Patricia Hemingway Hall, CEO of Health Care Service Corp

Blue Cross executives’ compensation soars as controversy rages over health insurance premium increases

By Mike Colias
March 15, 2010

Executives at Blue Cross & Blue Shield of Illinois’ corporate parent pocketed big bonuses last year, as more people lost health insurance and rising premiums put insurers at the center of a political maelstrom.

Patricia Hemingway Hall, CEO of Health Care Service Corp., saw her total compensation jump 62% in 2009, to $8.7 million, according to a recent company regulatory filing. Predecessor Ray McCaskey’s $15.7-million payment was bonus compensation built up in the years preceding his 2008 retirement. He served as CEO of the Chicago-based holding company for Blue Cross plans in Illinois, Texas, Oklahoma and New Mexico for 16 years.

All of the non-profit insurer’s top 10 executives saw total compensation jump at least 48% — it more than doubled for six of them — thanks to large bonuses. The company revised its bonus program “to reflect current market-competitive talent practices,” according to a statement. It pegs bonuses to goals for membership and earnings growth, and for keeping a lid on administrative costs.

“To manage a business of this size and complexity, our compensation must be competitive to attract the industry’s best and brightest,” the company says.

Big payouts to insurance execs will provide more ammunition to congressional Democrats and Obama administration officials who are pillorying insurers in an effort to revive health reform legislation. Payouts also rile some policyholders frustrated by spiraling health care costs and the threat of policy cancellations after they get sick, a controversial practice that’s especially common in Illinois (Crain’s, March 8).

“It’s greedy and outrageous for them to make huge profits and bonuses when small businesses are dropping their coverage because they can’t afford it,” says Linda Cherrington, 60, who along with her husband owns Cherrington Design & Building Inc. in Wheaton. After 10 years with Blue Cross, they switched the company’s coverage to another insurer last year when their premium jumped 45%.

Execs’ pay at Health Care Service has risen sharply in recent years, state records show. Including his 2009 compensation, Mr. McCaskey took in $36.5 million over a three-year stretch. He was the highest-paid CEO among Blue Cross operators during that stretch, according to the AIS Report on Blue Cross & Blue Shield plans. (The independent trade publication hasn’t compiled a 2009 ranking.)

Mr. McCaskey’s pay surpassed even that of the chief of Indianapolis-based Wellpoint Inc., the nation’s largest health insurer, whose 2009 revenue of $65.03 billion tripled that of Health Care Service.

Health Care Service is a mutual reserve company, owned by its policyholders. Its 12.5 million members put it among the top five health insurers nationally; most other large players are publicly traded companies that generally have higher annual revenue and more employees.

INCENTIVES

Health Care Service can’t offer stock options, which make up the bulk of a CEO’s pay at some public companies. Still, private firms often use long-term award plans that resemble incentive programs at public firms, says Mark Reilly, a partner at Chicago-based Compensation Consulting Consortium.

Ms. Hall’s pay last year topped that of Humana Inc. CEO Michael McCallister, whose pay was $6.5 million including stock options, according to a regulatory filing last week. Humana had $30.96 billion in revenue last year, compared with $17.34 billion for Health Care Service. (Health Care Service publicly discloses only its health-premium revenue, which represents the bulk of its business, though it also owns life insurance firms and other subsidiaries.)

Most other big insurers haven’t reported 2009 pay figures. In 2008, Ms. Hall’s $5.4 million in total pay was higher than that of Minneapolis-based UnitedHealth Group Inc. CEO Stephen Helmsley, who received $3.2 million including stock options. But both were dwarfed by Aetna CEO Ronald Williams’ $24.3 million.

Directors of Health Care Service generally were paid less than those at the larger insurers after factoring in stock options, with one exception: Chairman Milton Carroll’s $800,421 total compensation in 2008 was by far the highest among non-executive directors of any Blue Cross plan or any of the five largest publicly traded insurers. His paycheck grew to $944,951 in 2009. The compensation “is reflective of the fiduciary duties and scope of responsibilities for this role,” the company says.

Health Care Service posted a net profit of $514 million on its health insurance business last year, down 31% from a year earlier and roughly half of the more than $1-billion profit it turned annually from 2004 to 2006. Rising unemployment trimmed the membership rolls of its employer-based group policies. Health Care service itself eliminated 650 jobs, or 4% of its workforce, last August.

Higher-than-expected medical costs last year hurt profits, but the company also decided to plow more money back into the business and got more competitive on pricing, according to a January report from Moody’s Investors Service. Blue Cross says its average premium increase in Illinois this year will be 10%, lower than most other health insurers’ rate hikes.

Mr. Reilly, the consultant, was surprised that the firm’s executive compensation jumped so dramatically in a down economy.

“I would think a policyholder-owned company would pay executives a little less than a public company because they don’t seem to have the quarter-to-quarter challenges and shareholder scrutiny,” Mr. Reilly says. “They’re able to fly under the radar a bit more.”

©2010 by Crain Communications Inc.