business

One CEO's Health-Care Crusade

A lifelong believer in free markets, Safeway's Steve Burd now believes government must step in to rescue U.S. medical care

Signs of Steve Burd's hard-charging nature surfaced early in life. As a Wisconsin teen, he had a factory job making Valentine's Day candy hearts, the kind that say "Kiss Me." When the machine clogged, he'd clear away the batter with his hands, without shutting off the whirring mechanism. Once, he severed a fingertip. After a long lunch hour getting it stitched up, he returned to his post. "Famous old Midwestern work ethic," he laughs.

He proved just as tough while running companies over the past three decades, first as a turnaround specialist at buyout firm Kohlberg Kravis Roberts and then as chief executive of Safeway (SWY). During most of the 14 years that he has led the grocery store chain, Burd slashed jobs, perks, and even executive bonuses to stave off threats from lower-cost competitors such as Wal-Mart Stores (WMT) and Costco Wholesale (COST).

Then came the day in 2004 when he realized he just couldn't keep doing the same thing anymore. After hearing a Harvard University economics professor describe the breakdown of the American health-care system, Burd dispatched his top lieutenants to provide a full accounting of his company's health costs. Poring over financial reports, they stumbled on a sickening statistic: Their spiraling health expenditures had hit $1 billion, 119% of Safeway's net profit. "We started to do the rudimentary math," recalls Senior Vice-President Ken Shachmut, "and concluded that if this keeps happening, we were going out of business."

Leading the Charge

Burd first tried wellness and preventive-care programs. But it wasn't enough. His frustration grew so strong that he underwent a fundamental conversion: The lifelong believer in keeping government out of corporate affairs became convinced that, to rescue the U.S. health-care system, government had to get involved. Ultimately, all Americans needed coverage, and CEOs had to lead the charge. "I've become a bit of an evangelist on this," says Burd, sitting in his fifth-floor corner office overlooking the bustling Amador Valley, outside of Oakland, Calif.

The Safeway CEO represents a new breed of activist executive. The determined involvement of Burd and others like him is one big reason that advocates for health-care reform from Sacramento to Washington are beginning to grow optimistic about the prospects for remodeling American medical care. No one has any illusions that it's a sure thing, given the many failed reform efforts over the past six decades. But things may be different now because of an unusual confluence of factors, including the business community's heightened interest in sweeping change, the Democratic Presidential candidates' early emphasis on health issues, and the public attention likely to be generated by the recent release of agitprop director Michael Moore's new documentary, SiCKO.

What many moviegoers soon will be learning, executives have had to live with for years. Corporate health costs have risen by 87% since 2000, to $8,500 per worker. U.S. medical spending is expected to double in a decade, to $4 trillion. Translated into macroeconomic terms, more than one in every five dollars spent in America will go to health care.

No Burden for Foreign Competitors

An individual company's cost can be astronomical. Intel's (INTC) health insurance costs last year were equal to one-fifth of the $5.8 billion the company spent on research and development that year. For every new Chrysler (DCX) sold, the automaker estimates $1,400 covers health costs, a burden not felt by its international competitors. And that grande latte you picked up at Starbucks (SBUX) this morning? Well, the Seattle coffee giant pays nearly as much for health-care costs as it does for raw beans.

John Castellani, president of the Business Roundtable, which represents 160 of the country's largest companies, says that 52% of his members describe health costs as the biggest economic challenge they face. "The cost of health care has put a tremendous weight on the U.S. economy," Castellani says. "The current situation is not sustainable in a global, competitive workplace."

But what to do? Despite agreements on the problems, tender alliances tatter when it comes to identifying the best response. Big business splinters over solutions to cost. Small business protests the possibility of more federal mandates. Conservative purists insist on free-market remedies. "No bureaucracy will ever be able to get the scale of change we need," asserts former House Speaker Newt Gingrich (R-Ga.). And the Bush White House stands prepared to work with conservative groups to block any fix that increases the reach of government. "My message for the CEO of Safeway is to focus more on your private-sector solutions and less on trying to get other people to absorb your costs," says Grover Norquist, president of Americans for Tax Reform, who favors market-based measures such as expanded medical savings accounts.

Proselytizing by PowerPoint

Even supporters of change say there is no consensus solution to the deep economic pinch being felt by businesses and workers alike. "There is a strong yearning to do something," says Jason Furman, an economist at the Brookings Institution. "But it is completely undirected."

Burd is completely directed. Fit and trim at 57, he keeps up his energy with a regimen that includes a treadmill workout every day at 5 a.m. and weight lifting after dinner. His body-building burns about 2,200 calories per week, he estimates. And he laughs that he can pump iron after dinner and still get a good night's rest, something even Arnold Schwarzenegger, his friend and fellow health-care reformer, can't do.

That energy from within powers the improbable evangelist as he proselytizes by PowerPoint. Burd, who raised enough for President Bush's 2004 campaign to earn an elite "Ranger" moniker, has preached to more than 300 chief executives, shared the stage with Schwarzenegger, California's Republican governor, and lobbied for change at elite confabs.

Making Quality Data Available

The Burd prescription: insurance coverage for all, with government subsidization of the premiums of low- and moderate-income Americans. He'd emphasize wellness and preventive care. Burd would also require that every player—companies, consumers, and insurers—put "a greater skin in the game." He would introduce market-based reforms that wring costs from the system by improving technology and making cost and quality data available to all stakeholders. Burd is confident that his approach eventually will cut health spending by 30%.

The activist executive recognizes that every corporate leader doesn't share his sense of urgency. So he tells them that Safeway's burden foreshadows troubles ahead for other companies. His favored analogy involves an ocean liner taking on water. Safeway, with its tight profit margin, is in steerage class and sees the flood waters first. And if higher-profit occupants of first class don't act soon, it'll be too late. They'll all go down with the ship. "It's not many times in a career that you have a chance to work on an issue that is thought to be intractable," he says, "but where you see light at the end of the tunnel, and it's not a train coming at you."

Finding an Unlikely Ally

On July 24, while attending a health conference organized by Schwarzenegger at the University of California, Los Angeles, Burd met another unlikely ally in the health-care debate: Andy Stern, president of the Service Employees International Union (SEIU). Stern had professional and personal reasons for getting involved in the reform effort. He wanted better health-care coverage for workers, and he had gone through the painful experience of losing his daughter to scoliosis when she was just 13 (see BusinessWeek.com, 7/3/07, "Andy Stern: Health-Care Champion").

Stern did wonder about Burd's commitment. Why in the world, the union leader asked, would a CEO spend so much time on health care? The Safeway boss's response: "If I can save ½ of 1% in a low-margin business, it is huge."

Burd had read an essay by Stern earlier that month in The Wall Street Journal encouraging chief executives to join him in fixing the health-care system. After reading Stern's article, Burd concluded, "I could have written that piece myself."

Giving Temps More Mobility

The two men locked minds for 90 intense minutes. Stern immediately recognized common ground. After all, unions, too, had economic incentives: Escalating health costs keep eating into wages. "No one is doing this for altruistic reasons," says Stern.

After leaving UCLA, Burd and Stern continued to build coalitions. One evening last August, Kelly Services (KELYB) CEO Carl Camden welcomed Stern to his Bloomfield Hills (Mich.) home for dinner, and over grilled steaks they chatted about a common devotion to social causes in their youth. Stern convinced Camden a national health plan would benefit Kelly's nonunionized workers. After all, universal health coverage would help Camden's temps with mobility from job to job (see BusinessWeek.com, 6/12/07, "Universal Health Care: Say Yes").

Stern's pitches resulted in not one but two alliances. One assemblage announced Jan. 16, dubbed Divided We Fail, includes the Business Roundtable and the American Association of Retired Persons, as well as Stern's SEIU. Even more unlikely is the other group, called Better Health Care Together. It includes the SEIU and longtime nemesis H. Lee Scott Jr., chief executive of Wal-Mart, along with AT&T (T) and the phone giant's union group, the Communications Workers of America. Stern managed to find common ground by skirting specifics. "Everybody agreed not to talk about [details] yet," acknowledges Camden. "There's tension within all communities about how to go about this. Unions, too."

The Danger of Economic Gridlock

Click. Health-care costs in the U.S., as a percentage of gross domestic product, are almost twice that of Britain. Click.

On Jan. 22, in a darkened conference room in Orlando, Burd ran through his 45-minute PowerPoint presentation for 45 chief executives attending the Food Marketing Institute's midwinter conference. He flashed slides of statistics back to 1970, at the start of his career, when health-care costs ate up only 7.2% of GDP. Click. Today, that number tops 16%. Click. And if we don't get at those root causes, by 2015 it will go to 22%. Click. At such growth rates, he tells listeners, "you are going to find the American worker not competitive in the global marketplace and you could put our economy into gridlock."

One executive listening in Florida was Stephen Sanger, now in his 12th year as chief executive at cereal maker General Mills (GIS). Sanger, who has a reputation for demanding quick results—he once sent underlings to a NASCAR race to observe pit crews—immediately sought details and charts. Burd's approach at Safeway, explains Sanger, "holds great promise on a broader basis."

That signals a major shift for General Mills. Back in the 1990s, then-CEO H. Brewster Atwater militarized fellow brass on the Business Roundtable against Clinton-care, then-First Lady Hillary Clinton's health-care reform plan. And who did Atwater dispatch to rally the opposition? Sanger, then a corporate vice-president. "He didn't believe it would work," explains Tom Forsythe, a General Mills health policy specialist. Now, though, "[health care] has risen to such a problem we've got to address it."

How We Got Here

For all the corporate, political, and wonkish brainpower now engaged in the quest for a fix, the nation's improvised system of employer-sponsored health insurance emerged seven decades ago without much thought at all. During World War II, President Franklin D. Roosevelt imposed a limit on wages to avert wartime inflation triggered by a scarcity of workers. Employers competed for workers by offering health insurance. Later court rulings made it hard for employers to take benefits away, while giving unions power to negotiate for still more. Then, starting in 1954, the Internal Revenue Service rewarded companies providing health insurance by allowing them to deduct their contributions, a corporate tax benefit of $189 billion in 2004.

Movements to insure all Americans have arisen, and under the weight of powerful interests been repelled, at least six times since World War I, most recently with First Lady Hillary Clinton in charge. "One of the big mistakes of the Clinton experience was to think that they could do this without business and industry. It was arrogance," says Janet Murguia, who worked at the Clinton White House on the health-care proposal and is now CEO of the National Federation of La Raza, a civil rights group.

Back then, most companies didn't think they needed a change. Managed care held out the promise of relief. Retired Monsanto (MON) chief executive Dick Mahoney, who was co-chairman of the Business Roundtable when it resisted Clinton, says change "wasn't absolutely necessary" at the time.

These days, the retired CEO witnesses escalating costs at a St. Louis hospital where he serves on the board. The emergency room loses money because of the flood of uninsured people who seek basic care there. Today, Mahoney says, "if somebody said to Corporate America, the feds will do this and you'll just pay as a taxpayer, corporations probably would say, 'God bless you.'"

James Dicke III, president of Ohio-based Crown Equipment, agrees. Crown, the world's fifth-largest supplier of forklift trucks, complains of the advantage enjoyed by three of its four larger competitors—Toyota Motor (TM) and German-owned KION Group and Jungheinrich—which benefit from the cost savings of government-run health systems. "It's a huge issue for us, not only in absolute dollars but in competitive terms," says Dicke.

Crown finds itself in a bind despite creative cost-cutting dating back to 1994 when Chief Medical Officer James Heap, beset by a 25% injury rate, launched a prevention campaign and a personalized program to manage the health of the private company's 5,775 employees. Heap later began offering employees and their spouses credits for discussing risks with a counselor and cash awards for seeing health coaches. Of the current debate on health care, Dicke says, "I thought it was a conversation overdue 10 years ago."

Diverse Group of Advocates

The conversation this time may really be different. While in the past discussions over health-care reform repeatedly devolved into partisan sniping and, ultimately, inaction, there is now a growing consensus that the current system is broken and a diverse group of powerful advocates is leading the charge. There are businesspeople including Burd and Dicke, union leaders such as Stern, Republican politicians including Schwarzenegger and Presidential contender Mitt Romney, Democratic insiders like Hillary Clinton and John Edwards, and outside agitators such as Moore. "We've reached the tipping point where liberals and conservatives, Republicans and Democrats, business and labor realize that the most expensive option is the do-nothing course," says Karen Ignagni, CEO of America's Health Insurance Plans, an insurance industry trade group.

While Congress mulls incremental changes, states are becoming laboratories for experimentation. Last year, then-Massachusetts Governor Romney signed a bipartisan law to insure almost all the state's residents. It included an individual mandate to carry health insurance and offered financial assistance for poor and middle-income residents.

Schwarzenegger rolled out his proposal in January, with Burd at his side. "It's very important that we fix [the system] as quickly as possible," Schwarzenegger said in an interview with BusinessWeek. "A state ought not only to fix the little problems but to tackle big problems" (see BusinessWeek.com, 7/3/07, "Schwarzenegger's Health-Care Lift").

A Flight from Premiums

But not every executive attending the kickoff event at the state's health agency in Sacramento shared Burd's enthusiasm. Angela Braly, CEO of the nation's largest health insurer, WellPoint (WLP), agrees with several aspects of the Schwarzenegger approach, including universal coverage for children. But she says a guarantee of coverage for all would lead to a flight of healthier people from premiums, until they fall ill. That, she warns, "can destroy the marketplace."

The governor expresses no such fears and hopes that he can enact a bipartisan compromise into law that could become a model for national reform. "All great things start at a grassroots level, not in Washington," he says.

Watching the Sparks Fly

Back in Washington, words are much more common plentiful than action. More than a dozen lawmakers have proposals, the most comprehensive by Senator Ron Wyden (D-Ore.). It would phase out the employer-based coverage system and replace it with a package of government programs and tax incentives designed to cover all citizens. It would include an individual mandate, subsidies for working-class Americans, and a wellness initiative.

If the ideas sound similar to those backed by Burd, there's good reason. The conservative Burd and the liberal Wyden met in 2006 when the disciplined executive sought out the loquacious senator to discuss his business-based vision for health-care reform. Their initial hour-long appointment spilled into overtime, then into the Dirksen Senate Office Building stairwell as Wyden hurried away for a vote, onto the underground tram, and up and down the corridors of the Capitol. "You could see the sparks fly and the ideas going around and around in their heads," says Kevin Herglotz, Burd's top government-relations lieutenant. When Wyden unveiled his proposal in Portland, Ore., Burd was there to lend his support.

Still, veterans of past health battles predict that it could take three to five years for Washington to act. "We are a country of muddlers," observes Washington business consultant Art Lifson, a former Cigna (CI) vice-president active during the Clinton-era debate. "We seem to be much more comfortable making incremental changes."

All Eyes on New Hampshire

Two things could change that: the 2008 election campaign and SiCKO. Moore's movie skewers health insurers and Hillary Clinton, among others. The filmmaker is headed to New Hampshire to try to increase the visibility of the issue in the state that holds the first Presidential primary of 2008.

The Democratic frontrunners have beaten him to the microphone. Senators Barack Obama (D-Ill.) and Clinton (D-N.Y.) already have delivered speeches promising universal care and cost containment. Edwards, the 2004 nominee for Vice-President, has gone further, pledging to raise taxes on the wealthy to fund health insurance for all.

Politicians and directors aren't the only ones trying to keep the issue alive in New Hampshire. On June 25, the Business Roundtable's Castellani, SEIU's Stern, and AARP Chief Executive Bill Novelli held their own rally on the state house lawn in Concord, N.H., to push their pledge to make health security the top issue of the '08 campaign. "The American people are way, way ahead of the politicians on this," says Jim Papian, spokesman for the United Food & Commercial Workers Union, which has worked with Safeway's CEO on health policy issues.

Burd presses on, sensing a rare opportunity for sweeping change in the American economic landscape. He hopes to recruit even more evangelists to the cause, from business and beyond: "I don't want to be the only guy out there preaching the gospel."

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