‘Taking Aim’ at Insurance Co. Executive Compensation

December 6, 2009 by Michael Ricciardelli · 1 Comment
Filed under: Private Insurance, Proposed Legislation 

J.P. Morgan (who is said to have hated photographers)

J.P. Morgan (who is said to have hated photographers)

Over the weekend, the Associated Press published a story that told us: “Senate Takes Aim at Insurance Company Executive Pay.”

We’ve taken aim at Insurance Company executive compensation before here on Health Reform Watch, and you can find our article linked here in this interesting article by Morton Mintz at the Nieman Foundation for Journalism at Harvard University’s Nieman Watchdog (or even at the bottom of the Huffington Post posting of the A.P. story, after WSJ).

What Mintz points out is worth noting: he says of Ronald A. Williams, CEO of Aetna:

If Williams would care to justify his compensation — $64,857.46 a day, every day of the year; $2,702.39 an hour every hour of every day — I’d gladly extend him the opportunity to do so.

“Justify his compensation.” The truth is, I have honestly tried to imagine what an Insurance Co. executive could possibly do during the course of any given day to warrant that kind of compensation. Williams’ official bio tells us that:

Under his leadership, Aetna has sought to make a positive impact on health care in America by serving as a catalyst for change, focusing the industry, public policy leaders, physicians and employers on issues aimed at increasing access and affordability.

As a job description, I’m not entirely sure what qualifies as seeking “positive impact” or “serving as a catalyst,” but I’m pretty sure the following, as described by Mr. Mintz, will not qualify as aiming at “increasing access and affordability.”

Now, as I just read in Huffington Post, “Aetna is planning to force up to 650,000 clients to drop their coverage next year as it seeks to raise additional revenue to meet profit expectations.” Maybe he [R.Williams] can justify that, too.

Mintz goes on to list the numbers, but then makes an additional point worth noting regarding the totals:

Others in similar positions are also raking it in. I’ve learned from Seton Hall University School of Law’s Health Reform Watch that Williams’s 2007 compensation of $23,045,834 was nearly $2.8 million less than Cigna CEO H. Edward Hanway’s $25,839,777. Also in 2007, Coventry’s Dale B. Wolf received $14,869,823, United Health group’s Stephen J. Hemsley $13,164,529, Humana’s Michael McCallister $10,312,557, WellPoint’s Angela Braly $9,094,271. and Health Net’s Jay M. Gellert $3,686,230. Total 2007 pay for seven health-insurance CEOs: $100,130,021.

In 2008, Williams led the pack, with $24,300,112, followed by Hanway, $12,236,740; Braly, $9,844,212; Wolf, $9,047,469; McCallister, $4,764,309; Gellert, $4,425,355, and Hemsley, $3,241,043. Total 2008 pay for the seven: $67,859,240.

Suppose the seven had been paid, say, only $1 million each. That compensation would have enabled significant premium reductions — in 2007, of roughly $93 million; in 2008, of about $61 million — that would have enabled purchase of coverage by many of the 45,000 Americans whose deaths each year are linked to lack of health insurance.

Seven execs, two years’ compensation, $154 million in excess of $1 million per year.

Having said that Articles Editor of the Yale Law Journal, Aaron Zelinski, makes some very interesting and worthwhile points over at the Huffington Post regarding some of the shortcomings in the proposed Senate measure to curb Insurance Co. exec compensation. The subject readily lends itself to political grandstanding, and the Senate bill looks only to change the corporate tax deduction of health insurance executive compensation. Zelinski’s article, “Political Grandstanding: Excessive Compensation and the Health Care Bill,”  is well worth reading and well worth quoting at length. He writes:

Currently, publicly held corporations can effectively deduct unlimited amounts of executive compensation from their federal corporate income tax returns. Although Section 162(m) of the Internal Revenue Code purports to limit such deductions to $1,000,000 annually per executive, Section 162(m)(4) contains a loophole large enough to sail a mega-yacht through: Deductions are still allowed for any “performance based” pay, no matter how high.

The Internal Revenue Service has interpreted 162(m)(4) to allow almost any compensation plan to pass muster, even when executive compensation is tied to comically low performance metrics. Thus, Section 162(m) has become largely a dead letter; unlimited amounts of executive compensation can be structured as performance-based and therefore deducted for federal income tax purposes.

The current Senate health care bill seeks to revive Section162(m) by removing the “performance based” exceptions. However, the bill applies only to corporate salaries paid to health insurance executives, not to compensation for employees in any other industry.

Under the bill, health insurance companies would only be able to deduct compensation below $500,000 (or, under a pending amendment by Senator Blanche Lincoln of Arkansas, $400,000). More importantly, health insurance companies would be denied the Section 162(m)(4) loophole for performance-based pay. These insurance companies could still pay their executives large amounts, but taxpayer money would no longer subsidize such salaries via corporate income tax deductions.

Zelinski further states:

“Unfortunately, the Senate Democrats’ decision to target only the compensation paid to insurance executives belies an unwillingness to address the broader issue at hand: the taxpayer’s subsidy of excessive executive compensation via tax deductions.”

He also points out that “the proposed changes will do nothing substantial to address health care costs, since executive compensation is a minuscule fraction of such costs.”

I think Mr. Zelinski has a point; the net taxpayer result of this provision will certainly not cure what ails us as a country healthcare wise –but, grandstanding aside, it may be a step in the right direction. Some things seem more a matter of principle than money– and if they could speak, I wonder what those 45,000 Americans whose deaths each year are linked to lack of health insurance would say when looking at Ronald Williams’ pay.

Share/Save/Bookmark

Tags: , , , , , , , ,

Comments

One Response to “‘Taking Aim’ at Insurance Co. Executive Compensation”
  1. czander says:
    12/07/2009 at 12:05 pm

    Health care executives have certainly joined the ranks of greedy CEO’s. According to the Daily Planet (2007), several organizations demonstrated outside the annual shareholders meeting of United Health Group the largest HMO in the U.S. to “decry the gap between need and greed.” United Health Group CEO William McGuire, and his replacement Stephen Helmsley, as well as other Minnesota HMO executives, took billions in stock options. McGuire was the highest-paid CEO in Minnesota history, with stock options totaling $2 billion. Helmsley, who replaced McGuire, has stock options in excess of $750 million. In 2009 Helmsley’s compensation came to $57,000 an hour. McGuire and other executives who were ousted in October, 2006, are under criminal investigation due to stock option backdating fraud. According to Herbert Sacks past President of the American Psychiatric Association, when asked where does this money come from, he replied “from the denial and interruption of…patient care.”
    Not only are CEO salaries excessive but so are their Senior VPs’, VPs’, and board members. For example, in 2007, the top 6 health plan boards paid themselves a whopping $277,998,793 (Jodell, 2009).
    Estimates of the compensation cost for health care CEO’s and their executives total about $7 to 10 billion a year. If their pay was reduced by 80 percent it would cover health insurance for 500,000 families enrolled in a government insurance program at $10,000 per year per family. Also, if health care was nationalized the administrative savings alone would be enough to provide health care coverage for the one million uninsured in America. One third of every dollar spent on health care goes to administrative overhead and half of that goes to executives. According to the Security and Exchange Commission between 2000 and 2007 the 10 largest publicly traded health insurance corporations increased their profits 428 percent from $2.8 billion to $12.9 billion, as premiums increased 87 percent.
    Health care institutions have lost the confidence of a public that once valued their altruistic mission and many maintain that executive pay is a significant part of the health care problem in America. For example, Patrick Soon-Shiong the CEO of APP Pharmaceuticals stepped down as CEO in the spring of 2008, but the former surgeon still held 83 percent of the company’s shares. In July, he agreed to sell APP to a German firm. The sale finalized two months later for an initial $3.7 billion cash payment, as a result Soon-Shiong’s personal fortune gain $3 billion in 2008.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!