Blues execs profited from bogus bonusesFARGO - 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.
By: Patrick Springer, INFORUM
NOTE: Story originally published Tuesday in The Forum.
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:
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.
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.”
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.
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.