It has been said only half-jokingly that General Motors Corp. is actually a giant health-insurance provider - just one that happens to make cars.

But as U.S. automakers gear up for watershed contract talks with the United Auto Workers union this summer, the $10 billion price of covering more than 2 million auto workers and retirees is expected to be the most serious issue on the table.

GM alone spent $4.8 billion on health care in 2006. For the same amount, the company estimates it could have built four new plants or launched six new vehicles.

With the U.S. automakers -- GM, Ford Motor Co (F.N: Quote, Profile, Research) and Chrysler Group -- competing with non-unionized Japanese rivals and trying to reverse billions of dollars in losses, health care costs loom large.

The biggest problem is U.S. healthcare costs, said David Dranove, a health management expert Northwestern University's Kellogg School of Management. Until we figure out a way to bring those down, no amount of concessions will really help the automakers.

U.S. automakers pay their factory workers an average of about $73 per hour in wages and benefits, compared to just $44 per hour for the three major Japanese car makers operating plants in North America, according to industry data. Most of the difference stems from health-care expenses.

By some measures, the issue is the most critical for GM, which has the largest pool of employees, retirees and dependents. In 2005 the automaker spent $5.35 billion on health care, up nearly 80 percent from $3 billion in 1996.

In October 2005, GM cut a deal with the UAW to increase charges for retirees, reducing its own bill by $1 billion a year. But analysts caution those savings will be eaten away by spiraling health-care costs, absent further concessions.


I think it's going to be a hard fight, Argus Research analyst Kevin Tynan said. The union obviously does not want to make any additional concessions ... but they will have no choice. The alternative is much worse.

The UAW contract talks, which begin in July, come as health care heats up in the U.S. presidential campaign. Overall, U.S. health-care costs are estimated to be rising at an annual rate of 6 to 8 percent, with the bulk of that $2.1 trillion burden borne by the private sector.

Those costs are seen as central to the financial crisis for Detroit automakers, known for providing benefits long considered the gold standard for union workers.

GM, Ford and Chrysler lost more than $15 billion on a combined basis in 2006 and are in the middle of closing more than two dozen plants and slashing more than 80,000 jobs as they try to return to profitability.

Experts said that will require the automakers to shift costs and their workers to make hard choices.

The way the UAW has it now -- open-ended, fee-for-service programs fully paid for by the employer -- that is definitely not sustainable, said Alain Enthoven, a health policy expert at Stanford University.

The biggest operating gap between Detroit and its Japanese rivals is in the cost of providing health care to retirees.

In 2006, GM estimates that it spent nearly $3.3 billion to care for 432,000 retirees. The cost at Ford was near $1.8 billion. Chrysler spent $1.6 billion.

By contrast, on a combined basis, foreign automakers with U.S. plants -- including Japan's own Big Three -- paid just $23 million for retiree health care in the United States.

I expect unprecedented concessions on this contract and a big chunk of that will be, I believe, in the health care segment, Standard & Poor's equity analyst Efraim Levy said.

Detroit automakers have studied options that would allow them to shift the liability of future retiree health-care costs to a trust fund affiliated with the UAW, representatives from the companies have said.

Even so, many analysts say the automakers will not be able to talk their way out of a costly legacy until national health-care costs come under control.