BCBSVT Must Repay Members $3M for Executive Overcompensation

Skepticism about high executive compensation in a failing economy has put Blue Cross and Blue Shield of Vermont on the defense concerning its 2009 CEO payout. The insurance commissioner in Vermont is ordering BCBSVT to pay back $3 million to subscribers for what she calls the former CEO’s excessive compensation. BCBSVT is not challenging the order and says it has already started making administrative changes. One consultant advises plans to avoid similar issues by choosing peer groups for executive compensation rate comparisons with caution.

The commissioner of the Vermont Department of Banking, Insurance, Securities and Health Care Administration (BISHCA), Paulette Thabault, has had an eye on executive compensation at BCBSVT since the company requested a nearly 35% premium increase in November 2009.

At that time, she expressed concerns about a “definite link” between the former CEO William Milne Jr.’s $7 million retirement package and the proposed rate hike. BCBSVT denied there was a link, saying Milne’s compensation was written into his contract when he signed with the company 10 years prior.

Thabault tells The AIS Report her department hired an expert consultant and combed documents related to Milne’s hiring agreement and compensation package. “We found the compensation package to be excessive” by 25%, she says.

The investigation concluded that BCBSVT used unsuitable peer groups when determining a base salary for Milnes, she says. First, the company used only other Blue Cross and Blue Shield companies for comparison, rather than a mix of other managed care organizations. Second, the majority of the companies included in the pool were much larger than BCBSVT. Of the 14 companies used for comparison, nine had gross premiums in excess of a billion dollars, she says. BCBSVT’s gross premiums were only $590 million, Thabault notes, making for a “skewed pool.”

In a prepared statement, BCBSVT says, “In setting Mr. Milnes’ compensation BCBSVT’s board had sought recommendations from a leading national consultant on executive compensation, and in signing the order the company neither agreed to nor disputed BISHCA’s findings.”

Paul Dorf, managing director of Compensation Resources, Inc., in Upper Saddle River, N.J., explains, “the law specifically says you must look at peer organizations.  The problem, though, is Vermont is one of the smallest Blues plans. They have to pick and choose…

Blues’ National Medical Enrollment by Sector

Blue Cross and Blue Shield plans provide primary medical insurance to some 81.5 million people, 34.4% of all insured. According to an analysis of AIS’s Directory of Health Plans: 2010 data, about half of all Blues enrollment is in employer-sponsored commercial full-risk products, with another 35% of Blues membership in ASO arrangements.

METHODOLOGY: Researched by AIS editorial staff via survey and publicly available sources. Survey included health insurers operating as of Jan. 1, 2010. Enrollment data are current as of fall 2009 and include insured and ASO managed medical enrollment only, not pharmacy or other specialty enrollment. Blues enrollment may include some non-branded membership of BCBS affiliates.

who they compare against.” He advises companies to “look at organizations half their size to double their size” when setting compensation rates. Dorf was not involved in setting rates for BCBSVT. Milnes’s incentive bonus compensation also outweighed his base salary in some years, Thabault says.

In 2005, his incentive payment was $64,000 more than his base pay. And he was paid more than 100% of his target for the bonus compensation program. “That in and of itself is questionable. If you have a stretch target, you don’t expect to reach the stretch 100% of the time. Maybe perhaps then it’s not really a stretch.”

Horizon CEO’s Pay Increase Looks Steep Due to Tax Law Change

Horizon Blue Cross and Blue Shield of New Jersey also is taking some regulatory flack for alleged executive overcompensation. Sen. Frank Lautenberg (D-N.J.) recently expressed concern about the Horizon CEO’s 59% pay increase in a letter to the Commissioner of the IRS. However, one compensation expert emphasizes that context is key: What looks like a pay raise is actually the result of a change in tax law.

For 2009, Horizon’s CEO received $8.7 million — a 59% increase from the year before. In a letter, Lautenberg writes, “I am particularly troubled because, while it has been paying its chief executive these exorbitant amounts, Horizon has been increasing premiums and cost-sharing for its customers by as much as 60%.”

According to Lautenberg, “In the past three years, Horizon’s CEO has earned a total of $19.2 million in compensation — significantly more than other nonprofit BCBS chief executives.”

Horizon says in a statement that Lautenberg sent the letter without hearing Horizon’s defense. The insurer refutes claims it overpaid William Marino, saying an external executive compensation consultant studied comparative companies and compensation surveys, and found that “Marino’s target total compensation was 30% below market.” Horizon also says its total executive compensation “equates to 64¢ per member, per month or $7.68 per member, per year in annual premiums costs. This represents 0.24% of our members’ monthly premiums.”

Paul Dorf, managing director of Compensation Resources, Inc., in Upper Saddle River, N.J., says, “Under most conditions [a 59% pay increase] certainly would be considered extraordinary, but there are extenuating circumstances that it’s very important to understand.”

Executives at not-for-profits with deferred compensation have 457(f) deferred compensation plans. Under Internal Revenue Code Section 409A, which had a compliance deadline of Dec. 31, 2008, Dorf explains, all of the money from a 457(f) deferred compensation plan has to be taxable at the time an executive retires or leaves a company. To avoid significant penalties, Horizon changed its long-term compensation plan to pay the lump sum immediately rather than over time, so Marino could pay taxes on it.

“He didn’t get a 59% compensation increase — he got a 7.5% increase and the rest was deferred compensation slated to be paid over a long time period,” Dorf explains. “In this case, the need to meet the regulatory requirements was akin to the tail wagging the dog.”

The New Jersey Blues plan defended the compensation rates in front of the state Senate Health,
Human Services and Senior Citizens Committee on June 14, citing the change in tax law as the reason for the increase.

Regardless of whether the compensation was justified, “things looked distorted” on the tax forms, Dorf says. This is often the case, he says, because companies fail to fill out their paperwork correctly. In 2007, the IRS studied tax forms from 1,300 organizations, and found that one-third were improperly completed, according to Dorf. The IRS revised Form 990 to include Schedule O and J, with a space for explaining compensation information from Schedule-J.

Many companies still fail to include the narrative explanation. “Without that it’s difficult to understand what they’re doing and why. They’re shooting themselves in the foot” by not making the effort to fill it out correctly, Dorf says.

And in a climate of job loss and insurance premium increases, both state regulators and consumers are unhappy and eager to place blame. “You’re going to attract a lot of flies when you have honey smeared on executive compensation issues,” Dorf says. “Some organizations are totally callous and oblivious to that kind of concern. I tell clients they’d damn well better justify everything.” Contact Horizon through Daniel Emmer at (973) 466-4805 and Dorf at (877) 934-0505 or prd@compensationresources. com.

In all, Milnes’s base salary and bonuses exceeded the appropriate amount by $1.4 million, and his supplemental executive retirement plan (SERP) pay exceeded it by $1.6 million, according to Thabault.

The $3 million will be subtracted from future premiums, she says. “Blue Cross and Blue Shield of Vermont is a not-for-profit and has special statutory obligations. The company is obliged to operate for the sole benefit of subscribers and in the most efficient manner possible.” A $3 million overpayment violates that obligation, she contends.

Thabault also ordered the insurer “to make a strong effort to reduce administrative expenses.” BCBSVT declined to challenge the order and claims it is already making changes. The current CEO’s SERP benefit “was frozen as of the date of his appointment as President, and the Board directed that the long term incentive program for all executives be eliminated.”

Furthermore, “the company trimmed the number of executives from nine to seven, reducing overall executive compensation. In addition…[the board] reduced its own committee meeting fees by 50%” in
2009, according to the statement.

Members Will See the Refunds

The company “will reduce its administrative fees to customers by $3 million over the next two years. The reduction will be applied on a per member, per month basis.” BCBSVT will also provide the state with a medical cost management plan for the next two years. Dorf says it is his understanding the company asked Milnes to refund the money, but he refused. BCBSVT did not offer comments outside of the written statement and would not confirm or deny this information.

States are having trouble balancing their budgets these days, says Dorf, and may be “going after anything they can find to get money on.” Heightened scrutiny is not a surprise in this economic environment. BCBSVT has been cooperative throughout the process, says Thabault.

The order is one step in a larger attempt to contain rising health care costs, Thabault adds. “It’s true it’s not just insurance companies that need to…[control costs], but they’re part of it. We all need to look at cost containment and do everything we can to reduce medical trends. Insurance companies need to be part of that discussion and part of that solution.”


Blues’ Dues Payments Vary Widely

2009 Payments Made to the Blue Cross and Blue Shield Association by Selected BCBS Entities Blues Plan Annual Fee/Dues Paid to BCBSA:

**Anthem Blue Cross and Blue Shield of Colorado $315,210 **Anthem Blue Cross and Blue Shield of Connecticut $451,655 **Anthem Blue Cross and Blue Shield of Kentucky $470,390 **Anthem Blue Cross and Blue Shield of Maine $205,291 **Anthem Blue Cross and Blue Shield of Ohio $1,407,938 **Anthem Blue Cross Blue Shield of Missouri $59,809 **Anthem Blue Cross Blue Shield of Wisconsin $174,578 **Anthem Blue Cross of California $2,342,253 **Anthem Health Plans of Virginia $1,113,742 **Arkansas BlueCross BlueShield $2,008,543 **Blue Cross & Blue Shield of Rhode Island $2,254,692 **Blue Cross and Blue Shield of Alabama $3,495,351 **Blue Cross and Blue Shield of Florida, Inc. $3,370,679 **Blue Cross and Blue Shield of Georgia $1,333,581 **Blue Cross and Blue Shield of Kansas $1,143,298 **Blue Cross and Blue Shield of Kansas City $844,924 **Blue Cross and Blue Shield of Louisiana $1,149,982 **Blue Cross and Blue Shield of Montana $810,808 **Blue Cross and Blue Shield of Nebraska $768,949 **Blue Cross and Blue Shield of North Carolina $4,180,052 **Blue Cross and Blue Shield of Vermont $110,110 **Blue Cross and Blue Shield of Wyoming $143,058 **Blue Cross Blue Shield of Arizona $2,306,467 **Blue Cross Blue Shield of Delaware $577,982 **Blue Cross Blue Shield of Massachusetts $2,945,584 **Blue Cross Blue Shield of Michigan $9,296,856 **Blue Cross Blue Shield of Minnesota $3,030,606 **Blue Cross of Idaho Health Service, Inc. $1,645,395 **Blue Cross of Northeastern Pennsylvania $432,095 **BlueCross BlueShield of South Carolina $742,350 **BlueCross BlueShield of Tennessee $5,955,225 **BlueCross BlueShield of Western New York and **BlueShield of Northeastern New York $3,229,138 **Capital Blue Cross $118,712 **CareFirst BlueChoice $507,834 **CareFirst of Maryland, Inc. $1,246,399 **Empire Blue Cross Blue Shield $2,920,946 **Excellus BlueCross BlueShield $2,687,171 **Hawaii Medical Service Association $1,110,786 **HCSC, aka BCBS of Illinois $14,142,187 **Highmark Blue Cross Blue Shield $8,344,432 **Horizon Blue Cross Blue Shield $3,781,541 **Independence Blue Cross $269,297 **Mountain State BlueCross BlueShield $424,623 **Premera Blue Cross $19,128,295 **Regence BlueCross BlueShield of Oregon $782,201 **Regence BlueCross BlueShield of Utah $496,843 **Regence BlueShield $1,274,628 **Regence BlueShield of Idaho $330,774
**Wellmark Blue Cross and Blue Shield of Iowa $2,012,380 **Wellmark Blue Cross and Blue Shield of South **Dakota $278,594

SOURCE: The AIS Guide to Blue Cross and Blue Shield Plans: 2010, to be published in July. Visit www.aishealth.com/Products/gblu.html for more information.METHODOLOGY: Compiled by AIS from 4Q2009 State Insurance Dept. filings.