A Health Care CEO Who Didn't Put His Own Pay First

We recently posted about executives at two different not-for-profit health care insurance companies/ managed care organizations whose pay seemed to keep levitating, despite organizational financial losses, and commented on how the compensation of top executives of health care organizations seems always to go up, regardless of the financial fortunes, or quality of the products or services provided by their organizations. (Posts here and here.)

Today's Boston Globe, however, provided a contrast. The background is that the Beth Israel Deaconess Medical Center (BIDMC), a renowned Harvard teaching institution, is facing a budget shortfall.

Paul Levy, the guy who runs Beth Israel Deaconess Medical Center, was standing in Sherman Auditorium the other day, before some of the very people to whom he might soon be sending pink slips.

In the days before the meeting, Levy had been walking around the hospital, noticing little things.

He stood at the nurses' stations, watching the transporters, the people who push the patients around in wheelchairs. He saw them talk to the patients, put them at ease, make them laugh. He saw that the people who push the wheelchairs were practicing medicine.

He noticed the same when he poked his head into the rooms and watched as the people who deliver the food chatted up the patients and their families.

He watched the people who polish the corridors, who strip the sheets, who empty the trash cans, and he realized that a lot of them are immigrants, many of them had second jobs, most of them were just scraping by.

And so Paul Levy had all this bouncing around his brain the other day when he stood in Sherman Auditorium.

He looked out into a sea of people and recognized faces: technicians, secretaries, administrators, therapists, nurses, the people who are the heart and soul of any hospital. People who knew that Beth Israel had hired about a quarter of its 8,000 staff over the last six years and that the chances that they could all keep their jobs and benefits in an economy in freefall ranged between slim and none.

'I want to run an idea by you that I think is important, and I'd like to get your reaction to it,' Levy began. 'I'd like to do what we can to protect the lower-wage earners - the transporters, the housekeepers, the food service people. A lot of these people work really hard, and I don't want to put an additional burden on them.'

'Now, if we protect these workers, it means the rest of us will have to make a bigger sacrifice,' he continued. 'It means that others will have to give up more of their salary or benefits.'

He had barely gotten the words out of his mouth when Sherman Auditorium erupted in applause. Thunderous, heartfelt, sustained applause.

The editorialist's conclusion was:

Paul Levy is trying something revolutionary, radical, maybe even impossible: He is trying to convince the people who work for him that the E in CEO can sometimes stand for empathy.

Note that Levy is one of the few health care CEOs who blogs, and he appears to write his blog on his own, unfettered by public relations flacks or risk-averse lawyers. His discussion of his revolutionary plan is here.

Further note the context in which he is working. While his medical center does not seem to receive particularly payments from insurance companies and managed care organizations, a previously secret agreement between the previous CEO of Partners Healthcare, another renowned, but competing Harvard-affiliated medical system and the previous CEO of Blue Cross and Blue Shield of Massachusetts, the state's biggest, and not-for-profit health care insurer/ managed care organization awarded much higher payments to that health care system (see posts here and here). And the current CEO of that Blue Cross and Blue Shield of Massachusetts just received (see this post) a substantial raise, enough to make him the best paid health care CEO in the state, while his organization's revenues and membership decreased.

This case shows it is possible for a health care CEO to put the organization's mission, and the welfare and morale of its hard working staff ahead of his own remuneration. If only this example were not so rare.

A $4.3 Million Dollar CEO for a Not-For-Profit Health Care Insurance Corporation

The US stock markets are at lows unseen for more than 10 years, unemployment is rising, around the world national deficits are increasing, and times are tough for ostensibly not-for-profit Blue Cross and Blue Shield of Massachusetts, the state's largest health care insurer/ managed care organization. Per the Boston Globe:

Blue Cross-Blue Shield's business was affected by the stock market decline, the recession, and the increasing cost of medical care.

Membership at the state's largest health plan declined about 40,000 to just over 3 million.

'The decline in membership had an impact on results,' said chief financial officer Allen Maltz. 'In addition, many of our customers changed their benefits plans to products that have much lower margins.'

Blue Cross-Blue Shield insures employees of national companies that have locations outside Massachusetts, Maltz said, and those customers accounted for some of the drop-off in membership.

Maltz said Blue Cross-Blue Shield aims for a profit margin of between 1.5 and 2 percent. Last year's margin was almost zero. The firm had operating income from its medical claims business of just $1.6 million.

A new state assessment on reserves lowered income by $21 million, Maltz said. Revenue was flat at $6.7 billion, and medical claims were also unchanged at $6 billion.

Like most health insurers, Blue Cross-Blue Shield also relies on investment income, which fell 28 percent to $111 million. Maltz said the firm managed to avoid losses in the market by investing primarily in bonds and avoiding derivative securities that have declined precipitously in value.

Well, things are tough all over. But they are apparently not so tough for Blue Cross Blue Shield's CEO:

The salary and bonus paid to Cleve L. Killingsworth, chairman and chief executive of Blue Cross and Blue Shield of Massachusetts, increased 26 percent last year, to $3.5 million, even though the health insurer's membership declined and its net income fell 49 percent.

Based on previous years' retirement benefits - which Blue Cross-Blue Shield did not report for 2008 - Killingsworth's total pay package was likely about $4.3 million, making him by far the highest paid healthcare executive in Massachusetts.

And what was the justification for Killingworth's stellar pay?

Salaries at Blue Cross-Blue Shield were inflated by a complex executive bonus plan in which senior officials get bonuses based on a rolling average of the previous three years.

'These executives and the company performed and exceeded our expectations,' said Jay McQuaide, a Blue Cross-Blue Shield spokesman. 'They earned these incentives.' The key metrics in the incentive plan are membership and net profit, he said.

The company's board of directors did not do badly either. Unlike most boards of not-for-profit corporations, this one was paid:

The insurer's board members also received a 33 percent increase in base pay, from $30,000 a year to $40,000. Most earn far more because of payments for attending meetings and serving on committees.

Finally, according to the Boston Herald, other executives did quite nicely too:

Bay State health insurance bosses continued to rake in multimillion-dollar compensation packages last year as the state and its taxpayers struggled to pay ever-increasing health-care costs.

Data filed yesterday with the state’s Division of Insurance shows that Blue Cross Blue Shield of Massachusetts, the state’s largest HMO, doled out million-dollar pay packages to five executives, while Harvard Pilgrim Health Care paid its two highest-ranking executives a total of $2.7 million.

Blue Cross’ top earner is Peter Meade, who retired last spring as executive vice president of corporate affairs. Meade took home $4 million, a sum that includes retirement benefits accrued during his 12 years at the HMO.

It's just amazing that with all their talk about "pay for performance," top executives of health care organizations seem to make huge sums year in and year out, regardless of their organization's performance. (As an aside, how could someone say that the company's pay for performance "main metrics" were membership and net profit, when both fell, yet the CEO's pay rose?)

There was a brilliant discussion of the culture that lead to this sad state of affairs in the Times (UK) by Minette Marrin. It was about British bankers, but it just as well could have been about American health care executives:

The filthy rich, as Peter Mandelson affectionately calls them, are different. It is not just that they’re rich but that there’s something about being extremely rich that blurs ordinary perspective in all but the most exceptional people. Power may corrupt, but extreme wealth blinds and deafens.

I first came across the filthy rich just after I was married and went to live in Hong Kong in the 1970s. Leaving poverty-stricken Britain, my husband and I joined a gold rush of bankers and brokers to what was then still a crown colony. What we saw was wealth and conspicuous consumption beyond the wildest dreams of avarice.

Though we weren’t extremely highly paid, we spent a lot of time with people who were. Some were entrepreneurs and others were employees of banks and trading houses that, as today, offered them ways of making megabucks. Soon it became obvious that being very rich is like catching an insidious virus. Some people are able to resist it, but with most people the super-riches virus burrows into your nervous system for life. It blurs your perspective, weakens your grasp on reality and changes your identity into someone who is entitled to be very rich.

Ms Marrin's description of "plutocratic blindness" seems to apply to a CEO of a so-called not-for-profit organization who could claim more than $4 million in a year in which the global economy collapsed, and his own organization did rather badly by any financial measure.

This passage by Ms Marrin seems applicable to the Blue Cross Blue Shield Board who approved this disproportionate pay package:

But I do know things are done quite differently on the parallel planet inhabited by the filthy rich. Remuneration boards unselfconsciously award each other astonishing packages, wrapped up in euphemism.

The lack of selfconsciousness in this case may have been driven by the board's familiarity with how things used to be done in the American financial sector. A quarter of the board's members are leaders in that sector (see post here).

Let me close with Ms Marrin's suggested solution:

The filthy rich culture that has developed in the past 20 years is sick. It needs strong medicine, fresh air, open windows. Above all, what’s needed is a cold dose of fear – fear of failing, of being sacked and of losing the lovely money. Here is an excellent antidote to greed.