McDonnell Douglas Corp., in an unusually severe move to slash its medical care expenses, announced Thursday that it will cut off its health insurance for 20,000 non-union retirees across the country, including 8,000 in Southern California.
Although McDonnell retirees are not expected to feel the financial impact for four years, the move would mark one of the first times that a major U.S. company that isn't in bankruptcy has canceled such benefits.
Many companies are reducing health care benefits for already retired workers and future retirees, but few besides McDonnell plan to completely eliminate company-paid retiree coverage.
"This is news that is going to rock every board room in America," said Howard Rubel, an aerospace analyst at C.J. Lawrence, Morgan Grenfell. "It is going to say to people, 'What are my obligations for my employees? Where does that social contract end?' "
The move also reduces a huge accounting charge that St. Louis-based McDonnell was due to take next year, and comes at a time when the giant aerospace firm appears once again to be facing potentially serious financial problems.
McDonnell said it would soften the blow to retirees by setting up a special trust fund to cover their health care expenses from 1993 through 1996. McDonnell plans to divert more than $300 million--about $18,000 for each retiree--from its employee pension plan surplus to finance the program. It would hold retirees' out-of-pocket health care costs at roughly current levels over the four years.
Company spokeswoman Barbara Anderson, seeking to put the best face on the announcement, said, "For the retirees, it guarantees high-quality, very comprehensive health care for the next four years through this pre-funded trust account. And for McDonnell Douglas, it makes us more competitive, it reduces our costs, and it improves our cash flow."
Anderson said the company would no longer pay for benefits after the four years, but it remains "committed" to providing retirees access to affordable health care.
But analysts and benefits consultants called the move Draconian, noting that many retirees may have to rely entirely on Medicare.
"They're taking a very extreme position compared to what most employers have been doing. Most companies that have done this are in very severe financial straits," said Glenn Meister, a principal in the Los Angeles office of the benefits consulting firm A. Foster Higgins.
Bruce Lee, regional director of the United Auto Workers, which represents hourly workers at McDonnell's huge Long Beach plant, blasted the plan.
"It is going to cause terrible trauma," he said. "For those people who are retired, they are going to be scared out of their wits. For people still at the company, it is going to disrupt all their plans."
Lee said it is clear that the company intends to seek the same cutbacks from the union when the next contract is negotiated in 1994, which Lee said the union will oppose.
Other companies, such as Bethlehem Steel and Navistar, also have tried to cancel retiree health benefits, only to be rebuffed in court. Analysts predicted that McDonnell's plan will trigger lawsuits too.
McDonnell weathered a financial crisis in late 1990, which forced company Chairman John McDonnell to secretly ask the Pentagon for $1 billion in special funding. By late 1991, many analysts believed that the firm had recovered, and the firm's stock began an extraordinary rally.
But now it appears that the company's recovery was less than complete, and it once against must grapple with rising debt, write-offs against earnings and the need for innovative ways to conserve cash.
McDonnell shares have been trading near their lows for the year, but jumped $1.125 Thursday to close at $38.625 on the expectation that the retiree change will cut company costs.
The firm had no choice but to take a huge write-off under a new accounting standard taking effect next year if it had not terminated retiree health benefits. The firm estimated that it would have to write off $1.2 billion to $1.8 billion under the new accounting standard--halving its equity. Instead, the charge will now amount to $600 million to $700 million, the firm said.