Court Permits GM To Charge Retirees For Some Health

JULY 20, 1998 VOLUME 6, NUMBER 3

When General Motors Corporation first began offering health insurance to its retired employees in 1961, it required them to pay a portion of their medical care. By 1968, however, GM was not only paying all the costs of medical insurance for retirees, but was also covering their spouses, even after the death of the retiree.

In 1987, however, GM changed its approach. Concerned about the rising cost of health care for employees and retirees, the automaker adopted a new plan: retirees and current employees alike would continue to have a “fee-for-service” insurance option available to them, but they would have to pay an annual deductible of $200 ($250 for family coverage). They would also be responsible for a 20% copayment up to a maximum of $500. In other words, retirees who had previously received free insurance coverage would now have to pay as much as $750 per year for their policies.

As before, GM also made available a self-administered health program. Even participants in that program saw significant changes in 1987, however. They also were required to make payments for previously free services, and both kinds of plan participants suddenly lost vision and hearing aid coverage.

GM’s retirees had come to rely on the free medical coverage. In fact, over most of the two decades the plan operated as a full benefit, GM itself had consistently encouraged early retirements as a way of reducing its workforce; many of the early retirees had made their decisions at least partly on the basis of a belief that the health benefits would continue for the rest of their lives.

In 1989 retiree Robert Sprague and 113 other former GM employees brought suit against the corporate giant. They alleged that they had been induced to retire partly by representations that the health plan would continue for their lives, and that federal law required GM to continue the benefit at the same level. They pointed, among other things, to a series of brochures published by GM to describe its retirement benefits. A 1977 booklet was typical: it advised prospective GM retirees that “your basic health coverages will be provided at GM’s expense for your lifetime.”

In a series of rulings in the early 1990s, the Federal District Court held that the 114 listed plaintiffs could represent the claims of the 50,000 GM retirees who had been induced to leave the company early. The 34,000 “regular” retirees, however, were dismissed from the litigation, on the basis that they had not entered into separate agreements regarding retirement. Both GM and the plaintiffs appealed.

This January, the Sixth Circuit Court of Appeals dismissed all the claims of the GM retirees. Although the appellate judges recognized GM’s representations to the retirees, they also noted that the company consistently reserved the right to change the health benefit. Besides, the judges observed, the individual facts of each case would be incalculably difficult to identify: each retiree would have read different company literature, talked to different company representatives and had different information regarding the retirement options. Nothing in federal law, said the judges, required GM to continue the plan intact for the rest of the retirees’ lives. Sprague v. General Motors, January 7, 1998.

Three judges (out of thirteen) disagreed. Writing for the dissenters, Chief Judge Boyce Martin observed that “this is a classic case of corporate shortsightedness. When General Motors was flush with cash and health care costs were low, it was easy to promise employees and retirees lifetime health care…. Rather than pay off those ill-considered promises, it is easier for the current regime to say those promises never were made.” The Court of Appeals decision permits GM to change benefits for its retirees.

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