Blue Cross paring costs in bid to save up to $25m

THE BIGGEST HIT Chief executive Cleve Killingsworth will take a 50 percent pay cut. Other senior managers will take 30 percent pay cuts.

Blue Cross and Blue Shield of Massachusetts, the state's largest health insurer, said it will eliminate executive bonuses, cut bonuses for other employees, and freeze pay and hiring this year in an effort to save between $10 million and $25 million.

Cleve L. Killingsworth, the company's chief executive, will take the biggest hit - a 50 percent pay cut, the insurer said. Killingsworth earned salary and bonuses of $3.6 million in 2007, the last year for which figures are available. Other senior managers will face compensation reductions of about 30 percent as a result of forfeiting their bonuses.

The moves come in anticipation of a difficult year because of the economic recession. Blue Cross spokesman Jay McQuaide said the company, which has about 3 million members, would see that total shrink this year as more people lose their jobs and company-paid health benefits.

"Even if we keep existing accounts, the accounts will have fewer members," said McQuaide. "We know that 2009 will be a challenging year. We're not immune from the downturn."

Blue Cross membership grew from 1.6 million in 1998 to about 3.1 million in 2007, before decreasing slightly last year.

The insurer also warned that its investment income has suffered. It earned about $100 million from investments in 2007, which accounted for nearly half of its net income. Blue Cross will disclose 2008 compensation and financial results at the end of the month.

"The ongoing turmoil in the financial markets will continue to negatively impact our investment income," said Allen Maltz, Blue Cross's chief financial officer, in a statement. "The action we're announcing today is designed to maintain our financial strength and market leading position."

About half of Blue Cross's members are employees of large companies that have their own health insurance plans. Blue Cross essentially runs those plans for the companies and charges a fee that is closely related to its administrative expenses.

From 2002 to 2007, Blue Cross's administrative expenses averaged a little more than 10 percent of its total premiums, or about $705 million in 2007. But they grew along with membership, indicating that Blue Cross may not have been able to achieve significant economies of scale as its membership swelled by about 30 percent during that time.

Even if the savings amount to $25 million, they are unlikely to account for more than 3 percent of administrative costs for the year. But they will carry symbolic value. The combined compensation for the insurer's 10 senior managers increased 42 percent from 2005 to 2007, according to public filings.

In October, Blue Cross said it was working to lower administrative costs. At that time, it said it would lower costs through attrition, by letting employees do some work at home to reduce office expenses, and by increasing productivity with improved technology.

Under the cuts detailed yesterday, senior managers would not get any pay this year from an executive long-term compensation plan. Such payments often make up a significant percentage of top managers' pay. Payments from a separate bonus plan, which applies to all employees, would be cut 20 percent.

"We did not meet our targets for the senior executive incentive plan," said McQuaide.

Blue Cross and Blue Shield of Massachusetts has about 3,800 employees.

Jeffrey Krasner can be reached at krasner@globe.com.