HCSC: When is a Nonprofit Executive’s Salary an Affront to the Public?

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October 11, 2016; Houston Chronicle

Founded in 1936 by a group of Chicago civic leaders, hospital officials and physicians, Health Care Service Corporation (HCSC) today is the country’s largest nonpublic health insurer and the 4th largest insurer overall, serving nearly 15 million members. HCSC has been an independent licensee of the nonprofit Blue Cross and Blue Shield Association since 1947. HCSC also offers life insurance products. HSCS is structured as a (customer owned) mutual legal reserve insurer, which is to say it operates as a nonprofit.

The Houston Chronicle’s Chris Tomlinson takes issue with the $48 million in bonuses HCSC awarded its top executives after denying insurance options for the poor and seeking approval from the Texas Department of Insurance to approve an 82 percent increase in premiums on some plans. NPQ just commented in its nonprofit newswire on the likelihood of such requests being granted by the “captured” state regulators.

The biggest winner was now-retired CEO Patricia Hemingway Hall, who collected a $14.9 million bonus that pushed her payday to more than $16.57 million from the nonprofit health insurance company. That’s what you earn for telling the world that your company is going broke and simply can’t afford to offer health insurance to those most in need.

This is merely an update on extensive NPQ coverage of HCSC and similar nonprofit health insurance providers. Tomlinson echoes NPQ’s concerns.

This is more proof that nonprofit is a legal status, not a sign of an altruistic philosophy. Many of us make the mistake of thinking that there is something noble about not trying to make a profit. That somehow the organization is making a sacrifice for the good of mankind. Health Care Service Corp. proves that at least some people are getting rich working at a nonprofit that is supposed to be dedicated to providing high quality, moderately-priced health insurance. The company says, “Executive compensation and our marketplace participation are unrelated.” What? If not, why not?

Tomlinson refutes the routine claim that HCSC needs to pay its executives competitive salaries with data that shows performance has nothing to do with compensation.

It’s important to remember that health insurance companies like HCSC are nonprofits, but they are not charities. There are hundreds of thousands of tax-exempt entities recognized by the IRS that are not defined as 501(c)(3) private foundations or public charities. Examples include labor unions, country clubs, cemeteries, and certain mutual benefit insurance companies.

The promise of health care reform as expressed in the Affordable Care Act (ACA) is to ensure that health insurance coverage is affordable and that no one be denied adequate care. This goal is denied as long as nonprofit health insurance companies like those named above continue to accumulate enormous surpluses, funded by consumers. Insurance companies defend the accumulation of surpluses, saying they are intended to provide resources to pay claims, not make up annual operating deficits. According to an e-mailed statement last December from HCSC, “Our reserves serve a different purpose and that is to remain in place to protect our nearly 15 million HCSC members and ensure anticipated and unanticipated claims by our members.”

Some policymakers and many consumer advocates and grassroots organizations are challenging the nonprofit status of these insurance companies, often not understanding or distinguishing between “nonprofit” and “charitable,” incorrectly assuming that non-charitable nonprofit status implies the same altruistic “public benefit purpose” that charities are required to pursue.

Meanwhile, the business behavior of tax-exempt HCSC differs little from health insurers that do pay taxes, with the exception that for-profit insurers have investors with ownership interests and nonprofit insurers like HCSC do not. One would think that the for-profit insurers and hospitals would be the loudest critics of the competitive advantage of their nonprofit competitors.

With examples like HCSC and other noncharitable nonprofit insurers, perhaps the time has come for a public policy discussion about whether the tax code should be changed to require health insurance companies to become charitable in order to remain nonprofit.—James Schaffer

  • Jenn P.

    Mr. Schaffer- This is a great article! As a tax professional working specifically with TE entities, the difference between nonprofit and charitable is one I spend a lot of time explaining. When people learn that the NFL is a nonprofit things just get ugly! Anyway, I stumbled upon your article and just really appreciated seeing someone else reminding folks that not all exempt entities are public benefit organizations. Thank you!

    • Hi, Jenn. Thanks for your generous comment and for the good work you do helping to clarify the important distinctions that exist in the “nonprofit” sector. Everything we publish here is a team effort, and this article in particular received significant help from others more knowledgeable than me on such matters. On their behalf, thank you for reading our offerings and thank you for your kindness in letting us know your appreciation. Jim

  • STEVEN BALSAM

    Jim I’m going to agree with Jenn. Nice piece. We need to keep getting the word out that nonprofit is not the same as charity.