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Crippling costs

The Washington Post reported recently that US pharma price escalation has picked up during the past four years. These rising drug prices are giving firms with employee healthcare plans a headache.

Here's a little trivia question for you. It's a sort of conundrum, the answer to which could win you a pub quiz… Who invented painting by numbers - and for good measure, when and where? Any ideas? No it wasn't George Bush or Rolf Harris.

What country does it hail from? Sounds like the idea could be simple enough to be dreamed up in the Netherlands? When? Victorian times? It could have been the sort of thing to keep genteel ladies occupied between swooning and lacing themselves into their corsets.

No, it's all wrong. Painting by numbers was invented in the same year as the film African Queen was made. This pastime was invented and sold in the home town of a car with a French name. The car was named after a French pioneer who, in 1600, established forts to try and keep the British from trading.

See, I'm a mine of information. Take me to a trivia night!

The French pioneer was a swordsman from Gascony. His name was Antoine de la Mothe Cadillac. Got it? He gave his name to the most famous car ever to come out of the US, the Cadillac.

Our mate Antoine established forts in strategic locations in North America to try and stop the British from moving west out of New England. So then, where was painting by numbers invented?

Detroit, you dummy! Home of Barry Gordy, the record producer and songwriter. Born in Detroit in 1929, Gordy had his first success in 1959 with Reet Petite, which was recorded by Detroit-born Jackie Wilson, who had replaced Clyde McPhatter as lead singer of the Dominoes.Oh yes, I have trivia if you want it.

The next year, Gordy wrote Lonely Teardrops for Wilson and started the Jobette Publishing Company. At the same time, he began to produce records for the Miracles, Eddie Holland and Brian Holland. He went on to form Motown Records and by the early 1960s it was America's most successful record label.See I can do this stuff - take me to the pub!

Now then, when was painting by numbers invented? Easy, 1951. By whom? Oh, yes, I nearly forgot; Dan Robbins of the Palmer Paint Company, Detroit. Today, Palmer has seven plants across the US, one in Canada and one in England; and employs about 1,000 people. 

Motor city
Ever been to Detroit? It is a fascinating place for all sorts of reasons. Henry Ford opened his first car plant there - exploiting an abundance of cheap, black labour. It's also the home of General Motors.

The place is rich in history and is probably one of the few places in the US where you can get a snapshot of the whole history of the good old US.

It is also the place that may predict the future. The music industry has changed, that's for sure, and so has the motor industry. And, it may be set to change a whole lot more. If the past is in Detroit, the future must be there too.

Riding high 
In 2004, Detroit-based General Motors confidently told Wall Street investors and auto analysts that it was poised for higher market share and bigger profits, aiming at a profit-goal of $10 per share.

However, by the second week of January 2005, General Motors - the world's largest car maker don't forget - was issuing a profits warning for 2005 to Wall Street. At the same time it pushed the profit goal back to 2007 or later. Earnings per share look like they could be around $4.

It gets worse. North American profits look like they could fall by more than half. Indeed, GM looks like it will make less in its North American backyard than in Asia. This is not trivial.

Why? The war in Iraq? No. Americans deciding to take the bus? You must be joking! Automobile sales are good, it's just that the profits are lousy. Is competition forcing GM to discount its range at the dealerships? No, that's not the problem.

The problem is that while the company is making plenty of money, one balance sheet item is leaching it away. Just like the poor soul in Mack-the-Knife, there is an oozing of life.

For trivia fans: Kurt Weill and Bertolt Brecht wrote Mack-the-Knife in 1929, for the German play, The Threepenny Opera! The primary cause of GM oozing life? Rising healthcare costs. Or, to be more precise, the rising cost of prescription drugs. Definitely not trivial, inconsequential, or minor.

GM's chief finance officer, John Divine, explained that GM will spend about $5.6bn on healthcare in 2005, up from $4.8bn in 2003. The real expense comes from the healthcare plan GM is obliged to provide for its retired workers.

The Washington Post reported recently that US pharma price escalation has picked up during the past four years. Around one quarter of the most-used branded drugs increased in price at more than double the general inflation rate in 2000, while 87 per cent of those same drugs doubled the inflation rate in 2003.

In 2004, during the first quarter, US drug prices increased by 3.4 per cent. The average annual rate of increase rose from 6.9 per cent for the 12 months ending December 2003 to 7.2 per cent for the 12 months ending March 2004. Not trivial.

This is a huge problem for the US and top management in some of the world's biggest corporations, who have what they call 'retiree-health plans'. The older people get, the more drugs they are likely to need and for longer.

In the US, one of the reasons for working for, and staying with, big corporations is the access to an employee health plan. Health plans for individuals in the US are prohibitively expensive.

So, the profits of one multinational are being crippled by the profits of another multinational. This is not trivial, it's very significant. There is a message for us. GM has car plants here. If it cuts back, we'll all need to take a pill.

The Author
Roy Lilley is a healthcare author and broadcaster. He has written several books and is well known for his sometimes controversial opinions.

2nd September 2008

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