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Published September 10, 2009, 12:00 AM

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.”

Readers can reach Forum reporter Patrick Springer at (701) 241-5522