Friday, August 22, 2008

Merger Mania Redux: Combination Would Lead to Windfalls for Blue Cross Executives

The Philadelphia Inquirer published a story about what seems to drive merger mania in health care. In Pennsylvania, the two largest health insurance companies in the state, both not-for-profit, Highmark and Independence Blue Cross, have been pushing to merge

Highmark Inc. and Independence Blue Cross would pay their top executives as much as $4.2 million more if they were allowed to merge.

Kenneth Melani, the chief executive of Highmark, who is expected to have the same job at the combined companies, would get a 31 percent raise, to $3.9 million from $2.97 million, including incentives, according to documents filed with the Pennsylvania Insurance Department.

Independence Blue Cross' CEO, Joseph Frick, who is slated for the role of chief operating office after the merger, would earn $2.94 million, the same as his current pay. In 2006, Frick's pay was $1.6 million.

The two biggest raises after Melani's $930,000 are planned for chief financial officer Nanette DeTurk and David M. O'Brien, executive vice president for government services, both from Pittsburgh-based Highmark.

DeTurk, who is in line to be CFO of the combined entity, could get a $635,098 increase in total pay, which includes possible annual and long-term incentives. O'Brien, head of Medicare operations, would get a $556,184 raise under the plan filed Thursday.

Lance Haver, director of Philadelphia's Office of Consumer Affairs, said yesterday that the raises were another 'indication that the Blues have lost their social mission and operate more like for-profit insurance companies.'

If the reason for the merger is 'to better serve the public, then they don't need to raise executive salaries like this,' he said.

The insurers have said that efficiencies from the merger, which would create the largest health insurer in state history and one of the largest in the nation, would spin off $1 billion in savings to benefit subscribers, the uninsured and other charities.

Part of the savings would come from the elimination of 745 to 1,200 jobs, the companies have projected.

An editorial in the same newspaper noted that while executives would enrich themselves, the benefits to others were not so obvious.

Short of the windfalls for the top execs, the proposed merger looks like a loser for other Pennsylvanians.

Employees: Up to 1,200 Blue Cross jobs are expected to be eliminated if the deal goes through. Mergers create job overlaps that lead to reductions and a big annual savings.

Of course, there's no overlap for the two chief executives, who instead will divvy up their duties and still get big paydays.

Customers: Independence Blue Cross and Highmark already have a stranglehold on their respective markets, which helps explain why they can jack up rates without much recourse by their clients.

The proposed merger won't lead to a reduction in premiums for customers, who have been socked with annual double-digit increases. The Blue Cross CEOs say the merger will have 'minimal' impact when it comes to reining in rate hikes.

Competitors: If the merger is approved, the prospect of any real competition among health-insurance providers in the state will disappear.

The merger would give the new firm a combined market share of roughly 65 percent - making it the largest private health insurer in Pennsylvania. The result will be a more dominant health-insurance provider, making it even harder for other existing insurers to expand while scaring any new competitors from entering the state.

The leaders of not-for-profit corporations are supposed to have a duty of obedience, the obligation to advance their organization's mission, and a duty of loyalty, the obligation to put the mission ahead of their self-interest when acting in their leadership capacity. Highmark proclaims its mission to be "to provide access to affordable, quality health care." Independence Blue Cross seems to have avoided committing itself to a mission, but by implication also should be about providing fairly priced, accessible health insurance. However, the main effect of this merger seemingly would be to enrich the two organizations' top executives, not to improve health care or make it more affordable or accessible. This example of merger mania reminds us that far too many health care leaders seem more interested in enriching and empowering themselves rather than improving health care.

We need health care leaders who actually care about health.

Making the governance of health care organizations, particularly not-for-profit organizations, more representative of key constituencies, more transparent, more accountable, and subject to clear ethical standards might encourage people who care about health to lead health care organizations, and discourage people who care mainly about their own wealth and power from doing so.


Anonymous said...

The issue of the behaviors of nonprofit executives seems to be a recurring theme and one that brings ever increasing questions regarding control. I view this as a business issue and licensing and educational requirements become a system unto themselves, with goals and unintended consequences, that may not meet the desired needs of the public.

My suggestion would be that all nonprofits submit audited financial statements for public review. Currently, all publicly traded companies must adhere to standards not found in many medical or insurance situations. The use of an outside auditor would, hopefully, expose many of the abuses we are now finding, after the fact, in these organizations.

Nonprofits are afforded a special position in our communities, a position many have violated. Making an audited financial statement available to the community would not only expose executive pay, but also show how much money, and resources, are being returned to the community in exchange for this tax free status.

Publicly traded companies screamed when the new accounting standards were implemented. While far from perfect they did introduce a new level of transparency. In my community we have a nonprofit hospital owning a for profit insurance company and even the state cannot determine executive compensation from the minimal financial statement required by current law. Request for additional information are always met with the statement: This is proprietary information.

All I am asking is that we extend existing accounting standards and regulations to the largest group of hospitals and insurance companies in the country, nonprofits.

Steve Lucas

Marilyn Mann said...

This article in yesterday's Wall Street Journal says non-profit health plans are "feeling pressure" to merge or convert to for-profit status. I'm skeptical.