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Insurer’s board suspends own pay

Blue Cross reacts as criticism grows; status as charity to be reviewed

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By Robert Weisman
Globe Staff / March 9, 2011

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Blue Cross Blue Shield of Massachusetts board members, huddling in an emergency meeting yesterday, voted to suspend their five-figure annual directors’ payments and to start discussions with the state attorney general’s office and community leaders about the health insurer’s status as a public charity.

With the company facing mounting criticism over its pay for part-time board members, and Attorney General Martha Coakley set to recommend that nonprofit insurers stop compensating directors, the board’s unanimous vote was an effort to restore the company’s credibility as it presses hospitals to hold down medical costs.

“Obviously, this has become a great distraction,’’ Blue Cross chief executive Andrew Dreyfus conceded in an interview. Dreyfus said he called for the board meeting because “it was important that they make a statement’’ following a week of complaints from the public and some elected officials over the board fees and an $11 million payout given to former Blue Cross chief executive Cleve L. Killingsworth.

“I recognize that the public was angry, outraged in some cases, over the size of my predecessor’s retirement package. I get it,’’ Dreyfus said. He reiterated that his own salary and retirement pay will be less extravagant — in the best case, about half of what Killingsworth collected.

The suspension of directors’ compensation will last at least until the end of the year, giving Blue Cross time to conduct a “public conversation’’ on its legal classification, and the fee won’t be made retroactive if it is reinstated, Dreyfus said. “If at the end of that conversation, the community expectations are that our board should not be paid, then I’m willing to accept that,’’ he said. He said Blue Cross is reassessing its structure because, while classified as a nonprofit public charity, it pays state and federal taxes, doesn’t accept donations or grants, and operates like a complex business with nearly 3 million members and $7 billion in annual revenue.

“There’s a basic dissonance between what the community expects of us as a not-for-profit public charity and what we have to do in order to be successful and compete often with national for-profit insurance companies,’’ he said. For instance, he said, Blue Cross vies with national insurers for big business accounts and executive hires.

Last week, the Boston-based insurer disclosed that it agreed to give Killingsworth, who resigned last March, more than $11 million in salary, retirement, and severance payments. Public outrage was magnified by the fees Blue Cross pays to its 18 directors, most of whom are prominent business, labor, and education leaders. Those payments ranged from $11,415 to $89,886 last year.

Coakley said the Blue Cross move was encouraging, noting that board members at the state’s nonprofit hospitals and universities are not paid. She urged the state’s three other nonprofit health insurers — Harvard Pilgrim Health Care, Tufts Health Plan, and Fallon Community Health Plan — to follow suit and stop paying their directors. Until now, Coakley said, she has been dissatisfied with their responses to her office’s queries asking them to justify directors’ pay.

Spokeswomen for Harvard Pilgrim and Tufts last night said their companies are rethinking their board payments — which are less than those given to Blue Cross directors — after receiving Coakley’s request.

“While our decisions are made thoughtfully, at this time, given the position of the attorney general, we are evaluating our practices,’’ said Patti Embry-Tautenhan, vice president at Tufts, based in Watertown.

While her office is wrapping up a 16-month review of directors’ pay at nonprofit insurers, Coakley said the companies could render the inquiry moot by following the lead of Blue Cross and suspending board fees. Separately, her office opened an investigation last week into the practices followed by the Blue Cross board in 2005, when it voted to give Killingsworth the employment contract on which his severance package was based.

That inquiry will continue, Coakley said. Blue Cross board members unanimously approved Killingsworth’s contract after they had been criticized for approving an even more generous exit package for his predecessor, William Van Faasen, currently the insurer’s chairman. The board later voted unanimously to let Killingsworth resign with the same payout he would have received if he were fired.

Coakley said her office would participate in Blue Cross’ review of its legal status, but any decisions about changes would be left up to the insurer’s board.

“They have two choices right now,’’ she said. “They can stay organized as a not-for-profit, but I would hope that their directors would stay non-compensated indefinitely. Or if they decide they want to be organized as a for-profit, they’re going to have to get a statutory change’’ because the insurer was set up by state law.

Dreyfus said Blue Cross has no interest in losing its nonprofit status. He suggested two other possible outcomes: It could remain a nonprofit, but drop its designation as a public charity, which now puts it in the same category as organizations that accept donations, such as museums. Blue Cross also could become a member-owned mutual insurance company. In either case, he said, the board would have to determine whether to resume paying directors under a new legal structure.

Critics of Blue Cross applauded the suspension of payments to board members, but said it would do little to address the more pressing issue of annual double-digit premium increases that have been crippling the finances of families, businesses, and municipalities.

“I’d say this is a prudent move on their part,’’ said Jon B. Hurst, president of the Retailers Association of Massachusetts. He said Blue Cross should appoint board members who are feeling the crunch of rising medical costs. “I’m glad they’re acknowledging there’s a problem in the marketplace,’’ Hurst said. “Most of the health care costs disproportionately come down on small employers and consumers. Like any board, profit or nonprofit, their board should reflect their customer base.’’

Frank G. Glassner, chief executive of Veritas Executive Compensation Consultants, who had said Killingsworth’s compensation and severance was unusual for a nonprofit, yesterday said the fees paid to Blue Cross board members were not out of line with fees at similar-sized companies. “It’s an incredibly complex organization and it’s very time-consuming,’’ he said. “If directors are going to assume that kind of time, they should be compensated.’’

Dreyfus said compensation given to the company’s directors and executives is not a significant factor in driving up customers’ premiums. Cutting out board members’ pay, he said, might cause some directors to resign.

Blue Cross director Brian Barefoot, former president of Babson College, said he is not sure he would stay on as a director if the compensation freeze becomes permanent. Barefoot, a consultant who sits on multiple boards, said the position of director requires considerable time and dedication. “If we got paid for every time we were in that building and every time we spent an hour with the staff, we would be paid a lot more money,’’ he said. “I have a lot of competition for my time and services.’’

Philip Johnston, a Blue Cross director for 12 years, said the decision to suspend board fees was made after a thorough discussion. “When we complete the process we’re going through right now, we’ll be in a better place,’’ said Johnston, a former state Democratic Party leader who said he will keep serving on the board. “There will be more clarity surrounding the company and the definition of the company.’’

Another director, Richard Garrison, president of Boston consulting firm Bink Inc., said he hoped the public would help Blue Cross examine its mission. “We need to be talking about what is this entity,’’ Garrison said. “Is Blue Cross a charity? If so, where are the donors?’’ Garrison, who has sat on the board since 2000, wouldn’t say whether he will stay if the compensation is permanently eliminated.

Dreyfus, who took the helm at Blue Cross in September, identified health care affordability as his top priority. He asked the board to set his compensation at the “lowest end of the market,’’ he said. “I knew we would have no credibility on the affordability question if our compensation practices at the company were seen as excessive or unreasonable.’’

His contract calls for a salary of $800,000 this year, with the opportunity to earn $1.8 million in total compensation if he meets performance goals. That compensation is half of what Killingsworth collected in 2008, his peak earning year before last year’s exit package.

“To be clear,’’ Dreyfus said, “$800,000 is a lot of money. . . . It’s more than I ever thought I would make in my life. I don’t want anyone in the public to think I don’t think that’s a lot of money. I’m not looking for an ounce of kudos for earning that substantial amount of money.’’

And he admitted that even his wife, a schoolteacher, believes he is overpaid.

Beth Daley, Jenifer B. McKim, and Casey Ross of the Globe staff contributed to this report. Robert Weisman can be reached at weisman@globe.com.