The Massachusetts Blue Cross Blue Shield CEO's Golden Parachute - "'Have's' Greasing One Another's Pockets"

We have frequently discussed the kind of compensation now frequently given to leaders of health care organizations.  Although often even the most disproportionately outrageous compensation only attracts transient interest, a recent regional story in this genre has really gotten legs.

How Big the Golden Parachute?
The story was about the severance package given to one Cleve L Killingsworth, the former CEO of not-for-profit health care insurance company Massachusetts Blue Cross Blue Shield.  While first reported as being worth $8.6 million,(1) the estimate of his total severance was soon raised to $11 million.(2)

This is a Way to Control Costs?

Immediately, that amount was contrasted with the supposed emphasis of the company on controlling costs, and its recent poor performance:

Killingsworth’s tenure at Blue Cross, which has nearly 3 million members, was marked by efforts to address skyrocketing medical costs by launching a 'global payment' pilot program, under which health care providers are given an annual budget and incentives to keep patients healthy and out of the hospital.

'Without Cleve’s leadership, we wouldn’t be where we are today in shifting from fee-for-service to global payments,' said senior vice president Jay McQuaide.

But the insurer stumbled financially in recent years, recording back-to-back operating losses totaling nearly $215 million in 2009 and 2010 as the economy weakened and state regulators acted to limit premium increases for policies covering small businesses and individuals.(3)

Then focus shifted to the company's board of trustees, which lead to recognition of some more striking contrasts. First, some prominent members of the board which approved the huge golden parachute had been vocal supporters of controlling health care costs:

Key members of the Blue Cross Blue Shield board that gave the nod to then-CEO Cleve Killingsworth’s controversial $11 million severance have been public advocates for trimming soaring health-care costs — even as they sat on a panel that quietly approved the departing chief’s golden parachute.

Greater Boston Chamber of Commerce President Paul Guzzi has crusaded to lower health-care costs in his day job representing the interests of local businesses, many of which struggle under the burden of rising premiums for their employee health plans.

'Advancing payment reform to bring health-care costs under control' is one of the Greater Boston Chamber of Commerce’s top policy agenda items, Guzzi said in a statement in January. Guzzi made $84,463 as the Blue Cross board chairman at the time of the Killingsworth vote.

Robert J. Haynes, president of the Massachusetts AFL-CIO who made $72,700 as a Blue Cross board member in 2010, has championed health-care cost reduction for the thousands of union members he represents.

'Unions stand ready to be part of the solution to the health-care cost crisis in which we all find ourselves,' Haynes said in an AFL-CIO statement in January. 'The only way to ensure we are part of the solution is to guarantee that we have a voice and meaningful role in how cost savings are achieved.'

Bentley University president Gloria Larson, who earned $76,400 as a Blue Cross board member last year, helped organize a confab of business, labor and political leaders in Ashland in January that addressed rising health-care costs. Those who planned to attend reportedly included two other Blue Cross board members — Haynes and former Suffolk District Attorney Ralph C. Martin II.(4)

Why Pay a Non-Profit's Trustees?

Also, as the quote above pointed out, it appears that the board members were themselves paid fairly well for a very part-time job, even though in general trustees of not-for-profit organizations serve as unpaid volunteers. However, it was soon revealed the paying board members is common practice for all Massachusetts non-profit health insurance companies.(5)

Some Blue Cross board members tried to defuse the issue by minimizing the impact of their pay on the organization's total budget:

Robert J. Haynes, president of the Massachusetts AFL-CIO and a critic of excessive corporate pay, was questioned about his role on the board following a State House news conference he held on a union-backed plan aimed at lowering health care costs. He said he would not give up his $72,000 annual payment from Blue Cross until the issue was reviewed by the company, and said the money given to board members does not play a role in rising health care costs.

'The cost of health insurance is not affected very much,' Haynes said. 'It’s about $1 million that board members get paid. On $13 billion in revenue, it’s like pennies a year.' (6)

What Should the New CEO Be Paid?
However, soon the board felt the need to suddenly stop paying itself.(7) The current Blue Cross CEO noted how little he would be paid:

Dreyfus emphasized that he has taken 'rock-bottom-of-the-market' compensation levels -- $800,000 in base pay with the opportunity for $1.6 million in severance – for comparable positions in the insurance industry.

'I will be one of the lowest paid Blue Cross executives in the country,' he said.... (8)

Things are tough all over.

What is Mr Killingsworth Now Up To?

Meanwhile, Mr Killingsworth seems to be weathering the storm. An enterprising reporter attempted to interview him in his house in New York, described as "a sprawling clapboard monstrosity with the charm of an assisted-living facility." However, "Mr Killingsworth was nowhere to be found," and Mrs Killingsworth "slammed the door" on the reporter.  (See picture in cited article.)  (9)

Possibly, Mr Killingworth was away tending his other responsibilities, which include serving on the Boards of Directors of The Traveler's Company and TIAA-CREF, and apparently despite their apparently competitive nature, on the boards of the Harvard Medical School and Boston University.

The Reaction

There were plenty of reactions, mostly vigorously unfavorable, to the contrast between the company's non-profit status, supposed commitment to reducing costs, and financial performance, on one hand, and the compensation given to executives, and board members:

"undermines the credibility of insurers when they say they're serious about bringing down the cost of care" Deidre Cummings, President of the Massachusetts Public Interest Research Group (3)

"If you lose $149 million and then you get paid $11 million for doing it, it is very clear to people where their health-care dollars are going.  And it is not to health care." - Ethan Rome, Health Care for America Now (2)

There were also judgments that health care had become the sandbox for wealthy and well-connected insiders, at the expense of everyone else:

"What we have here today is yet another enraging story of the 'haves'greasing one another's pockets while the 'have-nots' slip beneath the waves." Margery Egan, columnist for the Boston Herald(10)

"Therein lies the problem with boards.  They're supposed to provide oversight, but too often it's the same people tossing money at each other to serve on the boards of each other's companies, the operative word always being 'Yes!'" Brian McGrory, Boston Globe columnist (5)

Most pessimistically:

"If Massachusetts is the model, then national health care reform is ultimately doomed." Derrick Z Jackson, Boston Globe columnist (11)

I am actually now more optimistic.  The coverage of this story really shows that the anechoic effect may be fading .  There is starting to be frank discussion of the role of bad leadership of health care organizations as a cause of health care dysfunction.  If we start to admit these problems, maybe we can figure out solutions.

I will add just one opinion to those expressed in these articles.  The clear problem here is again perverse incentives.  The issue with how much this CEO was paid, and how his board members were paid was not mainly the diversion from direct health care of the funds involved.  Instead, the concerns ought to be: what sorts of people do these payments attract?  Are they the sorts of people who will uphold the organization's mission?  Once attracted, what sorts of incentives do the prospects of these payments supply for what sorts of decisions?  Do these sorts of incentives lead to decisions that uphold the mission in the long-term?

In this case, these concerns are underlined by the Blue Cross trustees' cavalier attitude to their own pay, and the new CEO's belief that $800,000 a year is "rock-bottom." 

I hope that the amount of discussion this case provoked might actually lead to some needed regional changes.

More globally, as we have said before, far too often the leaders of not-for-profit health care institutions seem more interested in padding their own bottom lines than upholding the institutions' missions. They often seem entirely unaware of their duty to put those missions ahead of their own self-interest. Like the financial services sector in the era of "greed is good," health care too often seems run by "insiders hijacking established institutions for their personal benefit." True health care reform would encourage leadership of health care who understand health care and care about its mission, rather than those who see a quick way to make a small fortune.

References


1.  Gil G. Former Blue Cross CEO got $8.6m last year.  Boston Globe, March 1, 2011. 
2. McConville C. Ex-Blue Cross CEO walks away with $11M. Boston Herald, March 2, 2011.
3. Weisman R. Blue Cross CEO got $8.6m in exit deal. Boston Globe, March 2, 2011.
4. McConville C, Chabot H. Trio publicly crusade against rising health costs: behind the shield. Boston Herald, March 3, 2011.
5. McGrory B. Such health pay, it's sick. Boston Globe, March 4, 2011.
6. Levenson M, Weisman R. 2 Blue Cross directors justify stipends. March 8, 2011.
7. Crimaldi L, Dwinnell J. Blue Cross board suspends pay, CEO perks cut. Boston Herald, March 8, 2011.
8. Cheney K. Amid outrage, Blue Cross chief fights to 'reclaim' company's standing. Enterprise News, March 10, 2011.
9. Gelzinis P. Cleve Killingsworth's New York castle not shielded from bad taste. Boston Herald, March 11, 2011.
10. Egan M. You call this health care? - it's nauseating.  Boston Herald, March 3, 2011.
11.  Jackson DZ. No wonder health costs are so high.  Boston Globe, March 5, 2011.