What's in their wallets? Health plan executives bring home the bucks

Almost every CEO of a publicly traded health insurance company made more than the median salary for a top executive in the S&P 500 in 2007. But some analysts think that trend might not continue.

Despite growing scrutiny from their own stockholders, among others, last year health plan executives remained among the best-paid business managers, said Alexander Cwirko-Godycki, research manager for Equilar, a Redwood Shores, Calif.-based executive compensation research firm.

In its analysis of S&P 500 companies, Equilar found median total compensation for the CEOs was $8.8 million. The six publicly traded health plans that are a part of the S&P 500 index all paid their CEOs more than that median: from $9.1 million for WellPoint's Angela Braly to $25.8 million for Cigna's H. Edward Hanway. The highest-paid executive in the S&P 500 2007 was John Thain, CEO of Merrill Lynch, who took home $83.8 million, most of it in stock options and stock awards granted at his hiring last year, Cwirko-Godycki said.

Of the largest publicly traded health plans, only Health Net's Jay M. Gellert was below the median, at $3.7 million. His company is not part of the S&P 500.

Heidi Toppel, JD, senior executive compensation consultant for human resources consulting firm Watson Wyatt, said health plan CEOs' pay isn't out of line by Wall Street standards. "I would not consider the levels of pay to be stratospheric," she said.

But she and other experts acknowledge that pay is a thorny issue for health plans, particularly as physicians question why their reimbursement should be under pressure and why they need to jump through hoops to get care paid for while health plan executives take home large paychecks.

Investors are wondering about health plan paychecks as well. A "say on pay" shareholder resolution proposed this year by the Connecticut Retirement Plans and Trust Funds would have given WellPoint shareholders the opportunity to take a nonbinding vote on executive compensation. The measure failed. A similar resolution was submitted by UnitedHealth Group shareholders for a vote at its annual shareholders' meeting June 5. Results were not available as of press time.

Those investors, and anyone else, can get a fuller accounting of executive pay than they could only a few years ago.

The Securities and Exchange Commission in July 2006 adopted new rules for publicly traded companies that took effect for fiscal 2007. The new executive compensation disclosures, now including pre-arranged severance agreements and explanations of compensation in mandated "plain English," were first included in health plan filings this spring.

The rules break down not only base pay, bonuses, stock rewards and options, but also specify other compensation, such as a driving or flying allowance, retirement contributions, or financial planning services.

"When the original rules came out 14 years ago, the things like severance, pension plans, were not well disclosed, and a lot of compensation started flowing in that direction," Cwirko-Godycki said.

With the new rules, ways to strategically understate compensation have all but disappeared, he said. Toppel said the rules can be more grist for the "groundswell of public criticism about perquisites.

"These folks are making significant ... pay," and investors are asking, "Can't they pay for their own financial planning, their own golf trips?"

The new rules will also go a long way toward further discouraging the generous severance agreements that already have fallen out of favor, Toppel said. More often now, companies are arranging severance agreements that diminish the longer the executive stays at the company, she said.

The idea is that the severance pay needn't be so high if an executive has worked at the company for decades, since by then if the person is successful, he or she should have had opportunity to reap rewards.

Plans say they are sensitive to scrutiny of their executive pay. UnitedHealth Group is aware that shareholders, members and the public are increasingly sensitive to conspicuously large pay packages, said Kenneth Burdick, CEO of UnitedHealth Group's UnitedHealthcare division.

"We do compete for talent and it's important that we offer competitive compensation," Burdick said. "But the last few years have taught us a valuable lesson about this: there needs to be a balance ... in an industry when our customers are challenged every day to afford health care access."

United has taken particular heat, after it was accused of illegally backdating stock options to maximize their worth, to the point that former Chair and CEO William McGuire, MD, had amassed $1.8 billion worth of options. Dr. McGuire, without admitting wrongdoing, settled with the company and the SEC, giving back a total of $668 million in stock options. Other executives also gave back options, including current CEO Stephen Hemsley, who returned $190 million.

But analysts say the biggest reason to look for a possible decline in health plan executive pay is a pressure that affects any CEO at any publicly traded company -- a perceived failure to live up to investors' expectations.

This year, the slowing economy and disappointing (to Wall Street) first-quarter financial results from for-profit health plans will probably result in a decline in overall compensation for health plan executives, as the plans also likely cut staffing and outsource what they can, and eventually cut physician reimbursement, said Bill DeMarco, CEO for DeMarco and Associates, a consulting firm based in Rockford, Ill. The firm's subsidiary, Warren Surveys, checks health plan executive pay every six months.

"I think the economics are going to be changing," DeMarco said. "It's just more expensive to run a health plan."

And while the health plan executives take home less, DeMarco says, doctors shouldn't expect any of that money to be applied to health care or reimbursement. It's likely, he says, that physician reimbursement will be under greater pressure as health plan CEOs try to do what they're paid to do -- make the biggest profit possible.