THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING

Blue Cross to refund CEO’s exit pay to clients

But Killingsworth will keep his $4.2m

The payout for Cleve Killingsworth totaled $11 million. The payout for Cleve Killingsworth totaled $11 million.
By Robert Weisman
Globe Staff / July 7, 2011

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Blue Cross Blue Shield of Massachusetts, seeking to close the book on its widely criticized $11 million payout to former chief executive Cleve L. Killingsworth, yesterday said it will refund $4.2 million to customers, an amount equal to the severance portion of Killingsworth’s pay package.

The move follows a four-month investigation by the Massachusetts attorney general’s office, which found that while Killingsworth was entitled to the money under his contract, such generous severance terms don’t serve the purposes of the nonprofit insurer and weaken the authority of its board.

Killingsworth, who abruptly quit in March 2010, won’t have to give back the severance money or any other part of his payout, which also included a salary and bonus. Blue Cross will deduct the $4.2 million from fourth-quarter earnings, crediting it to employer groups and, in some cases, individual customers, according to senior vice president Jay McQuaide.

Employers, which buy group coverage for most of the nearly 2.9 million Blue Cross members in Massachusetts, will decide individually whether to make minor adjustments in payroll deductions. The rebate works out to less than $1.50 per member.

“Our office believes that customers should not have to foot the bill for such an exorbitant severance plan,’’ Attorney General Martha Coakley said yesterday.

Among other things, Coakley’s investigation found that while serving as chief executive of the state’s largest health insurer, Killingsworth also sat on the boards of 14 other companies and organizations, including three that gave directors “significant compensation’’ - financial services giant Travelers, retirement plan provider TIAA-CREF, and defense contractor Mitre Corp.

Killingsworth did not return phone calls or respond to an e-mail seeking comment.

Coakley said her office’s investigation concluded that the way severance was calculated in Killingsworth’s contract - though comparable to similar provisions for the chief executives of the state’s other nonprofit health insurers - virtually guaranteed that “if Blue Cross was ever going to need new leadership, it was going to cost $4.2 million.’’

Critics of the payout contended that it was irresponsible and insulted policyholders at a time when Blue Cross and other insurers were raising annual premiums by double-digits for many customers.

“It’s an important gesture,’’ Deirdre Cummings, legislative director for the Massachusetts Public Interest Research Group, said of the Blue Cross rebate. “I don’t remember a time when a decision like [the Killingsworth payout] was met by so much outrage. This was excessive compensation paid frivolously, and it did not meet with their promises to bring down premiums.’’

Cummings said she hoped Coakley’s report would put other health insurers and providers on notice that they must focus on holding down prices. “It reinforces for everyone in the health care system that they all have to do what it takes to lower costs,’’ she said.

The report also said that Blue Cross directors had decided to fire Killingsworth “due to the board’s loss of confidence in his performance.’’ But because unsatisfactory performance did not constitute a cause for firing under Killingsworth’s contract, the company was obligated to pay the severance.

Blue Cross has never acknowledged that its directors wanted to remove Killingsworth, saying only that he left after conversations with board members. McQuaide declined to comment on the attorney general’s report.

In a statement, the insurer’s board provided no new information on the circumstances under which Killingsworth departed. But the company said Coakley’s investigation showed it acted appropriately in awarding Killingsworth the compensation called for in his contract.

“Mr. Killingsworth’s contract, established in 2005 when he became CEO, was the result of a thorough process that included comparative market data and independent consultants to ensure it was market competitive,’’ the statement said. When he left in 2010, it said, “the board was legally required to fulfill the commitments made in the 2005 contract.’’

Blue Cross, however, said it now plans to review its recruitment and succession plans for top executives - and make amends to policyholders.

“To put this issue behind the company and as a gesture of good faith to our customers and the community, the board has decided to credit customers the $4.2 million severance paid to Mr. Killingsworth,’’ the Blue Cross statement said. It also noted that the board has reduced the pay and benefits for current chief executive Andrew Dreyfus, and has revised processes and policies for reviewing the chief executive’s performance.

Dreyfus, who took over the top job at Blue Cross last fall, asked the board to set his compensation at the lower end of the company’s pay scale. This year he is receiving a base salary of $800,000, substantially lower than what Killingsworth was paid.

Yesterday’s announcement of the rebate marked the second time recently that Blue Cross has acted to mollify its critics. In the winter, following the outcry over Killingsworth’s compensation package and the public disclosure of five-figure annual payments to board members, Blue Cross said it would suspend board salaries through 2011 while it reassessed the company’s legal classification as a nonprofit public charity. That review of its legal structure is underway.

One other nonprofit insurer, Worcester-based Fallon Community Health Plan, followed Blue Cross in halting board pay. But two others, Harvard Community Health Plan of Wellesley and Tufts Health Plan of Watertown, have said they would keep paying directors.

Robert Weisman can be reached at weisman@globe.com.