September 12, 2009-Fargo Forum
Study to look at cost sharing at Blue Cross Blue Shield
North Dakota’s top insurance regulator plans to examine whether customers of Blue Cross Blue Shield are improperly subsidizing its affiliated companies or health plans it administers.By: Patrick Springer, INFORUM
North Dakota’s top insurance regulator plans to examine whether customers of Blue Cross Blue Shield are improperly subsidizing its affiliated companies or health plans it administers.
Insurance Commissioner Adam Hamm said he will include a cost allocation study along with the Blues’ next routine financial examination.
State insurance examiners just concluded a special audit of the Blues’ expenses, leading Hamm to conclude that “millions and millions of dollars” of administrative costs paid by health-insurance premiums were misspent over a five-year period.
In that recently released financial examination, and in the previous routine financial audit, back in 2004, questions arose involving the proper allocation of costs and the possibility of cross-subsidization, Hamm said.
“What I learned is that we have questions,” he said, adding that he has drawn no conclusions.
Hamm has told Blue Cross Blue Shield the cost-allocation study is coming. “They think we’re going to be comfortable with the answers we get,” he said.
Blue Cross Blue Shield executives say they have controls in place to ensure that they fairly divide costs among different health plans and their umbrella of companies.
The cost-sharing review will coincide with the next routine financial audit of the Blues, which will cover 2005 to 2009, Hamm said.
Administrative costs are apportioned among not-for-profit Blue Cross Blue Shield and its subsidiary life and dental insurance companies as well as Noridian Administrative Services, a for-profit subsidiary that processes Medicare claims.
The Blues also must segregate costs for managing its own insured members as well as self-funded employer group health plans that it administers.
David Breuer, chief financial officer for the North Dakota Blues, said different methods are used to allocate costs.
Executives and other employees keep logs charting the time they spend working for one firm or group of companies. Statistical tools also help to allocate costs, Breuer said.
The economies of scale resulting from sharing resources help to significantly defray costs that help hold down premiums for Blues members, he said.
Noridian Administrative Services, for example, has invested in sophisticated computer hardware and software to analyze and pay claims, as well as mail-processing equipment that can be shared.
In an analysis provided to The Forum, the Blues calculated the net benefit to members of “absorbed overhead” costs to be $32.5 million from 2004 to 2008, the five years covered in the examination of expenses.
Noridian Administrative Services, listed as an investment asset for Blue Cross Blue Shield, experienced operating losses in four of the five years totaling $14.4 million.
The total investment in Noridian Administrative Services totaled $26 million, but its “fair value” was determined to be $7.3 million as of Dec. 31, 2008, reflecting a loss in value of almost $18.7 million, examiners reported.
Breuer said he was unable to provide an estimate of how much of the $26 million invested in Noridian Administrative Services originated with Blue Cross Blue premiums. The Blues’ calculation of the net benefit to members, $32.5 million, exceeded the total investment.
“It’s easy to see that there’s some savings there,” Breuer said.
North Dakota insurance regulators and customers have long had questions about the financial interrelationships of the Blues companies and how they benefit policyholders, Hamm said.
Although he’s not ready to disclose specifics of the impending cost study, Hamm said he wants to address longstanding questions.
“The guts of it would be to get at issues that have been around for years,” he said.
Denise Kolpack, the Blues’ vice president for corporate communications, said the affiliated companies provide other benefits in addition to investment income and economies of scale that help to hold down members’ premiums.
Together, the companies combine to provide strategic value and offer benefits of “one-stop shopping” for customers.
Because competition to win contracts to manage large self-funded insurance groups is steep, some have questioned whether the Blues have allowed its own policyholders to absorb costs of administering other health plans, Hamm said.
“I’ve never really had an answer to it,” he said.
In the last routine financial audit, in 2004, examiners recommended that the Blues “adopt a method to allocate expenses” for the plans it administers.
The Blues initially disagreed with the need to do so, but later took additional steps to ensure proper allocation of costs between plans to prevent cross-subsidization, Breuer said.
“I think we have those controls in place,” he added. Also, premium rate filings, subject to regulatory approval, always must account for administrative costs.
September 10, 2009-Fargo Forum
Blue Cross Blue Shield CEO weighs employee incentives
Says he’ll revise bonus plan but it must stay competitive
Paul von Ebers, the new chief executive of Blue Cross Blue Shield of North Dakota, is grappling with what might be called the $14.9 million question: How to fairly reward employees for good work?By: Patrick Springer, INFORUM
Paul von Ebers, the new chief executive of Blue Cross Blue Shield of North Dakota, is grappling with what might be called the $14.9 million question: How to fairly reward employees for good work?
That’s the amount the Blues paid its employees over a five-year period under a “pay at risk” program, paid in addition to base salaries, that came under heavy criticism in an examination of the health insurer’s expenses.
Von Ebers and Adam Hamm, the North Dakota insurance commissioner, have disagreed over the appropriateness of the program, which Hamm’s examiners found “virtually assure success.”
Nonetheless, von Ebers has agreed to draft a new incentive plan, including one that takes North Dakota’s relatively low wage rates into consideration. But pay also must remain competitive or the company risks losing talent over time, he said Wednesday.
Under the current plan, base salaries are set below the mid-range of a comparison of similar companies. The largest portions of payouts under the “pay at risk” program, he said, were for meeting customer satisfaction and service goals.
“Do we want to incent people to do the very best job they can or not?” von Ebers told The Forum editorial board.
Von Ebers said he will strive to balance many factors and come up with a plan that “makes sense.” Executives are studying a consultant’s compensation review.
Executive salaries are especially challenging to address, he said.
“If we’re high, we’re high, and I’ll accept that it’s a problem,” he said, referring to the outcome of the review.
“But we compete in this wide world, and we’ll deal with that.”
Incentives tied to financial performance probably will cover a longer time span, to reward stable and sustainable results, von Ebers said.
“I want to set goals that are tough but achievable,” he said.
Changes in compensation policies are among a list of directives Hamm gave the company, asking them to report back within 30 days, a deadline von Ebers expects to beat.
For instance, Blue Cross Blue Shield already has revised its policies for travel and charitable giving, which also were highlighted in the report.
Incentive trips for the sales staff, which cost
$1.2 million over five years, have been eliminated, but managers are searching for another form of sales incentives. Out-of-state trips now require executive approval.
In the future, donations will only be awarded to causes that promote health, von Ebers said. Donations larger than $5,000 now require board approval, and two high executives must agree on all other donations.
During the five years in the exam, ending last year, donations, pledges and other contributions totaled $6.6 million.
Although disagreeing with some of the examination report’s conclusions, von Ebers reiterated his earlier acknowledgment that it pointed to flaws that must be fixed.
“There are clearly things that I don’t consider acceptable,” he said, adding, “We welcome that feedback.”
Consumers are understandably concerned about rising health insurance premiums, von Ebers said. Over the five years in the report, aggregate premiums rose 41 percent for groups Blue Cross Blue Shield of North Dakota insures and administers.
The Blues also are tightening their investment policies, and likely will refrain in the future from investing in individual development projects like its $3.5 million investment in a Fargo Hilton hotel.
Von Ebers said the Blues expect to profit from the investment. A fact sheet released by the company said the total hotel project cost is $15.6 million but has an appraised cost of
$17.2 million, “resulting in an immediate entrepreneurial profit” of $1.6 million.
The hotel, originally slated to open last fall, now is expected to open in October. Examiners said the company cannot begin to recoup the expected 10 percent return until 2013, and profits are not assured.
Although defending the hotel deal, which examiners concluded was risky and lacked administrative oversight, von Ebers said, “I think it’s also true that we won’t be doing a deal like this again.”
During three years of the report, Blue Cross Blue Shield experienced insurance “underwriting losses,” but achieved bottom-line profits because of other factors, including investment returns.
“I am concerned about that,” said von Ebers, who was hired in July and began Sept. 1.
One of those underwriting-loss years came when state regulators prodded the Blues to return $26 million in premiums.
An underlying question involves a debate over the proper level of reserves to cover future claims, a critical element in setting premiums.
“This is a gray area,” von Ebers said of reserve levels. “I welcome a debate about what is safe,” adding that he would like to see a community dialogue to set parameters. “We’ll manage within those guidelines.”
September 9, 2009-Bismarck Tribune
Hamm Targets Blues Spending
North Dakota Insurance Commissioner Adam Hamm said Tuesday he is “disappointed with the judgment” of Blue Cross Blue Shield of North Dakota executives in light of a report detailing the company’s administrative costs over the last five years.
Starting in March, the insurance department conducted a “targeted evaluation” of the Blues detailing North Dakota’s largest insurer’s $418 million in administrative costs from January 1, 2004, through March 31, 2009.
Included in those costs are $15 million in employee bonuses regardless of company performance, $3.5 million for a Fargo hotel partnership investment, $1.2 million for incentive trips for sales employees and a total of $551,370 in severance packages for two former vice presidents, according to the report.
The insurance department issued its final 101-page audit to the Blues on Sept. 2. The insurance department was barred from detailing the report for 15 days under state law, but Hamm said he received written permission from the company to publicly address the report after the Forum of Fargo ran a story about it on Tuesday.
Hamm said he did not leak the report to the press and to his knowledge no one in his department leaked the report, but if he learns that someone did then the matter will be dealt with “swiftly.” Blues officials said they did not know if any of their employees leaked the report to the press.
Hamm said he did not want to put a “black and white number” on the amount of money that could be considered excessive, adding the compensation program, incentive trips, severance packages and hotel investment are evidence of “millions” of dollars in questionable spending.
“Health care premiums are for health care,” Hamm said. “They’re not for expensive retirement parties, they’re not for corporate jets, they’re not for risky hotel investments and they’re certainly not for a compensation structure that rewards senior management regardless of Blue Cross Blue Shield’s financial performance.”
Hamm said he sent a letter to the company directing its board of directors to address the issue immediately, giving the Blues 30 days to respond to an insurance department inquiry regarding the company’s compensation programs, travel policies, investments, severance packages and termination polices.
CEO Paul von Ebers said in a Tuesday press conference that the Blues are likely to respond before the 30-day deadline.
“There is no question that our members are very concerned about the cost of health insurance,” von Ebers said. “Certainly there are changes here indicated in the Department of Insurance report that we intend to follow up on it. Having said that, it is still true that the administrative overhead is less than the vast majority of insurance companies in the United States, and likely compared to other insurance companies in North Dakota.”
Von Ebers said the executive compensation at the Blues is evaluated against similar companies, adding the company has hired an outside consultant to address the company’s compensation model. The results of the analysis should be finished by October.
As for the additional $15 million in compensation given to employees, known as the “Pay-at-risk” program, von Ebers said the company is looking at establishing a new program by the end of the year. He said the additional compensation pays employees at “a market standard” and not above it. It’s used as a way to attract and motivate employees, he said.
Hamm began the audit after the Blues spent $238,000 on a Cayman Islands getaway for some employees as an incentive trip amid a national recession. The insurer’s CEO Mike Unhjem was ousted by the board of directors shortly after the trip and given a $2.5 million severance package, originally thought to be only $2.2 million.
Von Ebers said those trips have since been nixed.
As for the $3.5 million investment into the Concierge Hotel Fargo, LLC, von Ebers said the company is expecting a 10 percent return on it, adding, “I can’t guarantee that return, but that’s our expectation right now.”
Hamm said that investment is a “risky” thing to do with policyholder money.
The last audit of Blue Cross Blue Shield of North Dakota, a nonprofit mutual insurance company, was in December 2004.
September 9, 2009-Fargo Forum
Blues ordered to make changes
Insurance says ball is now in insurer’s court
Insurance Commissioner Adam Hamm announced Tuesday that he gave Blue Cross Blue Shield of North Dakota a 30-day deadline to address what he called “inappropriate” and “excessive” administrative expenses.By: Patrick Springer, INFORUM
Insurance Commissioner Adam Hamm announced Tuesday that he gave Blue Cross Blue Shield of North Dakota a 30-day deadline to address what he called “inappropriate” and “excessive” administrative expenses.
In response to the findings and Hamm’s directives, the Blues’ board chairman and new chief executive pledged to act quickly, and expect to beat the deadline with their plans to streamline costs and improve accountability.
Hamm’s directives stem from the findings of an examination by his office detailing expenses that mushroomed by
$64.2 million over five years, with more than two-thirds of the increase spent on employee compensation.
Items on the reform list include a “pay at risk” program that examiners determined almost assured payouts, travel policies and severance packages.
“I’ve directed the company to address these matters immediately,” Hamm said. He refrained from giving reporters a “black and white” figure of misspent funds, but added:
“All totaled, there’s millions of dollars of excessive expenses that were documented in this report.”
During the five-year examination period, Blue Cross Blue Shield reported administrative costs totaling $418.3 million that are reflected in premium costs. Administrative costs amount to about 7 cents of every $1 of premiums paid.
Hamm publicly released the report, obtained earlier by The Forum, Tuesday afternoon after the Blues agreed to its official release even though a 15-day “silent period” had not run.
“The majority of these items have been discussed long before the audit,” said Dennis Elbert, chairman of the Blue Cross Blue Shield board, adding that the board adopted a seven-point oversight plan in June.
Hamm ordered the probe last March, after news reports of a controversial sales reward trip to the Caribbean island luxury resort. Michael Unhjem, the Blues’ chief executive at the time, was fired in the fallout of that disclosure.
Unhjem’s replacement, Paul Von Ebers, said the examination report provides a road map to help him address administrative expenses.
“There will be a revised incentive program for executives for the year 2010,” Von Ebers said, adding that the plan should be completed before the end of the year.
Elbert, who is chairman of the business program at the University of North Dakota, said pay for executives and other employees was based on surveys of similar Blue Cross Blue Shield plans.
The target for compensation levels, with input from consultants, was to be at the mid-range for comparable companies. New compensation guidelines will take into account North Dakota pay levels for comparable positions.
Calling the “pay-at-risk” payouts bonuses, Von Ebers said, was inaccurate because they are part of employees’ regular compensation. Base pay levels are set below the mid-range level in the firm’s pay comparison studies.
But Hamm said nothing really was at risk in the so-called “pay-at-risk” program, which examiners concluded had set goals so low they “virtually assure success.”
“For senior management, it was heads you win, tails you win,” Hamm said, adding that the pay plan was not in the best interest of policyholders, who own the not-for-profit, mutual insurance company.
Among the other steps Hamm demands the company:
- Adopt policies eliminating “unreasonable expenses regarding retirement parties, gifts, luncheons, banquets and other similar expenses.”
- Enact travel policies eliminating payments beyond what the federal government allows, and to use charter aircraft only where cost savings can be documented. The report documented $400,066 in charter air costs among more than $15 million in total travel costs over the five years for the Blues and its affiliates.“The Board should also enact policies to reduce nonessential travel and out-of-state meetings,” Hamm’s letter to the company said.
- Implement policies to eliminate severance packages when there is no legal obligation. Examiners said the company paid almost $3.5 million in severance packages, including $2.5 million to Unhjem even though examiners concluded he had violated his contract, and $924,302 to three other executives, although only one had a severance clause in a contract.
- Scrutinize investments thoroughly to “identify risk exposure and potential obligations.” Hamm’s team concluded a $3.5 million hotel investment was risky, with profit potential that did not match the risk level.
“Health care premiums are for health care,” Hamm said. “They are not for hotel investments.”
The company said the hotel investment already has returned a $1.6 million profit but it is working to revise its investment portfolio policy.
“The ball is in their court,” Hamm said, referring to the steps the company now must take. He credited the board with taking some steps already, including firing Unhjem, but said more action is needed.
Von Ebers said the company looks forward to fixing the problems – and working collaboratively with health providers on even more fundamental issues of assuring high-quality health care at affordable costs.
September 8, 2009-Fargo Forum
Blues execs profited from bogus bonuses
By: Patrick Springer
FARGO - Nearly $15 million in employee bonuses that were almost assured regardless of performance.
Sales reward trips to posh resorts totaling $1.2 million.
A $3.5 million investment in a murky hotel partnership lacking audited financial statements.
All this and much more during just the past five years are among almost half a billion dollars in expenses detailed in a report by state insurance examiners who probed spending practices by Blue Cross Blue Shield of North Dakota.
The Forum obtained the 101-page report late last week and studied it in detail over the long holiday weekend.
Insurance Commissioner Adam Hamm ordered the “target examination” last March after news reports of a $238,511 reward trip to a Grand Caymans resort for Blue Cross Blue Shield sales leaders sparked public outrage in a time of belt-tightening by most.
The results of the examination, which reviewed expenses from Jan. 1, 2004, to March 31, 2009, for the state’s dominant health insurer, come as the nation is embroiled in a debate over health reform and health insurance rates run amok.
The report’s bottom line: The lavish expenses for the controversial trip to the sandy Caribbean beaches were symptomatic of a broader culture of extravagant spending by the company that collects almost 90 cents of every $1 in private insurance premiums paid in North Dakota.
Altogether, Blue Cross Blue Shield of North Dakota premium payers picked up the tab for $418.3 million in administrative expenses over the five-year period.
As noted by examiners, those expenses are used to determine members’ premiums, which have skyrocketed in recent years at double-digit rates along with soaring medical costs.
Blue Cross Blue Shield executives and directors repeatedly have boasted that the company has among the lowest administrative costs in the nation, less than 7 cents of every $1 in premiums.
Notably, however, more than two-thirds of the increase in expenses during the examination period went to employees of Blue Cross Blue Shield as well as its affiliates and subsidiaries, examiners found.
A team of examiners probed a wide array of expenses, including employee compensation, benefits and perks, executive severance packages, travel and charitable spending.
A sampling of significant findings of the report, which The Forum will detail in greater depth in continuing follow-up news reports, include:
Compensation balloons
Expenses at Blue Cross Blue Shield of North Dakota and other companies under the corporate umbrella of Noridian Mutual Insurance Co. climbed by $64.2 million over five years ending in 2008, with 68 percent of the rise – $43.7 million – consumed by increased employee compensation and benefits.
The lion’s share of that increase went to 15 top Noridian executives, whose salaries and benefits totaled $31.2 million during the five-year examination period.
As part of their compensation, the 15 executives pocketed $5.5 million in bonuses, $3.6 million of which were billed to Blue Cross Blue Shield, under an incentive program examiners concluded was rigged to pay out even when the company suffered losses.
Eighteen board members of the not-for-profit insurance company, owned by policyholders, collected $1.8 million in compensation during the examination period and spent $795,254 on travel for board meetings, retreats and conferences.
Board members attend monthly meetings, sometimes by phone, as well as an annual strategic retreat and subcommittee meetings.
Bonus program too easy
Costs under the so-called “Pay-At-Risk” bonus plan spiraled upward by 55 percent in five years, rising from $2.3 million to $4.5 million at Blue Cross Blue Shield – and totaling $43.9 million for all Noridian companies and affiliates during the period.
Those bonuses were more than five times the $8 million increase in the Blues’ surplus over the period, examiners noted.
The bonus plan is meant to spur employees, especially executives and managers, to produce good results.
But incentive goals under the bonus program were set way too low, and even then were manipulated at times to ensure bonus money would flow, examiners found.
“The target goals are at levels that virtually assure success,” the report said. “In contrast to sound business practices, PAR payouts are made even when underwriting losses occur.”
For a “low ball” goal example, examiners highlighted a 2008 target setting a net underwriting loss of $15 million. When the actual loss came in at $9 million, bonuses were paid because the target was exceeded.
Bonus payouts to Mike Hamerlik, executive vice president for corporate and government operations, increased 211 percent over the five-year period, from $75,694 to $235,366.
Hamerlik, who has direct responsibility for Noridian Administrative Services, which processes Medicare claims, raked in those bonuses even though the company suffered operating losses in four of the five years.
Similarly, Michael Unhjem, ousted in March as chief executive officer, saw his bonuses mushroom 111 percent during the five years, from $204,017 to $431,468 – even as the Blues’ underwriting losses worsened, examiners noted.
The Blues finished 2008 with an operating loss of $8.9 million, with premiums topping $1.2 billion, according to the company’s annual report.
Examiners noted, however, that the Blues now have adopted a new bonus plan aimed at more accurately reflecting truly good performance.
Big severances for some
New details emerged about the firing and $2.5 million severance package Unhjem received last spring following public outrage over last winter’s reward trip and his pay.
Examiners determined that Unhjem collected the contractual “golden parachute,” including two years of compensation, even though he was cited for eight “leadership issues” under his contract.
Lapses included his 2006 arrest for an alcohol-related driving violation. After the incident, the board sent Unhjem a “disciplinary action notice” and penalized him $75,000, tripling the amount of “extraordinary costs” associated with the highly publicized arrest.
Directors determined that Unhjem had “lied to authorities,” “withheld critical facts from the board that later compounded the negative public impact of his behaviors,” among other transgressions, including his personal behavior and a pattern of excessive drinking in public.
At $2.5 million, Unhjem’s severance was a bit higher than the $2.2 million previously disclosed, with the difference added by counting two years of health insurance coverage at a cost of $20,328 and a supplemental retirement plan contribution of $287,252.
Three other executives were paid severance packages totaling $924,302 upon their leaving, but only one was entitled to severance under the terms of an employment contract, examiners reported.
In one case, the 2006 departure of an unnamed former vice president of marketing for a Blue Cross Blue Shield affiliate was classified as a layoff instead of a retirement, thus entitling the executive to a $327,658 severance package that otherwise would have been unavailable.
A fourth veteran executive, who retired in 2008, was given a farewell party costing $34,814, including video production expenses of $23,961 and a gift of $1,524 – expenses examiners deemed “excessive.”
“Regular employees who are terminated or resign are not given comparable treatment to executives, even considering the different levels of responsibilities,” the examiners wrote. “Unlike executives, the severance payments for regular employees are conservative,” usually two weeks’ pay.
Flagged investment
Blue Cross Blue Shield invested $3.5 million for a 40-percent stake in the Hilton Garden Hotel, set to open this month in Fargo.
Examiners concluded the agreement spelling out the deal with partners in the hotel project was illegal because it could allow property to be disposed of without the Blue Cross Blue Shield board’s consent.
The 110-room hotel’s original bank backed out of the project, and a second bank agreed to provide a $11.2 million construction loan after Blue Cross Blue Shield made a loan guarantee of almost $4.5 million.
The contribution of the Blues’ partners for 60-percent ownership in the project, Concierge Hotel, Inc., valued at $5.25 million the “expertise value” of its three owners, although the partner firm’s own balance sheet reflects no such “intangible asset,” examiners found.
Examiners criticized Blue Cross Blue Shield for lax oversight of the deal, and said financial statements for the hotel were unaudited – meaning Blue Cross Blue Shield could not legitimately count its investment as an asset.
Some details of the project remained murky, examiners said, because they were “unable to obtain certain documents” and experienced lengthy delays in getting other documents.
The hotel deal came about after Unhjem was approached with a proposal in 2006 by business contacts Unhjem had known for several years “in a social context having met them through mutual friends.”
Employee benefits
Noridian employees collected $10.3 million in fringe benefits, including $1.1 million for car allowances.
Retirement program costs during the examination period totaled $58.2 million, and $5 million went to 242 Noridian employees who were laid off.
Blue Cross Blue Shield pays full single health coverage for veteran employees, as well as life and disability insurance at no cost for all employees.
Blue Cross Blue Shield had 1,086 employees last year; Noridian Administrative Services had 1,007, according to the report.
One perk under “employee relations and welfare”: cafeteria meal subsidies totaling $1.7 million.
Charitable donations
Blue Cross Blue Shield and its affiliates committed $6.6 million in sponsorships, donations and future pledges during the examination period.
Beneficiaries include donations and pledges totaling $4.25 million to the University of North Dakota Medical School, rural health grants of more than $4.5 million and $3.8 million for a program that provides health insurance for needy children; altogether, future pledges total almost $8.4 million.
Hamm has not released a copy of the report, which is expected to include written responses from Noridian. That report is expected to be officially released later this month.