes a stock more attractive to investors.
Currently, VEBAs are in existence in a number of industries, primarily steel,
telecommunications, utilities, and automobile manufacturers and their suppliers.
These VEBAs are administered by companies in those industries, or in some cases, by
the unions that represent workers.
VEBAs have attracted a significant amount of attention of late, thanks to the labor
negotiations between the United Auto Workers (UAW) and the big three American
automakers. In late 2007, General Motors, Ford, and Chrysler transferred financial
responsibility for retiree health benefits to a VEBA to be set up and operated by the UAW.
If market conditions or mismanagement lead a VEBA to become underfunded,
unions may attempt to extract larger price concessions than employers did.
Each of the automakers agreed to make an enormous up-front contribution to the VEBA
trust — between 56 and 62 percent of their total future health benefit obligations,
depending on the company — in exchange for clearing these liabilities from their
books. GM (which had faced a retiree health benefit obligation of about $50 billion)
settled with the UAW for a $29.9 billion contribution to the VEBA. Ford (whose obligation
had been about $23 billion) agreed to a $13.2 billion contribution, and Chrysler kicked
in $8.8 billion on an $11 billion obligation. The union is counting on funds in the VEBA
to grow through investments.
The resulting UAW-run VEBA was funded to the tune of more than $50 billion, ranking it
among the largest healthcare purchasers in the United States. It also becomes one of
the top 20 investment vehicles in the country.
The UAW is setting up an 11-member board of trustees to oversee the VEBA trust, to
set policies, and to select managers to invest and oversee the money. It is an
enormous responsibility, because the union will have to make do with its funds; when
the VEBA begins functioning on Jan. 1, 2010, the automakers are officially out of the
business
of retiree health benefits.
PLUSES AND MINUSES
On the surface, a union-run VEBA seems like a good deal for workers, in that once
money is transferred from an employer to a VEBA, employees no longer have to worry
about losing benefits in the event the company goes out of business or sustains
adverse business conditions.
A VEBA set up at Navistar in 1992, when the truck and engine manufacturer was in
bankruptcy, is still going strong. The UAW/Allis-Chalmers VEBA, set up 19 years ago,
has successfully served 6,000 retirees and dependents, even though it was funded
with just 22 cents on every $1 of retiree health benefit obligations — far less than the
UAW/Big Three plan.
The fact that many VEBAs start out underfunded—the result of negotiations between
employers and unions that allow the company to transfer less than 100 percent of the
original obligation—is a concern. Given the current state of investment markets in the
United States and around the world, initial loss of capital would be cause for VEBA
investment managers to hold their breath.
Another concern is that when VEBAs were originally conceived, retirees did not live as
long as they do now — often with chronic disease—nor could it have been seen that
healthcare costs would increase so significantly. These realities can put VEBAs at a
disadvantage in trying to remain solvent.
In fact, VEBAs at Caterpillar and Detroit Diesel actually ran out of cash. Six years after
Caterpillar handed over control of a $32million trust to the union as part of a 1998
agreement, the fund ran out of money. Since then, retirees have had to shoulder
thousands of dollars of out-of-pocket costs.
There is another challenge for unions: While workers are used to employers trying to
negotiate reductions in benefits and expect their unions to fight back, unions may now
be placed in the unenviable position of having to do the same thing they once fought
against—cutting benefits, potentially incurring the wrath of their members. If a union
managed VEBA begins to run short of funds, the board cannot go back to the employer
for additional funding. The union either would have to require higher cost sharing from
its members, reduce benefits, or both.
Unions, of course, anticipate this potential problem. And rather than risk angering their
members, they may try to rein in costs by extracting larger price concessions from
physicians, hospitals, and pharmaceutical companies — in other words, they may
attempt to negotiate even more aggressively than employers.
Since the UAW/Big Three agreement, physician and other medical organizations have
sought to discuss strategies with the UAW. An article in the Dec. 3, 2007, issue of AM
News, published by the American Medical Association, noted that “If previous transfers
from companies to unions are any indication, physicians should not expect the new
managers of retiree benefits to be more generous than the old ones. In fact, a union’s
takeover of benefits has sometimes resulted in even more aggressive cost-cutting
efforts than when the benefits remained under corporate control.”
Mark Gaffney, president of the Michigan AFL-CIO, who spoke at a conference
sponsored by the Michigan State Medical Society in April, was optimistic about the UAW
VEBA, estimating that the VEBA would make a 9 percent annual ROI while healthcare
costs would probably only grow by 5 percent a year. But Gaffney was countered at the
conference by Thomas Simmer, MD, chief medical officer of Blue Cross Blue Shield of
Michigan, who claimed the numbers would be “the other way around.”
“Biotech companies will have to sell their value propositions, just as they would
when courting an MCO or a group of self-funded employers,” Goff believes.
GAINING MOMENTUM
The trend of companies transferring their healthcare liabilities is gaining momentum, in
both the private and public sectors. “I am seeing a huge growth in the
number of VEBAs,” says Lance Wallach, president of VEBA
Plan LLC, a Plainview, N.Y.-based VEBA consulting firm. “In the
public sector, municipalities, states, and other governmental entities are required to list
their liabilities, including postretirement benefits that were promised to their workers.
They Now are finding that VEBAs are the least painful way to fund these liabilities, as
well as probably the safest way.”
As Wallach sees it, VEBAs are “definitely the future of
healthcare.” One reason for their popularity with employees and retirees, he
believes, is that the funds can’t be raided for other expenses. “It is very difficult for VEBA
funds to be diverted, unlike the money that funds the healthcare of workers and retirees
will be in a position similar to insurers, in terms of assessing value for payment and
assessing products.
“If you look within the union organizations, there is a spectrum of sophistication for
performing the basic benefit techniques for risk management, insurance, and
determining appropriateness,” explains Lyles, at the University of Baltimore. “Older
plans, such as that of the United Mine Workers, have extensive experience with this and
have applied research capabilities to provide information on appropriate use. However,
the large settlements in the last few months in Detroit have created responsibilities and
[roles] where the union will now need to backfill with a wide range of specific technical
capabilities to discharge their responsibilities effectively.”
With respect to biologics, Lyles says, there are additional challenges. “Because these
products are, in some ways, less intuitive than traditional pharmaceutical products,
there will likely be even less familiarity among the union managers about how to set
policies to make benefit coverage decisions.”
As Lyles sees it, unions need to educate their members about how to use their benefits
and get them actively engaged in prevention and health maintenance. “Some programs
like this have worked well,” he notes. But on a broad scale, he adds, the evidence
suggests that people frequently don’t use the information they get. “The information
itself is not strongly associated with the decisions that insured a governmental entity or
a corporation that can divert funds once earmarked for retiree healthcare to something
else.” Unions responsible for holding persons make or the actions that they take. There
can be short-term responsiveness to price, without examining the benefits or tradeoffs.”
That said, Lyles thinks some wellness programs, especially those that offer incentives,
are promising. “Because unions tend to have a close relationship with their members,
this offers them the opportunity to manage not just the financial side of the traditional
insurance activity, but also to look at the underlying medical needs that drive the cost
trend, and then take advantage of wellness and prevention activities, including health
risk appraisals.”
Wallach also sees challenges, especially those related to cost.
“Cost issues are definitely a problem. It’s not just the unions
that are becoming aggressive in trying to reduce benefit costs
associated with VEBAs. Everyone involved in VEBAs is trying
to reduce costs.” But union-run VEBAs, he thinks, represent a particular
challenge because “many of the union-managed VEBAs start out underfunded. I think
the UAW VEBA is grossly underfunded.”
You’ll get a nod of agreement from Bradford Kirkman-Liff, PhD, a professor in the
School of Health Management and Policy, at Arizona State University’s W.P. Carey
School of Business. “I am concerned with the long-term financial viability of some of the
union run VEBAs. With the dramatic events in the global financial sector, VEBAs may
now have even more serious long-term financial problems if their financial assets have
declined in recent weeks. “
The long-range costs of health- care,” he continues, “are very difficult to predict.”
Because union-run VEBAs often start out underfunded, Kirkman-Liff believes it will be
difficult for biotechnology companies to negotiate with them: “I think VEBAs will be very
tough in their negotiations, as a way to be aggressive in trying to implement cost-
management strategies. ”Moreover, he says, the bond of brotherhood across unions
could present other concerns for healthcare providers and biopharmamanufacturers.
“The unions probably will try to find ways to build bridges and alliances among their
VEBAs. As such, several VEBAs may come together to engage in bulk purchasing of
pharmaceuticals, medical equipment, and so on. In addition, some VEBAs may also
partner with group purchasing organizations.”
Kirkman-Liff agrees with Lyles that wellness programs offer a less drastic option for
cost containment. He believes that wellness programs, such as those that seek to
change
unhealthy behaviors, result in better health in general and may help to maintain the
funding viability of union-run VEBAs.
INDUSTRY STRATEGIES
So how can biotechnology companies deal with the new lay of the land?
“I think biotechnology companies should begin to reach out to union leadership,”
replies Lyles. “Help them to identify and understand biotechnology products and what
they represent beyond their price tags. In other words, provide education and training to
the people in the unions who manage VEBAs.”
Kirkman-Liff advises biotech companies to view VEBAs the same way they view large
managed care plans or a Medicare Advantage plan. “It should really be the same type of
negotiations,” he suggests.
Manufacturers market their products to MCOs and large employers, and will have to
learn how to do the same with VEBAs. There are similarities and differences in
marketing to a VEBA, compared with other entities, says Christopher V. Goff, Esq., CEO
and general counsel for the Employers Health Purchasing Corp. of Ohio and the
Employers Health Coalition of Ohio.
“Biotech companies will have to sell their value propositions, just as they would when
courting an MCO or a group of self-funded employers. They will have to develop a
relationship with the VEBA board just as they would with any other commercial
customer,” he says. But the difference, he adds, is that union managed VEBAs have a
finite pool of money. “Once those dollars are gone, the benefits are also potentially
gone, unless the VEBA finds another way to generate revenue.
“As such, the VEBA has to engage in some wise spending.”
But VEBAs have one advantage that traditional health benefit plans don’t: flexibility. Lack
of a defined benefit structure may give VEBAs an opportunity to pay more for care that
evidence suggests improves health outcomes or is cost-effective, or less for care that
may provide negligible benefit. And that may bode well for access to expensive care,
including biologics.
The reason, says Wallach, is that for a lot of traditional plans,
expensive therapies raise medical costs. “However, in a lot of cases,
there is more flexibility in how VEBAs are structured to pay costs, so they may be more
likely to pay for more expensive treatments, such as biotechnology. What will and won’t
be paid for doesn’t tend to be set in stone, as may be the case with a Blue Cross plan
or other traditional healthcare plan,” he says. As such, a biotech company with a skillful
negotiator may be able to get more treatments covered through a VEBA.
WHAT NEXT?
What the future holds for biotechs, in terms of dealing with VEBAs, is yet to be
determined. Contacted for this article, the UAW declined to comment on opportunities
or challenges for the biotech industry, explaining that decisions have not been made at
that level because the structure of the new VEBA was not yet in place.
Kirkman-Liff offers an interesting perspective, suggesting that a VEBA’s
responsiveness to high cost, high-tech therapies is really in the hands of the
biotechnology industry itself. “Certainly, it is very difficult to predict where technology will
lead,” he states. However, he believes that if the industry can develop affordable
personalized therapies based on an individual’s molecular makeup, then enormous
savings in healthcare costs could result. And with that, VEBAs may be much more
amenable to making biologics an integral part of the
healthcare mix they provide.
Few such products have reached the marketplace, however, and for now, the challenge
for unions and others that would manage VEBAs is not unlike what physicians faced
under capitation in the 1990s:Make do with what you have and spend the money wisely.
The implications for access to high-tech therapies can be important.
William Atkinson has been a fulltime freelance business writer for more than 30 years.
He lives in Carterville, Ill.
• NOVEMBER/DECEMBER 2008
VEBAs
EMPLOYERS TO UNIONS:
Faced with staggering healthcare costs, some large companies have transferred those
liabilities to a voluntary employee beneficiary association. Eager to control employee
and retiree benefits, unions gladly have taken on the challenge of running a VEBA.
But success in this field is hard won, and to earn it, some unions may be forced to take
a harder line with health care professionals and manufacturers than employers did.
BY WILLIAM ATKINSON
As employers have become more influential in managing healthcare financing and
access, so too have unions begun to arise as entities with the power to manage
access to care. Many unions offer supplemental benefits to their members. Some have
taken an even bolder step —negotiating with employers for complete access to retiree
health benefit management by establishing voluntary employee beneficiary
associations, or VEBAs.
Healthcare providers have always been advocates for providing broad access to
treatments for people enrolled in employer-sponsored health plans. But the trend
toward greater union control creates several concerns—especially with respect to costly
modalities, such as biologic therapies and diagnostics.
One concern lies in understanding the different ways that employers and unions look at
healthcare benefits. Most employers view benefits as a recruitment tool. Some forward-
looking employers have begun to think about benefit designs that dovetail with
productivity and profit goals. Unions, however, tend to have different goals in mind. They
want access to products and services that will keep workers on the assembly line or
behind the wheel of a truck.
For unions that want control of benefits through a VEBA, that presents a formidable
challenge: the learning curve. While employers have had years of experience learning
how to manage benefits, union leadership is relatively new to the game.
Fundamentally, VEBAs are not unlike health reimbursement arrangements (HRAs) or
other consumer-directed plan offerings, where helping employees understand how to
spend their healthcare dollars wisely becomes important. Unions in heavy
manufacturing and transportation, for example, experience high rates of disability, and
depending on how a traditional health benefit plan is structured, workers for whom high-
cost therapies may help to reduce or eliminate absenteeism or presenteeism could
blow through their benefits very quickly.
This puts a heavy educational burden on unions, which have fought hard for access to
biologics and other top-shelf healthcare interventions. Without some sort of educational
effort combining prevention, health maintenance, and smart use of healthcare
resources, though, those victories could be rendered hollow because of less-than-
optimal clinical outcomes and a poor return on the investment (ROI) of healthcare
dollars. Worse, in efficient management of those dollars could put the union at risk of
running out of money to fund members’ healthcare needs. Ultimately, this may force
unions to be even more aggressive than employers in managing healthcare costs.
Now, pit all of this against the backdrop of fast-rising healthcare costs and a darkening
economy, and it becomes clear that VEBAs represent a mine field for employees,
providers, and even biopharmaceutical manufacturers to negotiate.
WHAT IS A VEBA?
It is virtually certain that, in time, employees and healthcare providers will become more
familiar with VEBAs. “Over the next 5 to 10 years, as employers continue to face
unrelenting pressures to control costs, these types of strategic responses—whether it
be a VEBA or some other vehicle — will continue,” says Alan Lyles, ScD, MPH, PhD, the
Henry A. Rosenberg Pro- fessor of Public, Private, and Non-Profit Partnerships at the
University of Baltimore.
Internal Revenue Code section 501(c)(9) enables an employer or union to make
contributions into a VEBA — a tax-exempt trust account on behalf of covered workers or
retirees. Dollars in a VEBA grow tax-free and the earnings are not taxed when used to
pay for eligible out-of-pocket healthcare expenditures and insurance premiums. A
VEBA is an individual trust that replaces the employer as a guarantor of healthcare
coverage. As such, it is not a health benefit plan, but rather a funding vehicle to pay for
one’s healthcare costs.
VEBAs were first codified by the IRS in 1928. In 1976, 6,000 VEBAs were in existence.
That number increased steadily until 1993, when it reached 15,000. After 1993, the
number decreased because of changes in the tax code, bottoming out at 12,000 two
years ago. Now, their number is on the rise again, thanks to more favorable tax laws,
union interest in gaining control of healthcare benefits, and corporate understanding
that relieving themselves of large liabilities makes a stock more attractive to investors.
Currently, VEBAs are in existence in a number of industries, primarily steel,
telecommunications, utilities, and automobile manufacturers and their suppliers.
These VEBAs are administered by companies in those industries, or in some cases, by
the unions that represent workers.
VEBAs have attracted a significant amount of attention of late, thanks to the labor
negotiations between the United Auto Workers (UAW) and the big three American
automakers. In late 2007, General Motors, Ford, and Chrysler transferred financial
responsibility for retiree health benefits to a VEBA to be set up and operated by the UAW.
If market conditions or mismanagement lead a VEBA to become underfunded,
unions may attempt to extract larger price concessions than employers did.
Each of the automakers agreed to make an enormous up-front contribution to the VEBA
trust — between 56 and 62 percent of their total future health benefit obligations,
depending on the company — in exchange for clearing these liabilities from their
books. GM (which had faced a retiree health benefit obligation of about $50 billion)
settled with the UAW for a $29.9 billion contribution to the VEBA. Ford (whose obligation
had been about $23 billion) agreed to a $13.2 billion contribution, and Chrysler kicked
in $8.8 billion on an $11 billion obligation. The union is counting on funds in the VEBA
to grow through investments.
The resulting UAW-run VEBA was funded to the tune of more than $50 billion, ranking it
among the largest healthcare purchasers in the United States. It also becomes one of
the top 20 investment vehicles in the country.
The UAW is setting up an 11-member board of trustees to oversee the VEBA trust, to
set policies, and to select managers to invest and oversee the money. It is an
enormous responsibility, because the union will have to make do with its funds; when
the VEBA begins functioning on Jan. 1, 2010, the automakers are officially out of the
business
of retiree health benefits.
PLUSES AND MINUSES
On the surface, a union-run VEBA seems like a good deal for workers, in that once
money is transferred from an employer to a VEBA, employees no longer have to worry
about losing benefits in the event the company goes out of business or sustains
adverse business conditions.
A VEBA set up at Navistar in 1992, when the truck and engine manufacturer was in
bankruptcy, is still going strong. The UAW/Allis-Chalmers VEBA, set up 19 years ago,
has successfully served 6,000 retirees and dependents, even though it was funded
with just 22 cents on every $1 of retiree health benefit obligations — far less than the
UAW/Big Three plan.
The fact that many VEBAs start out underfunded—the result of negotiations between
employers and unions that allow the company to transfer less than 100 percent of the
original obligation—is a concern. Given the current state of investment markets in the
United States and around the world, initial loss of capital would be cause for VEBA
investment managers to hold their breath.
Another concern is that when VEBAs were originally conceived, retirees did not live as
long as they do now — often with chronic disease—nor could it have been seen that
healthcare costs would increase so significantly. These realities can put VEBAs at a
disadvantage in trying to remain solvent.
In fact, VEBAs at Caterpillar and Detroit Diesel actually ran out of cash. Six years after
Caterpillar handed over control of a $32million trust to the union as part of a 1998
agreement, the fund ran out of money. Since then, retirees have had to shoulder
thousands of dollars of out-of-pocket costs.
There is another challenge for unions: While workers are used to employers trying to
negotiate reductions in benefits and expect their unions to fight back, unions may now
be placed in the unenviable position of having to do the same thing they once fought
against—cutting benefits, potentially incurring the wrath of their members. If a union
managed VEBA begins to run short of funds, the board cannot go back to the employer
for additional funding. The union either would have to require higher cost sharing from
its members, reduce benefits, or both.
Unions, of course, anticipate this potential problem. And rather than risk angering their
members, they may try to rein in costs by extracting larger price concessions from
physicians, hospitals, and pharmaceutical companies — in other words, they may
attempt to negotiate even more aggressively than employers.
Since the UAW/Big Three agreement, physician and other medical organizations have
sought to discuss strategies with the UAW. An article in the Dec. 3, 2007, issue of AM
News, published by the American Medical Association, noted that “If previous transfers
from companies to unions are any indication, physicians should not expect the new
managers of retiree benefits to be more generous than the old ones. In fact, a union’s
takeover of benefits has sometimes resulted in even more aggressive cost-cutting
efforts than when the benefits remained under corporate control.”
Mark Gaffney, president of the Michigan AFL-CIO, who spoke at a conference
sponsored by the Michigan State Medical Society in April, was optimistic about the UAW
VEBA, estimating that the VEBA would make a 9 percent annual ROI while healthcare
costs would probably only grow by 5 percent a year. But Gaffney was countered at the
conference by Thomas Simmer, MD, chief medical officer of Blue Cross Blue Shield of
Michigan, who claimed the numbers would be “the other way around.”
“Biotech companies will have to sell their value propositions, just as they would
when courting an MCO or a group of self-funded employers,” Goff believes.
GAINING MOMENTUM
The trend of companies transferring their healthcare liabilities is gaining momentum, in
both the private and public sectors. “I am seeing a huge growth in the
number of VEBAs,” says Lance Wallach, president of VEBA
Plan LLC, a Plainview, N.Y.-based VEBA consulting firm. “In the
public sector, municipalities, states, and other governmental entities are required to list
their liabilities, including postretirement benefits that were promised to their workers.
They Now are finding that VEBAs are the least painful way to fund these liabilities, as
well as probably the safest way.”
As Wallach sees it, VEBAs are “definitely the future of
healthcare.” One reason for their popularity with employees and retirees, he
believes, is that the funds can’t be raided for other expenses. “It is very difficult for VEBA
funds to be diverted, unlike the money that funds the healthcare of workers and retirees
will be in a position similar to insurers, in terms of assessing value for payment and
assessing products.
“If you look within the union organizations, there is a spectrum of sophistication for
performing the basic benefit techniques for risk management, insurance, and
determining appropriateness,” explains Lyles, at the University of Baltimore. “Older
plans, such as that of the United Mine Workers, have extensive experience with this and
have applied research capabilities to provide information on appropriate use. However,
the large settlements in the last few months in Detroit have created responsibilities and
[roles] where the union will now need to backfill with a wide range of specific technical
capabilities to discharge their responsibilities effectively.”
With respect to biologics, Lyles says, there are additional challenges. “Because these
products are, in some ways, less intuitive than traditional pharmaceutical products,
there will likely be even less familiarity among the union managers about how to set
policies to make benefit coverage decisions.”
As Lyles sees it, unions need to educate their members about how to use their benefits
and get them actively engaged in prevention and health maintenance. “Some programs
like this have worked well,” he notes. But on a broad scale, he adds, the evidence
suggests that people frequently don’t use the information they get. “The information
itself is not strongly associated with the decisions that insured a governmental entity or
a corporation that can divert funds once earmarked for retiree healthcare to something
else.” Unions responsible for holding persons make or the actions that they take. There
can be short-term responsiveness to price, without examining the benefits or tradeoffs.”
That said, Lyles thinks some wellness programs, especially those that offer incentives,
are promising. “Because unions tend to have a close relationship with their members,
this offers them the opportunity to manage not just the financial side of the traditional
insurance activity, but also to look at the underlying medical needs that drive the cost
trend, and then take advantage of wellness and prevention activities, including health
risk appraisals.”
Wallach also sees challenges, especially those related to cost.
“Cost issues are definitely a problem. It’s not just the unions
that are becoming aggressive in trying to reduce benefit costs
associated with VEBAs. Everyone involved in VEBAs is trying
to reduce costs.” But union-run VEBAs, he thinks, represent a particular
challenge because “many of the union-managed VEBAs start out underfunded. I think
the UAW VEBA is grossly underfunded.”
You’ll get a nod of agreement from Bradford Kirkman-Liff, PhD, a professor in the
School of Health Management and Policy, at Arizona State University’s W.P. Carey
School of Business. “I am concerned with the long-term financial viability of some of the
union run VEBAs. With the dramatic events in the global financial sector, VEBAs may
now have even more serious long-term financial problems if their financial assets have
declined in recent weeks. “
The long-range costs of health- care,” he continues, “are very difficult to predict.”
Because union-run VEBAs often start out underfunded, Kirkman-Liff believes it will be
difficult for biotechnology companies to negotiate with them: “I think VEBAs will be very
tough in their negotiations, as a way to be aggressive in trying to implement cost-
management strategies. ”Moreover, he says, the bond of brotherhood across unions
could present other concerns for healthcare providers and biopharmamanufacturers.
“The unions probably will try to find ways to build bridges and alliances among their
VEBAs. As such, several VEBAs may come together to engage in bulk purchasing of
pharmaceuticals, medical equipment, and so on. In addition, some VEBAs may also
partner with group purchasing organizations.”
Kirkman-Liff agrees with Lyles that wellness programs offer a less drastic option for
cost containment. He believes that wellness programs, such as those that seek to
change
unhealthy behaviors, result in better health in general and may help to maintain the
funding viability of union-run VEBAs.
INDUSTRY STRATEGIES
So how can biotechnology companies deal with the new lay of the land?
“I think biotechnology companies should begin to reach out to union leadership,”
replies Lyles. “Help them to identify and understand biotechnology products and what
they represent beyond their price tags. In other words, provide education and training to
the people in the unions who manage VEBAs.”
Kirkman-Liff advises biotech companies to view VEBAs the same way they view large
managed care plans or a Medicare Advantage plan. “It should really be the same type of
negotiations,” he suggests.
Manufacturers market their products to MCOs and large employers, and will have to
learn how to do the same with VEBAs. There are similarities and differences in
marketing to a VEBA, compared with other entities, says Christopher V. Goff, Esq., CEO
and general counsel for the Employers Health Purchasing Corp. of Ohio and the
Employers Health Coalition of Ohio.
“Biotech companies will have to sell their value propositions, just as they would when
courting an MCO or a group of self-funded employers. They will have to develop a
relationship with the VEBA board just as they would with any other commercial
customer,” he says. But the difference, he adds, is that union managed VEBAs have a
finite pool of money. “Once those dollars are gone, the benefits are also potentially
gone, unless the VEBA finds another way to generate revenue.
“As such, the VEBA has to engage in some wise spending.”
But VEBAs have one advantage that traditional health benefit plans don’t: flexibility. Lack
of a defined benefit structure may give VEBAs an opportunity to pay more for care that
evidence suggests improves health outcomes or is cost-effective, or less for care that
may provide negligible benefit. And that may bode well for access to expensive care,
including biologics.
The reason, says Wallach, is that for a lot of traditional plans,
expensive therapies raise medical costs. “However, in a lot of cases,
there is more flexibility in how VEBAs are structured to pay costs, so they may be more
likely to pay for more expensive treatments, such as biotechnology. What will and won’t
be paid for doesn’t tend to be set in stone, as may be the case with a Blue Cross plan
or other traditional healthcare plan,” he says. As such, a biotech company with a skillful
negotiator may be able to get more treatments covered through a VEBA.
WHAT NEXT?
What the future holds for biotechs, in terms of dealing with VEBAs, is yet to be
determined. Contacted for this article, the UAW declined to comment on opportunities
or challenges for the biotech industry, explaining that decisions have not been made at
that level because the structure of the new VEBA was not yet in place.
Kirkman-Liff offers an interesting perspective, suggesting that a VEBA’s
responsiveness to high cost, high-tech therapies is really in the hands of the
biotechnology industry itself. “Certainly, it is very difficult to predict where technology will
lead,” he states. However, he believes that if the industry can develop affordable
personalized therapies based on an individual’s molecular makeup, then enormous
savings in healthcare costs could result. And with that, VEBAs may be much more
amenable to making biologics an integral part of the
healthcare mix they provide.
Few such products have reached the marketplace, however, and for now, the challenge
for unions and others that would manage VEBAs is not unlike what physicians faced
under capitation in the 1990s:Make do with what you have and spend the money wisely.
The implications for access to high-tech therapies can be important.
William Atkinson has been a fulltime freelance business writer for more than 30 years.
He lives in Carterville, Ill.
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