Tuesday, June 08, 2010

"A Kind of Blackmail": A Not-for-Profit Health Insurance Company CEO's Salary So Large It "Had Broken the Law"

Here is another case in the annals of over-paid executives of not-for-profit health care organizations, this time from the Burlington (VT) Free-Press,
Blue Cross and Blue Shield of Vermont overpaid its former chief executive officer by $3 million over an eight-year period and has been ordered to pay the money back to its subscribers by 2012 in the form of reduced premiums, a top state regulator said Wednesday.

The action by the state Banking, Insurance, Securities and Health Care Administration Department follows last year’s disclosure that William Milnes, the nonprofit firm’s former CEO, received a $7.2 million payout when he stepped down in 2008.

Furthermore, note that
[Commissioner of the Banking, Insurance, Securities and Health Care Administration Department Paulette] Thabault said her department had concluded Blue Cross had broken the law by paying Milnes more money than necessary to perform his functions as head of the nonprofit health-benefits provider.

The Department's review found obvious flaws in how Blue Cross Blue Shield set its former CEO's pay:
The department’s review found that Milnes’ salary package while at Blue Cross was excessive, and in some years, he was paid more in bonuses than he received in base pay. In 2005, for example, Milnes was paid $425,000 in salary and $489,800 in bonuses.

'Other health insurance or managed care organizations of a similar size to the Vermont company compensate their chief executive officers at a level of about 45 percent to 50 percent less than the compensation levels set by the company for Mr. Milnes,' the department order said in part.

The department said Blue Cross used a 'peer group' study to justify the pay it gave Milnes, but regulators concluded the study was flawed because it put Milnes’ position on the same level of chief executive officers of much larger Blue Cross sister companies.

'The peer group ... used in 2007 included 14 companies, all but one of which were substantially larger in terms of annual gross premiums,' the department’s order said. 'Nine of the 14 companies had gross premiums in excess of $1 billion.' Blue Cross gross premiums for 2007 were $590 million.

This story is striking because it seems that the overpayment of a not-for-profit health care organization's executive this time seemed to rise to the level of crime. However, current Blue Cross leaders seemed unconcerned.
'The company accepts the findings of the department, and it just wants to move on at this point,' [Blue Cross and Blue Shield spokesman Kevin] Goddard said.
Somehow, whenever a health care organization's conduct is publicly revealed to be shameful, the response is not sorrow or apology, but let's just "move on." Moving on, of course, minimizes the accountability of those initially responsible for the bad behavior.

Furthermore, do not expect corporate leadership to acknowledge anything wrong with how the pay for the top hired corporate executive was determined.
Goddard said the company thought the peer group numbers it was using were sound.

'Our board used a comprehensive analysis to come up with a compensation package for Bill,' he said. 'We relied on what we thought was professional information.'

One begins to feel a little sorry for the poor spokesman who is obligated to mouth these sorts of sentiments. Whether the analysis was rational, or the "professional information" was relevant or correct seems not to have bee anyone's concern.

In addition, although Blue Cross and Blue Shield is now obligated to reimburse its policy-holders for former CEO Milnes' excessive pay, do not expect the money to come out of his pocket:
None of the $3 million the company has to pay back will come from Milnes. Blue Cross asked Milnes, through his attorney, if he would give back some of the money but was rejected, according to documents in the case made public Wednesday.

'He has made it quite clear that Mr. Milnes is not willing to make a voluntary repayment of any portion of the Supplemental Executive Retirement Program distribution,' Christopher Gannon, a Blue Cross vice president, wrote in a letter to Thabault’s department Jan. 21.

One would think that the current company management would be so upset about its new $3 million obligation, that it would aggressively try to recover the money from the person who benefited from it. However, it seems that all the current Blue Cross and Blue Shield management was willing to do was politely requesting that Mr Milnes return it. Suing a former CEO, of course, is just something that is not done. Perhaps it would be too disturbing to  the cozy atmosphere now prevailing among top executives and the boards of trustees who are supposed to be supervising them. This seems to make clear that no one at Blue Cross and Blue Shield ever really was responsible for what Mr Milnes was paid.

As an editorial in the Rutland Herald put it:
On its face, it was an outrage. Blue Cross is a nonprofit corporation that insures about 150,000 Vermonters. That a nonprofit with a mission of providing health care coverage should be a source of extravagant personal profit was an affront to all Vermonters, including those struggling to pay escalating premiums, those struggling to find adequate care, or those with no coverage at all.

The usual excuse from companies is that big money is necessary to attract big talent. It's a marketplace. But this excuse is really a kind of blackmail that allows corporate executives to collude in the inflation of their own worth.

So the notion of the "imperial CEO" who can virtually set his or her own pay, unencumbered by any real accountability to a board of trustees who would dare not ruffle the imperial feathers has now been imported even into relatively small health care organizations in New England states once famed for their common-sense and frugality.

So here we go again.... We have discussed numerous examples of compensation of health care organizations' leadership that seems orders of magnitude above that which would be rationally justified. These latest examples of the wealth being accumulated by leaders of supposedly mission-centered not-for-profit organizations are a product of the current management culture that has been infused into nearly every health care organization in the US. That culture holds that managers are different from you and me. They are entitled to a special share of other people's money. Because of their innate and self-evident brilliance, they are entitled to become rich. This entitlement exists even when the economy, or the financial performance of the specific organization prevents other people from making any economic progress. This entitlement exists even if those other people actually do the work, and ultimately provide the money that sustains the organization.

Although the executives of not-for-profit health care organizations generally make far less than executives of for-profit health care corporations, collectively, hired managers of even not-for-profit health care organizations have become richer and richer at a time when most Americans, including many health professionals, and most primary care physicians, have seen their incomes stagnate or fall. They are less and less restrained by passive, if not crony boards, and more and more unaccountable. In a kind of multi-centric coup d'etat of the hired managers, they have become our new de facto aristocracy.

Or as we wrote in our previous post, executive compensation in health care seems best described as Prof Mintzberg described compensation for finance CEOs, "All this compensation madness is not about markets or talents or incentives, but rather about insiders hijacking established institutions for their personal benefit." As it did in finance, compensation madness is likely to keep the health care bubble inflating until it bursts, with the expected adverse consequences. Meanwhile, I say again, if health care reformers really care about improving access and controlling costs, they will have to have the courage to confront the powerful and self-interested leaders who benefit so well from their previously mission-driven organizations. It is time to reverse the coup d'etat of the hired managers.

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