Health insurer CEOs score 2016 pay raises despite uncertain future

In 2016, the health insurance industry braced for tremendous change. President Donald Trump and his administration promised to upend the regulatory framework insurers had been operating under for six years. The Affordable Care Act's insurance exchanges were depleting many big insurers, sparking millions in reported losses. Anthem and Aetna failed to alter the insurance landscape in proposed mergers with Cigna Corp. and Humana, respectively.

In a rocky year for the industry, the CEOs were rewarded for ensuring their companies weathered the storm by delivering revenue and earnings growth despite the chaos.

Most of the CEOs at eight of the largest publicly traded insurance companies got a pay raise last year. Combined, those eight executives made $171.8 million in total compensation in 2016 based on realized stock gains, essentially unchanged from last year, according to a Modern Healthcare analysis of company proxy statements filed with the Securities and Exchange Commission.

The analysis included Aetna, Anthem, Cigna Corp., Centene Corp., Humana, Molina Healthcare, WellCare Health Plans and UnitedHealth Group. Companies report total compensation, which comprises salary, stock and option awards, bonuses and other compensation. But those stock and option awards may not be realized for a few years. Realized compensation, however, takes into account stock vested and options exercised during that year.

For some context, the CEOs' combined 2016 realized compensation would be enough to cover the average annual premium for about 59,150 people enrolled in the most popular plan on the HealthCare.gov federal marketplace last year before financial assistance.

Executive compensation at the leading publicly traded health insurance companies has been climbing for years, said Mike Halloran, senior partner in executive compensation at consulting firm Mercer. The pay tracks closely with the size and scale of the companies, many of which have grown dramatically in terms of revenue.

Moreover, "the health care market in general is competitive right now for talent," Halloran said. Insurers are rapidly consolidating, and the companies are looking for talent that can manage operations on a larger scale.

For example, Aetna's revenue nearly doubled to $63.1 billion last year from $34.2 billion in 2010, when Mark Bertolini took over as CEO. Bertolini made $41.7 million in 2016 based on realized stock gains, while he made $10.6 million his first year at the helm of the company. Last year, he made the most of all the CEOs analyzed.

Bertolini's pay increased in 2016 despite several stumbles during the year. Like many other insurers, Aetna struggled to turn a profit on the ACA's insurance exchanges. It lost $450 million from the individual exchange plans in 2016.

The $37 billion tie-up with Humana, which Bertolini spearheaded, ultimately failed after a federal court blocked the deal saying it would harm competition. It was an expensive failure: In 2015 and 2016, Aetna spent $775 million in transaction and integration-related fees, according SEC documents. Moreover, Aetna had to pay Humana a $1 billion breakup fee.

Still, Aetna's board of directors rewarded Bertolini an annual bonus at 115% of his target for delivering "strong financial performance," growing membership, and expanding the Medicare Advantage footprint. Aetna's 2016 revenue grew by 4.7% over 2015, though its profit dropped by 5% year over year to $2.3 billion.

Humana CEO Bruce Broussard's pay increased dramatically to $17 million from $4.8 million in 2015. The spike was largely due to Broussard cashing in on stock awards from years past.

He was also rewarded by the board for delivering 2016 adjusted earnings per share of $9.57, up from the target of $8.85, "despite an extremely challenging operating environment due to our proposed merger agreement with Aetna," the company's proxy filing states. That adjusted figure excluded costs related to the Aetna merger and the payments Humana is owed under the ACA's risk corridor program. Humana spent about $127 million in 2015 and 2016 in fees related to the Aetna deal.

It's not surprising that neither Bertolini or Broussard's pay suffered from the failure of the merger. Betsy Field, a senior executive compensation consultant at risk management firm Willis Towers Watson noted that "typically you wouldn't see completing a merger as a goal in your annual or long-term incentive plan."

Still, Broussard's total pay ballooned despite lower profit. Humana's 2016 profit was $614 million, down from $1.3 billion in 2015, due to membership losses in Humana's individual commercial and group Medicare Advantage plans. Humana drastically reduced the individual plans it sold on and off the ACA exchanges in 2016.

Anthem likewise struggled with ACA exchange plan losses, but that didn't hurt CEO Joseph Swedish's paycheck. He made $17.1 million in total pay based on actual stock gains.

That's up 8.5% over 2015, even though Anthem's $54 billion deal with Cigna didn't pan out. The merger is still pending in appeals court after a lower court judge blocked it for threatening competition in the national employer market.

"Compensation increases for Mr. Swedish were implemented to recognize his performance," an Anthem spokeswoman explained.

Swedish received a $2.8 million bonus in 2016, largely for meeting the company's adjusted earnings per share goal of $11 per share. That measure is weighted at 85% of the bonus. Anthem revenue totaled $84.9 billion, up 7.2% year over year. Profit fell 3.5% over 2015 to $2.5 billion.

About 90% of the typical health insurer CEO's pay is tied to the financial performance of the company, Halloran said. Of that, the lion's share of incentive pay is stock performance. If shareholders are happy, top executives get paid the big bucks.

Cigna CEO David Cordani's pay was slashed by more than half last year. He made $22 million in 2016, down from $49 million the year before when he cashed out a lot of stock.

The swing in pay also reflects Cigna's failure to meet its financial goals. Cordani earned just 50% of his target annual bonus because the company didn't meet goals for adjusted income from operations, which slipped to $2.3 billion in 2016 from $2.4 billion the year before, or the operating expense ratio.

Stephen Hemsley, head of the nation's largest health insurer UnitedHealth, made $33.4 million in total compensation based on realized stock gains, up 66.1% over 2015.

Hemsley's non-equity bonus was $4.9 million because the company beat performance goals for revenue and operating income. The company also met target goals for employee engagement and teamwork, which are measured based on survey results. UnitedHealth recorded 2016 revenue of $184.8 billion, up 17.6% year over year.

At the same time, UnitedHealth rewarded Hemsley for enrolling almost 2.2 million new members during the year and improving its Medicare Advantage star ratings, according to the proxy. The company's adjusted earnings per share grew by 25% in 2016 to $8.05, with total shareholder return at 38%, "reflecting continued successful performance in an uncertain environment," the proxy noted.

Centene CEO Michael Neidorff earned slightly less than Hemsley at $32.2 million, down 27% over last year. His stock gains were lower than in 2015, accounting for most of the decrease in pay.

But despite the Medicaid insurer's stock price falling 14% in 2016, Neidorff still earned a $3.9 million annual bonus.

The proxy cited Neidorff's role in closing the company's $6 billion acquisition of insurer Health Net, making Centene the largest Medicaid insurer in the country by membership and revenue. The deal helped boost the combined company's revenue by 78% to $40.6 billion over 2015. Centene's total membership was 11.4 million in 2016, an increase of 6.3 million members over 2015.

Kenneth Burdick of WellCare Health Plans made $4.7 million, up from $3.3 million the year before. His annual bonus was $2.7 million, or 183% of the target, for meeting financial—revenue and earnings per share, for instance—and quality goals, like customer satisfaction.

Molina CEO Dr. J. Mario Molina's pay totaled $3.8 million, about half of what he made the year before. The lower pay "represented a disappointing year with respect to our financial results," the proxy stated. While Molina's revenue increased to $17.8 billion in 2016, the company didn't reach predetermined goals for net profit margin and earnings before interest, tax, depreciation and amortization, or EBITDA.