Blue Shield of California Does It Again: Huge but Undisclosed Compensation Hikes for Top Brass

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September 1, 2015; Los Angeles Times

Does it make a whit of difference in the behavior of Blue Shield of California that it purports to be a nonprofit and is appealing a decision of the California Franchise Tax Board to pull the mammoth health insurer’s tax exemption? Apparently not;  Blue Shield seems content to test the Board’s potential appreciation of the insurer’s nonprofit bona fides by increasing the executive compensation paid in 2012 by $24 million, an increase of 64 percent over 2011—and with barely a scintilla of public disclosure.

Los Angeles Times reporter Chad Terhune reported on Blue Shield’s generosity to its top brass after learning about the pay hike in a confidential state audit. Exempted from having to file a Form 990 despite its purported nonprofit status, Blue Shield isn’t revealing who got which slices of the $24 million, though indefatigable Blue Shield critic (and former public policy director) Michael Johnson says that Blue Shield sources told him that $20 million of that total went to the 2012 retirement package of Bruce Bodaken, Blue Shield’s chief executive officer—on top of his regular salary.

Terhune notes that a spate of retirements might account for some of the increased compensation in 2012, such as payments of retirement or severance, but exactly how much each is getting is not known because Blue Shield appears to be spurning part of a state requirement that it reveal compensation for its ten highest paid employees. (Blue Shield contends that it has to comply with compensation disclosure only for employees who were still employed by the company at the time of the paperwork submission, and because Bodaken and other executives had left by March of 2013, they and Blue Shield were spared the disclosure.) The specific non-disclosure practice adopted by Blue Shield is not sitting well with California Insurance Commissioner Dave Jones, who is concerned that Blue Shield might have intentionally misled the Department of Insurance with the implication that it was going to comply and release the specific compensation data.

“We disclose executive compensation in full compliance with all regulatory requirements while at the same time respecting our employees’ privacy,” company spokesman Steve Shivinsky told Terhune and the Times. “Many factors contributed to this one-time increase in officer compensation that affected a large number of employees, including severance, pension, deferred compensation, accrued vacation, merit increases, incentive pay, benefits and relocation expense reimbursement.”

Blue Shield’s loss of tax-exempt status wasn’t because of executive compensation, but other factors such as its mammoth $4 billion surplus and its insufficient provision of more affordable health insurance packages. However, it is difficult to imagine that state investigators won’t be taking a second look at Blue Shield’s executive compensation levels in the course of the company’s ongoing appeal.

“What is Blue Shield trying to hide? This raises so many red flags,” Frank Glassner, chief executive of Veritas Executive Compensation Consultants in San Francisco, said. “Blue Shield owes policyholders an explanation for how it spent this money.”

CEO Bruce Bodaken earned good PR points when he came out in favor of universal health coverage, a position distinctly at odds with other big insurers in the nation, and Blue Shield’s corporate foundation is an award-winning healthcare philanthropy. However, a progressive policy stance by the CEO and good philanthropy by the corporate giving arm do not overcome questions of the “nonprofit-ness” of Blue Shield’s core business practices, as NPQ described in March.

The unknown but possible compensation paid to Bodaken puts Blue Shield, with $13.6 billion in revenues, paying a top executive salary comparable to the packages of the top five insurance behemoths (in 2014): $15 million to Aetna’s Mark Bertolini (current revenues of $60.1 billion), $13.5 million to Anthem’s Joseph Swedish (revenues of $73.9 billion); $14.5 million to Cigna’s David Cordani ($36.6 billion), $10.1 million to Humana’s Bruce Broussard ($50.6 billion), and $14.9 million to UnitedHealth Group’s Stephen Helmsley ($138.2 billion). These numbers do not include what the CEOs might make were they to exercise all of their stock options. Discussing the salaries of these CEOs and others, Wendell Potter, who used to direct financial communications for Cigna, cited the reaction of Paul Dorf, the managing director of Compensation Resources, to the health insurers’ exceptionally lucrative executive pay packages:

I think what is going to happen is that the government is going to be stepping in. I really foresee it. As this stuff becomes public and more of the media recite these numbers, I think people are going to go to their legislators. […] This is crazy.

Government ought to be stepping in to control health insurance plan salaries and benefits for executives. In Massachusetts, Attorney General Martha Coakley stepped in to try to stanch massive payments to board members of Blue Cross Blue Shield of Massachusetts, with attention prompted by the discovery of huge lump-sum retirement payments to two former BCBS CEOs—though if the numbers that Johnson reports are correct, those payments would be smaller than what Bodaken scored.

David Bjork of Integrated Health Strategies thinks that government intervention on the health insurance CEO compensation issue is all but unavoidable. He writes:

Health insurers, tax-paying or not, are likely to face intense scrutiny of their executive pay practices because of a perception that executive pay is linked to rising premiums and costs of care. Efforts to control the cost of health care could lead Congress to limit pay for executives of nonprofit and for-profit providers, insurers, and even manufacturers to avoid rewarding them for making profits from publicly funded health care programs.

In California’s case, it appears that the excesses of Blue Shield, compounded by a resistance to basic elements of nonprofit disclosure that doesn’t seem nonprofit-like, have prompted the state to step in and declare the nonprofit health insurer unworthy of a nonprofit tax exemption. With Terhune’s revelations about Blue Shield’s almost-secret increases in executive compensation, the state may be able to take another step to rein in executive compensation in the interest of controlling costs and reducing premiums.—Rick Cohen