Salary Up 26% For Blue Cross CEO
Story from the Boston Globe

Salary, Bonus Totals $3.5 Million as Insurer's Net Income Slides 49%

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.

The jump came during a tough year in which 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.

"We made money in one of the toughest economic environments in the last 75 years," he said. "The company seeks to maintain strength to weather just this kind of situation."

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 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.

The insurer recently said it was eliminating executive bonuses for 2009. Senior executives will still participate in a companywide bonus plan.

The company said the cutbacks would reduce cash compensation to senior executives about 30 percent and payments to Killingsworth about 50 percent, exclusive of retirement benefits.

At Harvard Pilgrim Health Care, the state's second-largest health plan, chief executive Charles D. Baker's total compensation, including retirement benefits, rose 24.5 percent to $1.7 million.

Net income for 2008 increased to $48.1 million from $45.6 million in the previous year, and membership grew 38,000 to 1.07 million.

"We did a great job of managing expenses," said James DuCharme, chief financial officer, in a statement. "Our overall administrative spending in 2008 was $15 million lower than it was in 2007."

Tufts Health Plan earned net income of $18.8 million in 2008 despite suffering investment losses of $6.2 million in 2008. In the fourth quarter alone, Tufts lost $27.3 million because of investment losses and an operating loss of $1.3 million. In 2007, Tufts posted net income of $110 million.

Enrollment increased to 698,000 at year-end compared with 678,000 in the first quarter.

"During such a challenging period, we are pleased to end the year with a positive net income," said Umesh Kurpad, chief financial officer, in a statement.

Chief executive James Roosevelt Jr. earned compensation of $1.06 million, excluding contributions to an executive savings plan, down slightly from $1.19 million in 2007.

The state's health plans are among the best nationwide, as ranked by the National Committee for Quality Assurance, a respected nonprofit. Harvard Pilgrim has been ranked best commercial health plan in the nation for four consecutive years. Tufts' plans, excluding its Medicare Advantage plan for seniors, were ranked second nationally last year, and Blue Cross and Blue Shield of Massachusetts ranked ninth.