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GM And UAW Retiring

 May 13, 2009 11:10 PM

Car sales won't be the only thing going limp for the UAW retirees. Bloomberg's"GM Union Retirees Said to Cede Dental, Prescription Benefits" is reporting that gm 522,000 UAW retirees could lose reimbursements for dental care, and certain drugs such as pfe) Viagra and AstraZeneca's (AZN) Nexium ("The Purple Pill"). The loss of vision care and higher co-pays for doctor visits and the drugs that remain in the formulary are also in the works. Only the 62,000 active workers vote on the retirees' fate.

The two hard hitting issues surfacing: First, almost 8.5 retirees for every active production worker is unsustainable no matter how the Obama Administration slices and dices the numbers. Second, why are the UAW retirees getting any health benefits after they become eligible for Medicare at age 65?

Beyond the above two obvious questions, let's look at the implications for the pharmaceutical industry. The proposed agreement seems to be segregating drugs by their implied necessity. This is a major step beyond Merck (MRK) and Pfizer reporting weakness in cholesterol drug sales and trouble with getting patients to visit the doctor when they don't feel ill.

Merck and Pfizer think they just need more advertising to convince patients that they can be ill without feeling ill, so don't let a bad economy keep you from regularly visiting your doctor. Success in such a campaign is unlikely. The pharmaceutical industry concentration on "preventative" drugs for cholesterol, high blood pressure and pre and post cardiac events over the last two decades has made it vulnerable to deep swings in the economy.

Very few employees get drugs for free anymore. So with no immediate pain, these drugs become expendable when money is tight. And the doctor visits to follow up on cholesterol and high blood pressure treatments are also expendable.

The formulary changes are a bigger issue. The UAW is being forced to make choices for the first time. Not every medicine advertised on TV will be available to them without subsidy. The process is starting with drugs that help avert inconveniences such as requiring more time for romance, and a little indigestion.

Disappointments aside, the next step will be for unions and employers to start evaluating the cost benefits of drug choices for real illness. As the true payees, they can be far more successful than private insurance companies have been in the past. The insurers simply raised premiums rather than sustain lawsuits from unhappy policy holders. Now that employees know they cannot have it all, they will be far more open to healthcare rationing of all kinds.

The drug companies are fighting government funding for the comparative cost-benefit analysis of drugs. The pharmaceutical industry should fear voluntary rationing by employers, unions and other employees far more than America replicating Britain's NICE. The UK's health service primarily questions the benefits of very expensive drugs. Here we are starting by eliminating fringe drugs. But these fringe drugs have become the lifeline of big pharma.

It won't long before employers and employees raise the cholesterol and high blood pressure bar instead of constantly lowering it. Image that – payees realizing they've been duked by faux medicine. Add now patients are doing exactly what the free market drug companies don't want them to do – making choices.

Disclosure: Author is long PFE.

[Related -General Motors Company (GM) Q4 Earnings Preview: EPS in Drive, Guidance in Reverse?]

[Related -Ford Motor Company (NYSE:F): This American Icon Has 50% Upside]



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