Bank and auto executives have found out that one of the consequences of more federal support is more federal scrutiny of their pay. Are healthcare CEOs in line for the same lesson?
Subsidized then scrutinized
Reform will bring billions of dollars to the industry, but it could also deliver added examination of executive pay
In 2008, the federal government made unprecedented forays into the financial services industry. Congress approved and President George W. Bush signed the $700 billion Troubled Asset Relief Program. In 2009, the federal government became the majority shareholder in General Motors Co.
It didn't take long for the federal government to decide that, if it was going to pay the piper for bailouts, it was going to call the tune on executive compensation for the recipients. Getting tough on executive compensation also was a response to voter anger about exorbitant pay for bailout recipients. The Treasury Department appointed a pay czar in June 2009 to oversee executive compensation at companies receiving TARP money, including more than a dozen banks and GM.
In 2010, Congress approved and President Barack Obama signed into law two measures that are collectively known as healthcare reform. Reform means billions more federal dollars will be injected into healthcare. And, just like with TARP, there's plenty of outrage stemming from both the policy itself and executive pay in the affected industry—in healthcare's case, particularly for insurers.
Last spring, federal lawmakers sponsoring a bill to grant HHS more authority to oversee insurance rates also ripped the compensation of health insurance CEOs. A study of 342 CEOs in the Standard & Poor's 500 index found CEOs of healthcare companies, broadly defined, were the top compensated CEOs in 2009 (See chart, p. 14).
Just last week, Health Care for America Now, a lobby group with heavy union backing that supported healthcare reform, issued a report totting up executive compensation for 10 insurers from 2000 to 2009, with totals of $842.9 million for exercised stock options and $944.1 million for all other compensation.
Nine of the insurers highlighted by Health Care for America Now are part of Modern Healthcare's eighth annual survey of healthcare services CEO pay. The survey covers the compensation of the CEOs of 10 companies in three sectors: hospitals, insurers and specialty-care providers.
Stephen Hemsley, president and CEO of UnitedHealth Group, took the top spot in this year's survey, with $106 million in total compensation, including stock option exercises that netted him $98.6 million. Last year's top earner—Wayne Smith, chairman, president and CEO of Community Health Systems—led hospital executives again with $20.8 million in total compensation, but was fourth overall. Kent Thiry, chairman and CEO of dialysis provider DaVita, led specialty-care executives with nearly $29 million in total compensation.
UnitedHealth Group did not respond to several requests for interviews with either Hemsley or with Douglas Leatherdale, the chairman of the company's compensation committee and former CEO of the St. Paul Cos. Likewise, Community Health Systems, Franklin, Tenn., declined a request to interview either Smith or its compensation committee chairman, H. Mitchell Watson Jr., a former IBM executive. A spokeswoman said the company's proxy statement covers all that it has to say on Smith's compensation.
DaVita also declined requests to interview Thiry or John Nehra, a special partner with private equity firm New Enterprise Associates and DaVita's compensation committee chairman. DaVita spokesman James “Skip” Thurman agreed to respond to questions with written responses. In the decade since Thiry joined DaVita, Thurman wrote, the company's share price has increased by 1,300%, outperforming 98% of the companies in the Standard & Poor's 500 index in that time. The company also has improved its clinical outcomes for 10 consecutive years, reducing its mortality rate from more than 20% in 2000 to 16.5% in 2010, Thurman wrote.
DaVita's proxy statement indicated that Thiry moved his residence from Northern California to the Denver area in November 2009 as DaVita has moved its headquarters from El Segundo, Calif., to Lakewood, Colo. In the past, DaVita paid for Thiry's use of a fractional-share plane or chartered jet to travel between his former residence and the El Segundo headquarters near Los Angeles—a total of $221,784 in 2009. Thiry and the board agreed that it was important for him to make his residence in the Denver area to encourage other executives and employees to do so, Thurman wrote. With more than 2,000 locations in the U.S., Thiry is on the road for 150 days a year in any case, Thurman added.
The companies chosen are the 10 largest by net revenue in each sector that also make periodic reports to the U.S. Securities and Exchange Commission. Those reports include an annual proxy statement, either filed as a stand-alone document or as part of the annual 10-K filing that details executive compensation.
Three hospital companies that could have made the top 10 list by net revenue could not be considered because they do not file SEC reports. By their responses to the magazine's 34th annual Hospital Systems Survey (June 7, p. 18), Ardent Health Services, Nashville; Capella Healthcare, Franklin, Tenn.; and Prime Healthcare Services, Ontario, Calif.; had sufficient revenue to make the list, but none of those privately held companies reports its executive compensation publicly.
The list includes two newcomers. Allen Wise replaced Dale Wolf at the helm of Coventry Health Care in January 2009. Prospect Medical Holdings, Los Angeles, with its deal to boost its stake in one hospital to a majority interest, increased its net revenue from acute-care hospitals above that of SunLink Health Systems, Atlanta, so Prospect's chairman and CEO, Sam Lee, replaces SunLink CEO Robert Thornton Jr. Prospect also has an independent physician association division, but only acute-care revenue was included in considering it for the survey.
The specialty-care portion of the list contains the same 10 companies and executives as last year's survey.
Next year will see more turnover on the list. Alec Cunningham replaced Heath Schiesser as CEO of WellCare Health Plans on Dec. 28, 2009. David Cordani took over Cigna Corp. as president and CEO on Jan. 1, replacing H. Edward Hanway.
Whether they are veterans of the list or new to it, corporate healthcare CEOs are bound to continue to feel the heat of scrutiny from the public and politicians.
U.S. Rep. Jan Schakowsky (D-Ill.) co-sponsored a bill with Sen. Dianne Feinstein (D-Calif.) to allow rate review for insurers before healthcare reform kicks in more fully in 2014. In introducing the bill, Schakowsky singled out the pay of Angela Braly, chairwoman, president and CEO of insurer WellPoint, because the company was raising its premiums by 39%, but Schakowsky said Braly's compensation was far from the most egregious. For now, Schakowsky said she prefers rate regulation to a law that sets compensation.
“It's out of that pot of money that they make their profits that enable them to pay their CEOs their very high salaries,” Schakowsky said. “It's certainly something that Congress needs to monitor, and it's something that the media ought to expose. It's important for the people who are scraping together the dollars to pay their health insurance premiums to know what luxurious lives these CEOs are leading. They're living in a parallel universe.”
The heat could be turned up as a result of stock options granted in 2009, when the stock market was down, said Ed Lawler, director of the Center for Effective Organizations at the University of Southern California. Equilar, an executive compensation research firm, found that 87.5% of options granted in 2009 were already “in the money”—the current share price exceeded the option grant price—at the end of fiscal 2009. Equilar studied 342 CEOs of S&P 500 companies who were in their jobs in both 2008 and 2009.
“Those lucky enough to get stock options near the bottom of the market are poised to benefit greatly,” Lawler said. “That might once again stimulate some discussion or action in Congress.”
Michael Faulkender, an assistant professor of finance at the University of Maryland, noted that government's role in financial services is unique compared with other sectors of the economy.
The decision to extend federal protection for bank depositors, made during the Great Depression, puts the government in the role of backstopping the entire financial system, Faulkender said. Moreover, as the financial crisis in 2008 showed, even those financial institutions that don't take insured deposits expose the government to risk from bailouts—the too-big-to-fail risk, he said.
In healthcare, regulators could be concerned about the market concentration among insurers in some markets, Faulkender said, which is a version of the too-big-to-fail risk. The overall level of federal spending on healthcare raises the separate, more philosophical and partisan issue of how much one wants to see government try to fix the imperfections of market-driven outcomes, Faulkender said. Some of those attempts have consequences that might be contrary to the intention of policymakers and inefficient economically, he said.
Overall, the research suggests that the structure of pay, rather than its level, is what is important, Faulkender said. Pay must be structured to align incentives for executives with the interests of shareholders, but without encouraging overly risky decisions that cost billions rather than millions.
“The amount that CEOs get paid relative to the sizes of their organizations—it's a tiny, tiny percentage of the overall organization,” Faulkender said. “Therefore, while $50 million is absolutely a lot of money, when you're talking about a firm that's worth a couple hundred billion dollars, it's a rounding error.”
—with Rebecca Vesely and Jessica Zigmond
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