Health Care Service Corp. bosses rake in the green

Growing pressure to bring down health care costs hasn't pinched pay for top brass at the nation's sixth-largest health insurer.

Eight of the 10 highest-paid executives—including former leaders—at Blue Cross & Blue Shield of Illinois parent company Health Care Service Corp. got raises in 2018. So did seven of the company's nine returning outside directors.

The pay hikes came in a banner year for Chicago-based HCSC, which owns Blue Cross plans in five states. Net income more than tripled to $4.1 billion last year, thanks mostly to a tax refund, as revenue rose 10 percent to $36 billion. But at a time when health care spending and insurance premiums are rising, rich pay packages fuel controversy.

"When consumers get unhappy with some segment of the economy, they start to look at how much the people who run those companies get paid," says Katherine Hempstead, a senior policy adviser at the Robert Wood Johnson Foundation. "Health care is having a pretty long moment where people think it costs too much."

Most striking is the pay of Milton Carroll, an energy industry executive who has served as HCSC's board chairman since 2002. Carroll collected $930,347 last year, after pocketing nearly $5 million in each of the two previous years, company filings show. That's far more than non-executive board chairmen got at comparable publicly traded health insurers. Humana and Cigna, for example, paid their chairmen $543,860 and $501,183, respectively.

"Most non-exec chairs don't earn that kind of money," says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Carroll isn't an average non-executive chair, HCSC spokesman Matt Burns says. "It's fair to say (Carroll) spends significantly more time on company matters than your typical large-company board chair," Burns says, noting Carroll has managed multiple CEO transitions for HCSC. "The continuity of (Carroll's) leadership is critical to the company's strength and stability."

Burns explains that Carroll's pay rose to $4.9 million in both 2016 and 2017 pursuant to a two-year agreement under which he helped oversee a transition to new executive leadership and provided "strategic guidance in a rapidly evolving industry and regulatory environment." During the same two-year period, HCSC paid its then-CEO a total of $16.8 million.

The remaining HCSC directors collected $2.4 million last year, up from $2.3 million in 2017. Pay for individual board members, not including Carroll, ranged from $90,510 for new director David Lesar to $343,724 for M. Ray Perryman.

Those payouts are generally in line with director compensation at other large health insurers. Median total non-executive director pay at S&P 500 companies is approximately $285,000, proxy advisory firm Institutional Shareholder Services says in a May report.

Senior HCSC executives saw sharp increases last year. CEO Paula Steiner took home $14 million, a 38 percent increase from 2017, and Chief Financial Officer Eric Feldstein got $3.5 million, a 96 percent bump. Both executives left the company in July after Steiner disagreed with directors over long-term growth plans. Lesar is filling in as interim CEO while HCSC searches for a permanent successor.

Meanwhile, the insurer continues paying large sums to former leaders. Patricia Hemingway Hall, who retired as CEO in 2015, got $3 million last year, $6.5 million in 2017 and $18 million in 2016. Under HCSC's incentive program, many leaders collect paychecks for up to three years after retirement, Burns says.

Competitors paid their CEOs similar amounts last year. Anthem chief Gail Boudreaux got $14 million, Humana's Bruce Broussard received $16 million and Cigna's David Cordani got $18.9 million, according to proxy statements. Anthem also paid a former CEO who left in 2017 $4.5 million to serve as a "senior adviser" to Boudreaux.

"HCSC's strong results against near- and long-term performance standards is the reason for the year-over-year total compensation changes," Burns says, declining to disclose specific performance targets used to set executive pay.

The company's annual net premium income increased 10 percent to $36 million in 2018. And a $1.7 billion tax refund under the Trump administration's tax cuts drove a 226 percent rise in net income to $4.1 billion, from $1.3 billion the year earlier.

Profits and executive pay at HCSC soared amid continued growth in medical costs. Health care spending is projected to rise at an average rate of 5.5 percent per year, reaching nearly $6 trillion nationwide by 2027, according to the Centers for Medicare & Medicaid Services. Such spending is largely financed by health insurance—be it private or government-funded.

The average annual premium for employer-sponsored family coverage rose 5 percent to $19,616 in 2018, according to the National Conference of State Legislatures. Like other insurers, HCSC won't disclose its rates for employer-sponsored plans. But a "frequently asked questions" page on its website acknowledges that health insurance premiums in general have increased.

Industry experts warn that surging premiums invite questions about high pay for insurance company honchos.

"As insurance premiums continue to rise, so does scrutiny around executive pay levels," Judy Canavan, leader of BDO's compensation surveys practice, says in a statement about the firm's latest health insurance executive compensation trends report.

"Blue Cross bosses rake in the green" was originally published in Crain's Chicago Business.