Executive Word -- Distribute Health-Care Costs Fairly

Dec. 21, 2004
Foreign producers must pick up part of the tab.

Wilbur L. Ross Jr. Chairman, CEO WL Ross & Co., New York

Born: 1937

Education: Bachelor's degree in English literature from Yale University, New Haven, Conn.; master's in business administration, with distinction, Harvard University, Cambridge, Mass.

Career Highlights: 2000: Formed WL Ross & Co. LLC, a private equity investment and hedge fund management firm, following a 26-year career as executive managing director of Rothschild Inc., the U.S. affiliate of the Rothschild family's merchant banking group. 2002: Named board chairman of International Steel Group Inc., which he organized following the acquisition by WL Ross of the assets of the bankrupt LTV Steel Corp.

Interests: Serves on the board of the Turnaround Management Association. Member of the World Bank Bankruptcy Reform Study Group, New York Society of Security Analysts' Committee on Alternative Investments and the International Advisory Board of the mayor of Seoul.


Financier Wilbur L. Ross Jr. became an immediate player in the steel industry when his private-equity firm purchased most of the assets of bankrupt integrated steel producer LTV Corp. in 2002 for $327 million and formed the International Steel Group Inc. (ISG). He was already well known in the distressed investment community, where he has been involved in the restructuring of more than $200 billion of defaulted companies' assets around the world. While WL Ross & Co. was not obliged to pick up the health-care benefits of LTV's 70,000 hourly retirees and their spouses when the company purchased LTV's assets, it agreed to establish a benefit trust based on ISG's profitability to help defray some of those costs. At press time it seemed likely that ISG would complete a $1.5 billion deal to purchase the assets of the bankrupt Bethlehem Steel. Ross recently spoke with IndustryWeek about the burden he says health-care costs are placing on domestic manufacturing.

IW: You have commented that in every industrialized country with which U.S. manufacturing competes, there is subsidized health care, which puts U.S. companies like yours at a great disadvantage, competitively speaking.

Ross: Absolutely true. In every single other country, throughout Europe, Russia, China, Japan, Korea, Thailand, India, the payment for health care is viewed as a societal issue and paid for by government. The U.S. is unique in that the payment comes from the private sector. One of the tragic issues that it creates is what we've just seen in the steel industry, and I'm afraid we're going to see in other industries. It means that if you pick the wrong employer, and your employer goes bust -- even after you have retired -- your life expectancy will be shortened by the fact that your employer went bust and terminated your health care [coverage]. It also is a huge problem for the economy overall because health care has become such a huge component of peoples' costs. In the case of Bethlehem, they were shipping about 9 million tons a year at peak . . . and their health-care costs were running over $20 million a month. [That's] over $240 million dollars a year . . . [and] this is for retirees alone. Steel only sells for $300-and-some-odd dollars per ton, so you're talking about more or less 10% of the total selling price of steel is consumed just in retiree health benefits. That's a huge cost disadvantage, and it isn't just [the] steel [industry].

IW: What would you propose?

Ross: We need to deal with [health care] at the federal level. Since one of the problems is that imports don't pay their fair share, I think some kind of a value-added . . . where there's a surcharge on all goods and services sold in the country -- whether they're imported or domestically produced -- would do two things: It would shift part of the burden to the imports, so their costs would go up, [and] the price they would have to charge people would go up. It would simultaneously lower the price the domestic producer could charge. So it would change quite radically the competitiveness of U.S. products within the U.S. versus foreign. It would also make it much easier for U.S. companies to export because, while we still pay higher wages than foreign companies, at least we wouldn't be paying higher wages and have these huge health-care costs.

IW: How does this address health-care costs?

Ross: If the surcharge would go to fund the payment [of health care], if it were collected on everything sold, including on imports, you would distribute the burden very differently.

IW: Is this a health-care proposal to address costs for both active and retired workers?

Ross: Yes.

IW: How would this proposal lower the price domestic producers could charge?

Ross: The total amount of imports into this country is about $1.4 trillion, and the exports are only about $900 billion. Now that $1.4 trillion of imports represents about 14% of the whole economy. So right now, 14% of the whole economy is not paying anything toward American health care. By redistributing the burden . . . making the importers pick up their fair share should result in a very material savings on the 86% that's domestic.

IW: The domestic producer would simultaneously be able to lower its price, despite the surcharge, because it would not be picking up as much of the health-care cost?

Ross: Exactly. They would only be picking up 86%.

IW: So, are you suggesting that the United States join subsidized health care?

Ross: No. Well, it would be subsidized, but in a different way in that I don't mind the private sector contributing, because if you don't contribute directly, you contribute through tax.

IW: Have there been efforts to get this proposal to someone who could make a difference?

Ross: The Steel Caucus, which is the senators and congressmen from the steel-producing states, are trying to schedule . . . a joint session of hearings between the House and Senate, and I have been invited to address that group. I intend very vigorously to raise this concept down there.

IW: Would this proposal, or one like it, put the U.S. back on equal footing with other industrialized nations?

Ross: It would close the gap.

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