(FORTUNE Magazine) – FROM THE LOOKS OF IT, GM HAS MORE in common with Big Steel and washed-up airlines every day. While its auto business stagnates, health-care costs are taking an ever bigger bite out of its bottom line. Left unchecked, they could further undermine GM's already shaky credit rating and push it into a full-blown financial crisis.

Last year health care for GM's 1.1 million employees and retirees and their dependents added $1,525 to the cost of every car and truck GM produced in North America. GM now buys more from Michigan Blue Cross than it does from any steel or rubber producer. Driven by giant increases in prescription-drug prices, GM's medical costs jumped 8.5% in 2004 and are expected to leap another 10.5% this year. GM feels the pain more than its competitors because after several decades of downsizing, it has 2.5 aged retirees for every active worker. And the high costs are crushing profits. GM expects to lay out $5.6 billion for medical care this year but is forecasting a profit in North America of just $500 million. Standard & Poor's is watching closely. Another downgrade would push GM bonds into junk territory--and the vultures would start circling.

In an interview in Detroit, GM CEO Rick Wagoner said he's starting to rein in costs. He's working to make medical-delivery systems more efficient and to get government help on catastrophic health care and malpractice reform. There are two other can't-miss solutions to rising costs, but Wagoner has made them off-limits. One is to take a page out of the airlines' book and declare bankruptcy. But that would shake confidence, sink the residual value of its vehicles, destroy its credit, and send dealers fleeing. When asked whether bankruptcy is an option, Wagoner replied, "That's not a good idea. A lot of other things come along with Chapter 11, which basically end up in a lot of pain."

So why doesn't GM pursue its second option: Going after the United Auto Workers? The UAW's active and retired workers have a better health-care plan than do most CEOs; it is certainly more lavish than that of GM's white-collar workers. UAW members don't pay a cent for their health insurance, nor do they pay any deductibles. When a UAW member visits the doctor, he makes only a tiny co-pay. Is it any wonder that Detroit seems to have a denser concentration of chiropractors, podiatrists, and psychologists than anywhere else in the Western world? Or that GM's nickname around Detroit is "Generous Motors"? Yet Wagoner refuses to take on the union by asking it to reopen its contract.

That's mostly because the union digs in its heels when bargaining issues turn up in the press. "The minute you go public, the union shuts down," says an industry executive. "That doesn't work. But I think they [the UAW] are acutely aware they have a very rich benefit." Other Detroit insiders figure that talks between the company and the union are already underway but are taking place beneath the radar.

There is reason to expect some concessions when the UAW contract with GM expires in 2007. As David Cole, director of the Center for Automotive Research in Ann Arbor, points out, UAW workers approved a new contract with Caterpillar in January that calls for such reforms as a two-tier wage system for new hires--and worker contributions to their health insurance premiums for the very first time. -- Alex Taylor III