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 Article of Interest - Michigan, Insurance

Blue Cross/Blue Shield of Michigan Top 10 Executives Made Nearly $6 Million

MIRS, May 5, 2003

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According to documents obtained by MIRS, the compensation level of the 10 highest paid Blue Cross/Blue Shield of Michigan (BCBSM) officers totaled nearly $6 million ($5.947 million) for 2002, while its 43-member board pulled in a combined $1.2 million.
Topping the list was BCBSM President and CEO Richard WHITMER. His compensation level was $1.547 million. Whitmer's salary was $745,000. His bonus equaled $758,097 and all other compensation tallied an additional $43,125.
Whitmer's overall compensation for 2002 was up nearly $200,000 from the $1.350 million he was paid in 2001. His 2002 level of compensation had increased by more than 50 percent over the $902,338 level he received in 2000.
After Whitmer, the highest-paid BCBSM officer was Les VIEGAS, senior vice president of the auto national services division, who made $586,398. The BCBSM's board averaged $28,000, but their salary levels were all over the map. The highest-paid board salary was paid to Gregory SUDDERTH, the president of Labor-Management Service, Inc. ($79,805) while Peter SECCHIA, chairman of Universal Forest Products, only received $42 for his service in 2002.
The other officers and their 2002 compensation were as follows:
- J. `Paul' AUSTIN, Senior Vice President for Michigan Sales and Services, $538,141.

- George FRANCIS III, Senior Vice President for Human Resources, $511,812.

- Steven HESS, Senior Vice President, General Counsel, $485,805.

- Ray KHAN, Senior Vice President, Information Officer, $482,141.

- Marianne UDOW, Senior Vice President, Corporation Strategic (MC) Administration, 463,127.

- James EPOLITO, Senior Vice President, President and CEO of the Accident Fund, $461,392.

- Mark BARTLETT, Senior Vice President and CFO, $448,078.

- Richard COLE, Senior Vice President for Corporate Communications, $423,389.

The 10 top 2002 compensation levels represent an increase of roughly $2.2 million (nearly 60 percent) over the 2000 levels. The information could add rhetorical fuel as the Legislature ponders small group market reform legislation and measures that could force the Blues to make more disclosures to the public.

According to Cole, Whitmer's compensation level is actually lower than that of most executives who head corporations of similar size and complexity.

“A lot of people mistakenly believe we're like the Salvation Army or Red Cross,” Cole said. “But we have to offer salaries that would attract someone who is capable of managing a $12 billion business.”

But Cole said the Blue Cross Board, while having to offer competitive executive compensation, still can't offer compensation at levels as high as for-profit entities can afford to offer.

“We don't have stock options to offer to provide the level of compensation that executives of other large corporations would receive,” Cole said. “So our benefit levels don't approach the levels of other, similar sized, corporations.”

Cole's statement is consistent with an article published in The Detroit News Sunday, which listed the 50 highest paid executives in Michigan. Whitmer's $1.5 million was not enough to qualify him for that “Michigan's Fortunate 50” list.

According to Cole, BCBSM ranks 156th on the Fortune 500 list of largest corporations. Cole said that if Whitmer were in a similar position with another comparable for-profit corporation he'd be building up much greater wealth and working toward company ownership.

“He's making about one-fifth of the compensation he'd be making at comparable insurance companies,” Cole said. “I think I read recently that about 250 insurance executives make more than $1 million.”

Cole said, however, that BCBSM executives don't tend to be motivated by the same factors that motivates other for-profit executives.

“We have to compete for people [executives] from the same pools of prospects as other companies, but generally we can't offer the same long term growth [in terms of wealth and position in the firm] as other corporations can,” Cole said. “And remember, you're looking at a list of the top 10 employees of about 8,500 workers.”

MIRS asked Cole about the jump in compensation levels that the top 10 BCBSM employees experienced over the past two years.

“As you can see that was mostly an increase in bonuses,” Cole said. “That came about because of accomplishing goals that had been set. For instance, in 2000 someone may have reached only 30 percent of the goal, so their bonus would have reflected that. But in 2002, more people may have accomplished 60 or 70 percent of that goal. In other words, the incentive didn't change, more people got closer to achieving it.”

In addition to the compensation figures, the information MIRS obtained showed that in 2002 BCBSM spent $9,674,128 on marketing and advertising. Some observers maintain that figure seems low, particularly compared to the Michigan State Lottery, which currently has a $17.6 million recommended advertising budget.

However, Cole said the $9 million figure is actually bloated, and BCBSM media buys for 2002 were more in the neighborhood of $5 million. Cole also said he believes his own compensation was probably rolled into the overall advertising figure.

In addition, Cole said that 2002 was an unusually active year for BCBSM in terms of advertising.

“We had the rather unsubtle attempt by the state to for-profitize us,” Cole said. “We also spent $1 million on generic drug advertising that saved us up to $30 million overall.”

Sen. Tom GEORGE (R-Texas Twp.), who last week introduced legislation on restructuring BCBSM, said he wasn't interested in commenting on the compensation levels, but would like to see more detailed information turned over involving costs such as advertising.

One bill from George's package is SB 457, which would require biennial reporting by Blue Cross/Blue Shield on outside contracts, advertising, and certain administrative expenses. According to George, he wants to see more specific BCBSM information turned over to the Legislature.

“I'm interested in a little bit more of break down on the advertising,” George said. “For instance, during my campaign, there was a full-page newspaper ad that consisted of Richard Whitmer attacking me on my Blue Cross legislation. As a nonprofit, I'd like to see how that was helping them meet their mission statement. It seemed to me to be a little bit politically inclined.”

George said he'd also like to see the Legislature receive more of a break down on how BCBSM interacts with its subsidiaries.

“I'd like to see more disclosure on things like administrative expenses,” George said. “We're told that administrative expenses for their (BCBSM's) products are very low. But I don't think they've sufficiently answered the questions on that. I'd like to know more about what the full story is on situations like MASA (Michigan Association of School Administrators), which administers the insurance, as well. I'd also like to know more about their relationship with PPOM. I think we need more disclosure to shed some light on how those types of situations work.”

George M. CARR, of the Health Insurance Association of America, a group opposing the health insurance rate band legislation that BCBSM is currently supporting in the Legislature, said that Whitmer's salary level is justified.

“Blue Cross of Michigan had a great year,” Carr said. “They made $50 million underwriting in the small group market. They had a strong performance in their stocks and bonds, in what was a dismal year overall for the stock market. They also made over $200 million on the insurance side alone. It was a strong performance and, when a company has a strong performance like that, the CEO usually benefits.”

Rep. Fulton SHEEN (R-Plainwell), a member of the House Health Policy Committee said Whitmer's compensation should raise some issues about the rate band legislation BCBSM is supporting in the Legislature.

“That seems to be an awful lot of money for an executive to make who is running a nonprofit tax-exempt, state sponsored health insurance group,” Sheen said. “But it is consistent with what I've learned about [BCBSM]. Last year Blue Cross made a $289 million profit. So why on Earth are we doing small market health insurance reform?”

Liz BOYD, spokesperson for Gov. Jennifer GRANHOLM, said the Governor really has no particular opinion on Whitmer's compensation level at this time.

“We don't set his compensation,” Boyd said.


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