Executive compensation and the rising cost of health care

The revelations about the huge golden parachute given the outgoing CEO of ostensibly non-profit Massachusetts Blue Cross Blue Shield induced some public discussion about the disconnect between executive compensation and the mission of health care organizations.

First, new proxy statements revealed the compensation of executives of two large for-profit health care insurers/managed care companies.

Cigna

As reported by the AP, via ABC News, the CEO got a big raise:

Cigna Corp. CEO David M. Cordani’s total compensation more than doubled in 2010, his first year as leader of the nation’s fourth-largest health insurer, and a period in which the company’s earnings, revenue and enrollment all climb.

Cordani, 45, received compensation valued at $15.1 million last year from the Philadelphia managed-care company, according to an Associated Press analysis of a regulatory filing Friday.

That included a $1 million salary, a performance-related bonus totaling more than $7.3 million and stock and option awards adding up to $6.7 million.

In 2009, Cordani’s compensation was $6.5 million, but he did not serve for the entire year. Note that according to the 2009 proxy, the previous CEO, H Edward Hanway, received $12,236,740 in total compensation in 2008, his last year as CEO.

What was the rationale for the huge rise in Cordani’s compensation from 2009 to 2010?

The company said in its proxy statement filed with the Securities and Exchange Commission that Cigna ‘effectively executed on its growth strategy under Cordani’s leadership last year.

‘Revenue rose significantly in 2010, reflecting strong premium growth in (Cigna’s) ongoing business segments,’ the proxy said.

Cigna earned about $1.35 billion, or $4.89 per share, on $21.25 billion in revenue in 2010. That was up from $1.3 billion, or $4.73 per share, on $18.41 billion in revenue in 2009. The insurer’s medical membership climbed 4 percent to 11.4 million people compared to the final quarter of 2009, when it fell more than 5 percent. That helped raise premiums and fees in health care, the insurer’s largest segment.

Also,

Cigna shares climbed 4 percent to close 2010 at $36.66, while the Standard & Poor’s 500 index rose 12.8 percent.

So to recap, Cigna’s current CEO’s total compensation doubled in a year while earnings and the stock price rose about 4%.

WellPoint

Also reported by AP, via the Washington Post, the CEO got a small raise (but ended up with compensation similar to Mr. Cordani’s above):

The president and CEO of health insurer WellPoint Inc. received a 3 percent boost in total compensation in 2010 even as the company’s profit and enrollment numbers slipped during a transitional year for U.S. health care companies.

The Indianapolis-based insurer awarded Angela Braly a total pay package worth $13.4 million up from $13.1 million in 2009. Wellpoint disclosed the compensation — which includes salary, bonus and other awards — in a filing with federal financial regulators late Friday.

On the other hand, the company did not do so well financially:

The insurer’s profit fell sharply last year compared with 2009, when the sale of its NextRx subsidiary contributed $2.2 billion in after-tax income. Medical enrollment also slid 1 percent last year to 33.3 million members.

So what was the rationale for even a small raise (over an already huge compensation package)?

In the company’s filing, Wellpoint’s board of directors highlighted accomplishments by management, including reducing general expenses by 3 percent.

Also,

A Wellpoint spokeswoman stressed Friday that the company’s pay formula rewards executives for improving enrollee health, boosting share prices and meeting other pre-set goals.

‘For the CEO, almost 90 percent of total target compensation is based on company performance and is tied to meeting established goals,’ Kristin Binns said in a statement.

So while Cigna did slightly better financially than last year, its CEO’s total compensation doubled to well over $10 million, and while WellPoint did slightly worse financially than last year, its CEO’s total compensation increased, again remaining well over $10 million.  It seems that the leaders of top health care organizations will continue to get richer, no matter how well their organizations performed financially, let alone what effect they had on patients’ and the public’s health.

So what drives up health care costs?

Just to distract from CEOs getting increases in their already huge compensation that seem disproportionate to any reasonable measure of their companies’ financial performance, health care insurers continued to deny any responsibility for the rise in health care costs.

For example, the San Francisco Chronicle published a story entitled, “Insurer Wants Focus on What Drives Up Health Costs,” which had a familiar ring:

When health insurers notify members that rates are going up – often in the punishing double-digits – they typically blame rising medical costs.

They say the problem really isn’t theirs; it’s all the other pieces of the health-care puzzle that drive up costs that must be passed on to customers.

Don’t blame you, don’t blame me, blame that fella behind the tree.

It went on to name all the usual suspects:

Insurers say their costs grow in part because of new medical technologies and the rising price of pharmaceutical products and medical equipment.

The consolidation of hospitals and doctors into large networks also makes it hard to keep prices low, as do waste, fraud and malpractice, they say. The system also lacks incentives for hospitals and doctors to curb costs. For example, they can charge twice by repeating tests and procedures, and by readmitting patients.

Insurers also say they lose money with policies people buy on their own, as opposed to group coverage from employers. Because the individual policies are more expensive, healthier people tend to avoid them, leaving insurers with a sicker pool.

Poor reimbursement from government programs such as Medi-Cal also forces insurers to raise private insurance prices to make up the slack, they say.

Finally, as people get older and fatter, they gobble up more health care resources.

‘When you’re looking at growth in premiums, the largest engine of that growth are those medical costs,’ said Charles Bacchi, executive vice president of the California Association of Health Plans, which represents health insurers. He said critics who claim that insurers raise prices to increase profits and pad executive salaries are wrong, and that insurers’ average profit margin has remained at 3 to 5 percent for years.

First, note that the executive compensation, the administrative costs, the marketing, public relations and lobbying costs all come off the top of revenues before any profits are generated, and before any possible dividends get paid to stock-holders.   I suspect that the insurance industry spokespeople immediately switch the topic to profits and investors’ results to distract from those who really make money from health insurance companies, the top executives, and all those managers, bureaucrats, marketers, public relations people, and lobbyists who never touch patients and never deliver any care.  As Wendell Potter has written, many people like to blame government bureaucrats for health care’s problems. They may deserve some blame, but not any more, and perhaps less than corporate bureaucrats and executives.

Recall further what Wendell Potter described in Deadly Spin. All those health insurance corporate public relations people were earning good salaries in part based on their ability to distract the public and policy-makers from the insurance companies’ roles in health care dysfunction. Potter wrote:

Rather than admit responsibility for the failures, insurance executives pointed the finger of blame at their customers, the ‘consumers’ of health care, and, of course, the providers of care. In introducing the concept of their new silver bullet – consumer driven health care – insurance executives claimed that the ‘real drivers of health care costs’ (one of my CEO’s favorite expressions) were the people who sought care when they really didn’t need it and the doctors and hospitals who were all too willing to provide this unnecessary care. Sure, the aging population and expensive new technology were also factors, but the main culprits were people who just didn’t realize how expensive health care had become.

Note the similarities among the “real drivers of health care costs” promulgated by the corporate PR people and the defense of the health insurers’ role mounted above (some of the more obvious color-coded). Note that the defenses never explain why the insurance companies seem unable to negotiate prices down, and why they all use the physician payment schedule derived from the recommendations of the secretive RUC.

For some final irony, the Chronicle found an academic who was not too hard on the health insurance companies:

Glenn Melnick, a health economist at the University of Southern California, sympathizes with many of the insurers’ arguments.

He blamed rising costs mainly on higher prices charged by hospitals and doctors, which account for the largest portion of health care spending.

The reporter did not note Professor Melnick’s full title, Professor and Blue Cross of California Chair in Health Care Finance. Oops.

So in summary, health care costs continue rising, access keeps declining, and there is no evidence of improvements in quality. Large health care organizations blame each other for the problems, but nearly all of them continue to make their top executives extremely rich. Although the amounts diverted to these executives cannot solely account for the rise in health care costs, the perverse incentives given those who lead health care are likely a major cause of the problems. A health care system run by leaders who are comfortable becoming extremely rich while the health care crisis worsens is a likely recipe for dysfunction.

We now know commercial health insurers deploy well paid public relations departments to use stealthy if not downright deceptive means to distract those who want to address what really causes health care dysfunction. It is likely that all large health care organizations use similar stealth advocacy strategies. These strategies have successfully distracted the conversation away from problems with health care leadership and governance, at least until now.

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.

Furthermore, we need an open discussion of the real issues related to health care dysfunction, not one stifled by the anechoic effect, spun by corporate PR, and dominated by “third parties” whose conflicts of interest are hidden.

Roy Poses is an internal medicine physician who blogs at Health Care Renewal.

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  • James deMaine

    Every dollar spent is “benefiting” someone.  Those at the high end use all kinds of means to justify their compensation.  The perverse incentives show that true reform will continue to be very hard.  In the Seattle area, a recent survey showed that 19 hospital executives received a salary of more than a million dollars (seven were in one hospital system). See http://seattletimes.nwsource.com/html/localnews/2013723659_apwahospitalpay1stldwritethru.html
     

  • Anonymous

    It’d be nice if Doctors who signed onto these Healthplans could be also voting members of their Boards

  • http://profiles.google.com/joel.sherman Joel Sherman

    You haven’t even approached the worst abuses, CEO Dr William W. McGuire retired in 2006 from United Healthcare with a retirement package near 1 BILLION dollars.  He was ultimately forced to give much of it back because it was based on illegal post dated options.There’s a reason why public insurers such as Medicare have much lower administrative costs.  It’s the biggest reason why the defeat of the public option is a tragedy.

  • http://profiles.google.com/joel.sherman Joel Sherman

    You haven’t even approached the worst abuses, CEO Dr
    William W. McGuire retired in 2006 from United Healthcare with a
    retirement package near 1 BILLION dollars.  He was ultimately forced to
    give much of it back because it was based on illegal post dated options.
    There’s a reason why public insurers such as Medicare have much lower administrative costs.  It’s the biggest reason why the defeat of the public option is a tragedy.

  • http://pulse.yahoo.com/_ZNE5BQXLXFP6LWG3QOGPLO4FB4 JoeR

    Same story all over the place in healthcare and all over everywhere!  Nothing done by our elected officials, same problem there!  I’m not sure what we can do since nothing we have tried works.

  • smfwrites

    Ok, all the CEO compensation cited in your post added up to $52.5 million for about 5 people. A lot of money, to be sure. Hard to imagine what people do to earn it. But what percentage of $2.5 trillion is that? Because that’s the total health care tab for this year. Ax the pay every every health insurance CEO in the country and you’ll budge premium by less than a penny on the dollar.

    Even the federal government estimates the TOTAL administrative cost burden (not just execs but everyone) at 7 cents on the health care dollar (all spending, not just insurance premiums).

    So tell us, doctor, just where should the country look to for lower spending? That other 93 cents, perhaps? It’s a lot easier to carp about CEO pay than to take responsibility for our actions, as patients and as those wielding the prescribing pen. But it won’t change the fact that our lousy health and the myriad treatments we pursue will sink this country further into debt than our two unfunded wars.

  • Anonymous

     Joel Sherman hit the magic “recall” button – “Dollar Bill” McGuire at United Healthcare is the ultimate example on the abuses by fat cat insurers who feasted on the public under the auspices having to “pay for the talent” to compete. Who the heck are they kidding when bonuses were handed out to the people who did the best jobs of holding claims payments down? And we defend this system?