The Economy

Good Week/Bad Week: Amazing Medical Breakthrough!

Health-care costs went up a meager 7.5 percent last year; workers thought to be sucking it up. Plus: Les Moonves's house party, and GM blows a gasket.
John GoffApril 22, 2005

Disclaimer: While the entries in GW/BW are based on actual news items, some of the people, quotes, and hat sizes in this article are fictional. Other stuff I just plain made up.

Please, no lawsuits.


Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

1. Plan Sponsors

Some good news this week on the benefits front. According to Mercer Human Resource Consulting, the average cost of health-care coverage rose just 7.5 percent in 2004. That’s a big slowdown from the 10.1 percent jump in 2003, and the smallest increase in five years.

The survey found that companies spent, on average, $6,679 per employee on health-care coverage, up from $6,215 in 2003. The figure does not include what employees paid in out-of-pocket expenses, nor premiums paid for guys named Murray. Mercer offered no explanation for this exclusion.

So what accounts for the seeming slowdown in heath-benefit costs? The consultancy pointed out that longer-term cost-management strategies are gaining traction with large employers (over 250 pounds or a size 10 dress). In addition, Mercer found that workers decreased their use of health-care services in 2004. That was particularly true for employees who passed away during the fiscal year.

Perhaps the biggest reason for the slow climb in costs, however, is that smaller companies did an especially good job at keeping a lid on expenses. Mercer found that smaller employers, for example, got much more aggressive in shifting costs onto employees. Fully 31 percent of small-employer PPO plans now have an in-network deductible of $1,000 or more. One out of six ask workers to pay at least $2,500 of their initial medical costs. Of that group, three percent require workers to perform minor surgery themselves.

The higher deductibles — not to mention the home surgery — have been effective. Observed Blaine Bos, a Mercer consultant, “When you start the year with a $1,000 deductible and don’t see any major expenses ahead, you think twice about going to the doctor if you have a cold.”

But the Over-the-Counter Drug Makers Association (ONYX) warned against such a course. A spokesman for the group claimed that ongoing clinical studies suggest that, left untreated, a cold can lead to other health problems, including “massive hair loss, deformity, and impotence.”

Still, most benefits experts predict companies will require employees to shoulder more of the burden for their health-care costs in coming years. At the top of the corporate agenda: rolling out more consumer-driven plans and denying coverage to workers who look excessively pale.


1. General Motors

Somewhere, Alfred Sloan must be shaking his head.

On Tuesday, General Motors Corp., the world’s largest automaker, reported it lost a whopping $1.1 billion in the first quarter of 2005. Management at GM blamed the red ink on rising health-care costs and lackluster customer response to certain models (notably, the company’s disappointing gas/oleo hybrid). It was the worst three-month performance at GM since 1992, and the worst performance by any “GM” since the Wham! concert in Prague in 1986.

Revenue for General Motors the first quarter came in at $45.8 billion, down $2 billion from a year ago. That works out to a loss of nearly $2 per share, way off from GM’s initial forecast of a breakeven quarter. The company also indicated that its market share in North America — the company’s prime market — fell from 26.3 percent to 25.2 percent.

The automaker’s management has said health-care costs continue to grow at an excessive rate and hamper profitability. GM spent over $5 billion last year to cover 1.1 million salaried and hourly employees, retirees and family members. GM predicts the amount could grow to $5.8 billion this year.

Some analysts contend, however, that GM’s loss in the first quarter had more to do with uninspired new models than health-benefit woes. Jim Wankle, who covers the auto industry for Detroit-based brokerage firm Mooney Whitcomb, says most consumers were puzzled by GM’s new line of right-wheel-drive cars. He also noted that the company’s “Beats Walking” advertising campaign failed to boost sales.

Wankle says GM has its work cut out for it if it wants to gain back market share from Japanese rivals Toyota and Honda. “Right now, GM seems to be looking for a quick fix, so they’re really going with gimmicks over design smarts,” Wankle told GW/BW. Example: Honda’s next car, says Wankle, will be a hybrid that gets 60 miles to the gallon and goes from 0-60 in 6.8 seconds. And GM’s next model? “The Chevy Anole, a souped-up Corvair that changes colors based on its surroundings.”

2. Les Moonves and Thomas Freston, Viacom

Despite shareholder ire over egregious executive salaries and benefits, corporate boards continue to hand out generous perks to company officers.

Take Viacom. This week the media conglomerate filed its 2004 proxy statement with the Securities and Exchange Commission. In it, the company reported that Les Moonves and Thomas Freston both received about $20 million in salary and bonus last year — not exactly chump change. But Viacom also revealed that the company also paid the two outrageous sums to stay in their own private homes when working out of town.

Moonves, who is based in Los Angeles but has a place in New York, received a $105,000 expense reimbursement from Viacom for staying in his Manhattan apartment rather than a hotel when conducting business in the Big Apple. Likewise, Freston, who works out of New York but owns a home in LA, charged the company over $43,000 for staying in his California digs when doing business on the West Coast.

Not surprisingly, corporate critics were appalled by Viacom’s largesse. Said Shareholder United spokesman Larry LaGree: “We are appalled by Viacom’s large ass.” When informed by reporters that the word is largess, LaGree replied “Largess, large ass. Same diff. The point is, we can no longer tolerate these sort of corporate boon-doggies. Research shows that these parks drain corporate coffins and ultimately, delude shareholder value.”

Paul Hodgson, senior research associate at the Corporate Library, a governance research organization, warned that more startling revelations may be coming. “This year is going to be the year of finding odd little things in that ‘other compensation’ column, because they’re scared that the SEC will clamp down on stuff,” Hodgson explained. “Because of that companies have to reveal these sweet little deals. People think they’ll stop doing them because they’ll be ashamed. But that doesn’t seem to be the case.”

Indeed, recent proxy statements show a shocking lack of propriety on the part of many corporate boards. In its filing with the SEC, Millhouse Industries, the San Jose, Calif.-based manufacturer, revealed that it paid CEO Patrick Simpson $24,000 last year “as recompense for Mr. Simpson’s use of his personal terry cloth bathrobe on business trips in lieu of Mr. Simpson purchasing the velour garments hoteliers routinely offer for sale.” Added the board: “But we always tell Pat he’d look good in anything.”

And finally, a new feature we like to call:

This Date (More or Less) In History

Disclaimer #2: All material presented here is based on facts or published accounts (excluding the stuff about the two pyschics, which I threw in just for the heck of it).

On April 22, 1955, (actually, April 15) Ray Kroc, a local San Diego businessman, opened his first McDonald’s restaurant in Des Plaines, Illinois.

The year before, Kroc mortgaged his home to scarce up enough cash to purchase the exclusive distribution rights to a milk-shake maker called the Multimixer. Kroc soon heard about a fast-food restaurant in California — run by brothers Dick and Mac McDonald — that used eight of the machines. Seeing a big opportunity, Kroc pitched the brothers on the idea of opening more restaurants (he figured he’d be able to place eight of his Multimixers in each new franchise). When Dick and Mac asked who would run the new restaurants. Kroc already had somebody in mind.

Actually, Kroc was convinced this was his destiny. As a boy, Kroc had visited a phrenologist who claimed the youngster would one day work in the food-service industry. Two other psychics, however, predicted he would wind up in the pants business.

Kroc turned out to be well-suited for the fast-food industry, displaying a natural bent for both risk-taking and tidiness. He once said: “If you’ve got time to lean, you’ve got time to clean.” He wasn’t kidding, either. In the early years, Kroc used to walk around the parking lots of his restaurants, removing gum from the asphalt with a putty knife.

By 1960, there were more than 200 McDonald’s outlets across the country, but they weren’t doing so hot, mostly due to low franchising fees. It wasn’t until Kroc figured out how to really soak his franchisees — by becoming their landlords — that McDonald’s finally took off.

The Big Mac came in 1968, followed by the Egg McMuffin in 1973, then Chicken McNuggets in 1983. The company went global in 1967 (Canada and Puerto Rico), then expanded operations into at least one new country every year from 1970 to 1979. In Japan, the locals pronounce the name of the company “Ma-Ku-Do-Na-Ru-Do,” or Makudo, for short. At the opening of the first Golden Arches in Japan in 1971, the president of the company’s Japan operation stated: “The reason Japanese people are so short and have yellow skins is because they have eaten nothing but fish and rice for two thousand years”; “if we eat McDonald’s hamburgers and potatoes for a thousand years we will become taller, our skin become white and our hair blonde.” (and in case you’re busily preparing a ticking package with my address on it, that previous quote is exactly what he is reported to have said. Apparently, things were different in 1971).

Kroc, who relinquished his title of CEO in 1968, passed away in January 1984. Less than a year later, the New York Stock Exchange added McDonald’s to the Dow Jones Industrial Average. To make room for the Golden Arches, cigarette purveyor American Brands was removed from the group of the 30 constituent stocks that make up the index. The first company to be kicked out of the Dow was phonograph maker Victor Talking Machine, in 1932 (earlier, the company had been bought by RCA, hence RCA-Victor). The name of the RCA dog was Nipper. The name of the dog who starred in “Old Yeller” was Spike. He was owned and trained by the Weatherwax family, famous for training Lassie. It’s a strange world we live in.

Ray Kroc’s success proves conclusively that a good idea, coupled with enough transfats to clog the Saint Lawrence Seaway, will generally go over big with the American public. For his part, Kroc insisted that “we’re not in the hamburger business; we’re in show business,” The first Ronald McDonald was former Today Show weatherman Willard Scott. Before that, Scott had been a Bozo. He was so.

Over the years, original shareholders of McDonald’s have made out just fine. An investment in 100 shares of McDonald’s at the 1965 IPO price of $22.50 would today be worth about $1.8 million (adjusted for stock splits, historical rates of inflation, and the decreasing amount of fun you have as you get older).

It’s not entirely clear where Kroc ranks with the great moguls of past generations. But historians generally credit Kroc with applying the principles of mass production and quality control to food retailing. I’m not so sure. To me, he’ll always be the guy out in the parking lot with the putty knife.