Blue Cross bosses pocket pay hikes
Top brass at Chicago-based Health Care Service Corp. got big raises last year, as health insurers emerged largely unscathed from the economic fallout of a pandemic that hammered other segments of the health care industry.
The biggest winner was former board member David Lesar, who served as interim CEO of HCSC from July 2019 through May 2020. His total compensation surged 172% to $16.9 million. Paula Steiner, who left HCSC after stepping down as CEO in July 2019, pocketed $12.6 million last year.
Maurice Smith, who took the helm last June, got a 63% boost to $5.9 million, while longtime board Chairman Milton Carroll’s pay jumped 81% to $8.9 million.
Lesar and Smith, each of whom served as HCSC’s CEO for part of 2020, collected a total of $22.8 million last year. That’s significantly more than competitors paid their top executives during a banner year for health insurers. Anthem chief Gail Boudreaux took home $17.1 million, Humana’s Bruce Broussard got $16.5 million and Cigna’s David Cordani got $19.9 million, according to proxy statements.
Pay rose alongside profits at the nation’s seventh-largest health insurer, which owns Blue Cross & Blue Shield plans in Illinois, Texas, Montana, Oklahoma and New Mexico. Net income at HCSC soared 75 percent to nearly $4 billion on a 14% rise in revenue to $44 billion. Revenues increased as more people enrolled in HCSC plans, according to HCSC spokesman Greg Thompson.
Compensation decisions at HCSC “are based on competition in the industry for talent, as well as near- and long-term performance standards, including benefits to members such as expanded access to coverage and efforts to help control the rise in medical costs,” Thompson says in an email.
But Carroll, an energy industry executive who has served as HCSC’s board chairman since 2002, collected far more than his counterparts at comparable publicly traded health insurers last year. Humana and Cigna, for example, paid their nonexecutive chairmen $545,157 and $550,964, respectively.
“I don’t see chairmen of the board for very large public companies making anywhere near that amount of money,” says Mark Reilly, managing director of the Overture Alliance, a Chicago-based executive compensation consultancy. Reilly notes that board chairmen typically work about five days a month and make roughly $500,000 a year.
Thompson declines to say how much time Carroll spends on company matters, but he notes that it’s “significantly more time” than a typical board chair. He says Carroll’s pay reflects “substantial institutional knowledge based on a long tenure with our company, including managing CEO transitions,” and that “the continuity of his leadership was critical to the company’s strength and stability.”
Carroll has collected $930,000 in recent years when there wasn’t a leadership change, but he took home $4.9 million in both 2016 and 2017 pursuant to a two-year agreement under which he helped oversee a transition to new executive leadership, an HCSC spokesman told Crain’s in 2019.
Reilly says overseeing CEO transitions and helping new leaders understand a company’s culture and how its board functions are common duties for most board chairmen.
“To think somebody should get $8.9 million—it’s excessive,” Reilly says. “The board is deciding pay, and the board is increasing his pay as chairman of the board. There’s a conflict of interest there, possibly.”
The remaining eight HCSC directors collected $2.4 million last year, down 12% from 2019 when there were three additional members. Pay for individual directors (not including Carroll) ranged from $176,407 for former Houston Rockets basketball player Clyde Drexler to $346,261 for Dr. Dianne Gasbarra.
Sources familiar with HCSC’s board say Carroll has a history of filling open spots with directors who are loyal to him, noting that several members have ties to the energy industry.
Lesar, who served on HCSC’s board for two years, is now CEO of Houston-based CenterPoint Energy, where Carroll has been a director since 1992 and executive chairman since 2013. The pair are also linked through oil services company Halliburton, where Carroll is a director and Lesar previously was executive chair. Patricia Hemingway Hall, who retired as CEO of HCSC in 2015, joined Halliburton’s board in 2019.
Former Anadarko Petroleum CEO R.A. Walker, an HCSC board member since 2019, was on CenterPoint’s board until 2015. In August, Walker joined Enable Midstream Partners’ board as a CenterPoint representative.
Thompson declines to comment on how board members are selected but says HCSC looks for leaders who can help the insurer better understand the needs of its diverse customer base. He adds that Texas is an important market for HCSC, which has many customers in the oil and gas industry.
Meanwhile, HCSC is among health insurance companies that benefited from a decline in nonemergency medical care during the early months of the pandemic, but claims returned to nearly normal levels later in 2020, Thompson says. At the same time, other industry players, such as independent hospitals, struggled to stay afloat. Any COVID-fueled hospital consolidation could improve providers’ bargaining power with insurers, putting more pressure on HCSC and others in the future.
In October, HCSC said its five Blue Cross plans—which serve more than 17 million members—spent $930 million in response to the public health crisis, including waiving cost-sharing for telehealth services, as well as COVID testing and treatment. And with insurers required under the Affordable Care Act to spend at least 80% of premium revenues on medical care, HCSC said it issued rebates totaling $455 million to individuals and small groups last fall.
Medical loss ratio rebates are expected to be even higher this year, when they’re based on performance in 2018, 2019 and 2020. According to a new Kaiser Family Foundation analysis, private insurers are expecting to pay out $2.1 billion in rebates to consumers this fall, the second-highest amount ever issued.
As more people get vaccinated against COVID-19 and routine medical care resumes, insurers are bracing for higher claims in the coming months. Still, now could be the right time for HCSC to abandon its relatively cautious expansion strategy.
While big insurers like UnitedHealth Group and CVS Health have executed multibillion-dollar transactions that blur the lines between insurers, pharmacies and doctors, HCSC has mostly opted to invest in its existing markets and offerings. That could change following a $2.7 billion antitrust settlement that will free Blue Cross plans to invade each other’s markets.
HCSC’s naming of Arun Prasad, previously a managing director at investment bank Moelis & Co., as chief strategy officer, could signal that the insurance company is ready to make a deal.