Blues execs to get bonus in conversion

Medical societies and consumer groups are expressing dismay after learning that Washington-based Premera Blue Cross is proposing to award its top executives and board members lucrative stock options if the insurer obtains government approvals to convert to for-profit status.

Premera's request to transform to a publicly traded plan has been pending with insurance regulators in Washington and Alaska since 2002. The company's plan for changes in executive compensation was released to the public in February in response to a Seattle newspaper's Freedom of Information Act request.

If the conversion goes through, Premera CEO Brereton "Gubby" Barlow would get annual stock options estimated at $750,000, bringing his total compensation to about $2.2 million. Four executive vice presidents each would receive annual stock options valued at $375,000. Moreover, compensation for members of Premera's board would nearly triple after conversion because of stock options, from $44,500 to $119,500.

"That's obviously a lot of money that's being wasted," said Bob Crittenden, MD, a Seattle family physician and former president of the Washington Academy of Family Physicians, which is opposing the conversion. "When you make somebody into a wealthy person overnight on one of these conversions, it makes you wonder."

The disclosure of the planned boost in compensation "was strong evidence that the whole conversion proposal is ill-considered and doesn't make good economic sense for the state of Washington or its citizens who need access to health care," said Bob Perna, director of health care economics at the Washington State Medical Assn., which also opposes conversion. Premera has 1.2 million members in Washington.

"I think it's just one more nail in the coffin on this proposal," Perna added, predicting that state regulators will look critically at any conversion plan containing provisions for steep pay hikes.

The stock option plan also was criticized by Kyle Tanner, campaign director of Washington Citizen Action, the state's largest grassroots public advocacy group.

"I was shocked," Tanner said, "but quite frankly we know from other conversions the primary motivation is executive compensation. This is money that should go to premiums and to provide better services."

Planned changes in compensation connected to Blue Cross conversions have sometimes become stumbling blocks to winning state regulators' support for the proposals. In March 2003, for instance, Maryland Insurance Commissioner Steve Larsen rejected CareFirst's planned for-profit conversion and acquisition by WellPoint Health Networks, in large part because he felt CareFirst's top officers had sought to profit from the deal through big bonuses.

The planned pay increases also concern doctors in Alaska, where Premera has about 106,000 members, said Alex Malter, MD, an internist in Juneau and president of the Alaska State Medical Assn. "We feel strongly the executives should not make a windfall through this conversion," he said.

The compensation increases are not excessive when compared with pay levels at other publicly traded health plans, said Scott Forslund, a spokesman for Premera. For example, the median total direct compensation for CEOs of comparable managed care companies is $2.23 million, he said -- virtually the same pay that Barlow stands to receive after a conversion.

"Premera will have the ability to competitively recruit executive talent based on the median of the market," Forslund said.

Premium increases on the way?

Consumer and physician groups have also expressed concern that a Premera conversion would result in an increase in the cost of insurance and swell the ranks of the uninsured.

A PricewaterhouseCoopers report to the Washington insurance commissioner predicted that to attain its net operating margin targets after conversion, the insurer would have to find ways to trim health care costs or administrative expenses or to increase premiums -- as much as 8% to 10% in some areas of the state.

Another study published by the Alaska Division of Insurance predicted that a conversion would cause premium increases of 2% to 5% in that state because of a rise in Premera's state premium tax rate and federal income tax rate and the need to satisfy investors with higher profits.

Some doctors in Washington also may find doing business with Premera less palatable after conversion, the PricewaterhouseCoopers study indicated. Because Premera will be under greater pressure to improve its bottom line after conversion, the report said, physician rates in less competitive parts of the state could be cut.

Premera has downplayed the effect that a for-profit conversion might have on either premiums or physician payments.

The insurance commissioners in Washington and Alaska are expected to rule on the conversion proposal by July.