'End of an Era'

Oct. 17, 2005 — -- General Motors' announcement that it is reducing its health care benefits for current employees and retirees does not have wider implications for most Americans, although other automakers may follow suit, ABC financial contributor Mellody Hobson said.

"The truth is, GM slashing its health care benefits isn't the start of a new chapter, it's actually the end of an old era," Hobson said. "Most companies force their workers to pay a large percentage of their health care costs. At GM, some employees and retirees were opting for no co-payment plans, which are now almost unheard of."

GM says its hourly workers pay 7 percent of their own health care costs, while at most major companies, that number is in the double digits. GM says asking employees to contribute money to health care is a way to avoid bankruptcy by 2007.

"This is a company that has lost $2 billion in the last 12 months," Hobson said. "They are the largest buyer of health insurance in the nation. They have to do something. They have got to make very big cuts."

GM spends between $5 billion to $6 billion every year on health insurance, which is more than it spends on steel. GM says health care costs add about $1,600 to every car it sells. The company is one of 4 percent of companies in the United States where employees can pay nothing toward their health insurance.

Hobson said other automobile companies will most likely ask their employees to contribute to the cost of the health insurance as a result of the move, but Hobson said the bigger story with GM's announcement is oil.

"Gas, at $3 a gallon, that's what is causing the ripple effect and GM is one of the casualties," Hobson said. High gas prices have discouraged people from buying the larger cars that GM produces, Hobson said.

GM has been coming up with new incentives to try to increase sales.

"We are hearing things like they are going to give a $500 gas card for anyone who buys an SUV, basically that's two months free gas. We are hearing zero percent financing or a $6,000 rebate on some of the cars sold," she said.

Hobson added that competition also has hurt GM. In the 1960s, Detroit's Big Three accounted for more than 90 percent of the domestic auto market. Today it represents only 55 percent. That competition may be forced to follow GM's example.

"With GM leading the way, the rest -- Ford and Chrysler -- are going to have no choice but to do the same," Hobson said. "They'll have to cut their huge health care bills and offer consumers new incentives."