OUR AN­NUAL LOOK AT WHO'S MAK­ING WHAT United Health Group's Stephen Hem­s­ley took home more than $106 mil­lion in com­pen­sa­tion and ex­er­cised stock op­tions last year /

Modern Healthcare - - Front Page - Vince Gal­loro

Bank and auto ex­ec­u­tives have found out that one of the con­se­quences of more fed­eral sup­port is more fed­eral scru­tiny of their pay. Are health­care CEOs in line for the same les­son? In 2008, the fed­eral govern­ment made un­prece­dented for­ays into the fi­nan­cial ser­vices in­dus­try. Congress ap­proved and Pres­i­dent Ge­orge W. Bush signed the $700 bil­lion Trou­bled As­set Re­lief Pro­gram. In 2009, the fed­eral govern­ment be­came the ma­jor­ity share­holder in Gen­eral Mo­tors Co.

It didn’t take long for the fed­eral govern­ment to de­cide that, if it was go­ing to pay the piper for bailouts, it was go­ing to call the tune on ex­ec­u­tive com­pen­sa­tion for the re­cip­i­ents. Get­ting tough on ex­ec­u­tive com­pen­sa­tion also was a re­sponse to voter anger about ex­or­bi­tant pay for bailout re­cip­i­ents. The Trea­sury Depart­ment ap­pointed a pay czar in June 2009 to over­see ex­ec­u­tive com­pen­sa­tion at com­pa­nies re­ceiv­ing TARP money, in­clud­ing more than a dozen banks and GM.

In 2010, Congress ap­proved and Pres­i­dent Barack Obama signed into law two mea­sures that are col­lec­tively known as health­care re­form. Re­form means bil­lions more fed­eral dol­lars will be in­jected into health­care. And, just like with TARP, there’s plenty of ou­trage stem­ming from both the pol­icy it­self and ex­ec­u­tive pay in the af­fected in­dus­try—in health­care’s case, par­tic­u­larly for in­sur­ers.

Last spring, fed­eral law­mak­ers spon­sor­ing a bill to grant HHS more author­ity to over­see in­surance rates also ripped the com­pen­sa­tion of health in­surance CEOs. A study of 342 CEOs in the Stan­dard & Poor’s 500 in­dex found CEOs of health­care com­pa­nies, broadly de­fined, were the top com­pen­sated CEOs in 2009 (See chart, p. 14).

Just last week, Health Care for Amer­ica Now, a lobby group with heavy union back­ing that sup­ported health­care re­form, is­sued a re­port tot­ting up ex­ec­u­tive com­pen­sa­tion for 10 in­sur­ers from 2000 to 2009, with to­tals of $842.9 mil­lion for ex­er­cised stock op­tions and $944.1 mil­lion for all other com­pen­sa­tion.

Nine of the in­sur­ers high­lighted by Health Care for Amer­ica Now are part of Mod­ern Health­care’s eighth an­nual sur­vey of health­care ser­vices CEO pay. The sur­vey cov­ers the com­pen­sa­tion of the CEOs of 10 com­pa­nies in three sec­tors: hos­pi­tals, in­sur­ers and spe­cial­ty­care providers.

Top of the ta­bles

Stephen Hem­s­ley, pres­i­dent and CEO of Unit­edHealth Group, took the top spot in this year’s sur­vey, with $106 mil­lion in to­tal com­pen­sa­tion, in­clud­ing stock op­tion ex­er­cises that net­ted him $98.6 mil­lion. Last year’s top earner—Wayne Smith, chair­man, pres­i­dent and CEO of Com­mu­nity Health Sys­tems—led hos­pi­tal ex­ec­u­tives again with $20.8 mil­lion in to­tal com­pen­sa­tion, but

was fourth over­all. Kent Thiry, chair­man and CEO of dial­y­sis provider DaVita, led spe­cialty-care ex­ec­u­tives with nearly $29 mil­lion in to­tal com­pen­sa­tion.

Unit­edHealth Group did not re­spond to sev­eral re­quests for in­ter­views with ei­ther Hem­s­ley or with Dou­glas Leatherdale, the chair­man of the com­pany’s com­pen­sa­tion com­mit­tee and for­mer CEO of the St. Paul Cos. Like­wise, Com­mu­nity Health Sys­tems, Franklin, Tenn., de­clined a request to in­ter­view ei­ther Smith or its com­pen­sa­tion com­mit­tee chair­man, H. Mitchell Wat­son Jr., a for­mer IBM ex­ec­u­tive. A spokes­woman said the com­pany’s proxy state­ment cov­ers all that it has to say on Smith’s com­pen­sa­tion.

DaVita also de­clined re­quests to in­ter­view Thiry or John Nehra, a spe­cial part­ner with pri­vate eq­uity firm New En­ter­prise As­so­ci­ates and DaVita’s com­pen­sa­tion com­mit­tee chair­man. DaVita spokesman James “Skip” Thur­man agreed to re­spond to ques­tions with writ­ten re­sponses. In the decade since Thiry joined DaVita, Thur­man wrote, the com­pany’s share price has in­creased by 1,300%, out­per­form­ing 98% of the com­pa­nies in the Stan­dard & Poor’s 500 in­dex in that time. The com­pany also has im­proved its clin­i­cal out­comes for 10 con­sec­u­tive years, re­duc- ing its mor­tal­ity rate from more than 20% in 2000 to 16.5% in 2010, Thur­man wrote.

DaVita’s proxy state­ment in­di­cated that Thiry moved his res­i­dence from North­ern Cal­i­for­nia to the Den­ver area in Novem­ber 2009 as DaVita has moved its head­quar­ters from El Se­gundo, Calif., to Lake­wood, Colo. In the past, DaVita paid for Thiry’s use of a frac­tional-share plane or char­tered jet to travel be­tween his for­mer res­i­dence and the El Se­gundo head­quar­ters near Los An­ge­les— a to­tal of $221,784 in 2009. Thiry and the board agreed that it was im­por­tant for him to make his res­i­dence in the Den­ver area to en­cour­age other ex­ec­u­tives and em­ploy­ees to do so, Thur­man wrote. With more than 2,000 lo­ca­tions in the U.S., Thiry is on the road for 150 days a year in any case, Thur­man added.

New blood

The com­pa­nies cho­sen are the 10 largest by net rev­enue in each sec­tor that also make pe­ri­odic re­ports to the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion. Those re­ports in­clude an an­nual proxy state­ment, ei­ther filed as a stand­alone doc­u­ment or as part of the an­nual 10-K fil­ing that de­tails ex­ec­u­tive com­pen­sa­tion.

Three hos­pi­tal com­pa­nies that could have made the top 10 list by net rev­enue could not be con­sid­ered be­cause they do not file SEC re­ports. By their re­sponses to the mag­a­zine’s 34th an­nual Hos­pi­tal Sys­tems Sur­vey (June 7, p. 18), Ar­dent Health Ser­vices, Nashville; Capella Health­care, Franklin, Tenn.; and Prime Health­care Ser­vices, On­tario, Calif.; had suf­fi­cient rev­enue to make the list, but none of those pri­vately held com­pa­nies re­ports its ex­ec­u­tive com­pen­sa­tion pub­licly.

The list in­cludes two new­com­ers. Allen Wise re­placed Dale Wolf at the helm of Coven­try Health Care in Jan­uary 2009. Prospect Med­i­cal Hold­ings, Los An­ge­les, with its deal to boost its stake in one hos­pi­tal to a ma­jor­ity in­ter­est, in­creased its net rev­enue from acute-care hos­pi­tals above that of SunLink Health Sys­tems, At­lanta, so Prospect’s chair­man and CEO, Sam Lee, re­places SunLink CEO Robert Thorn­ton Jr. Prospect also has an in­de­pen­dent physi­cian as­so­ci­a­tion di­vi­sion, but only acute-care rev­enue was in­cluded in con­sid­er­ing it for the sur­vey.

The spe­cialty-care por­tion of the list con­tains the same 10 com­pa­nies and ex­ec­u­tives as last year’s sur­vey.

Next year will see more turnover on the list. Alec Cunningham re­placed Heath Schiesser as CEO of Well­Care Health Plans on Dec. 28, 2009. David Cor­dani took over Cigna Corp. as pres­i­dent and CEO on Jan. 1, re­plac­ing H. Ed­ward Han­way.

No end in sight to scru­tiny

Whether they are vet­er­ans of the list or new to it, cor­po­rate health­care CEOs are bound to con­tinue to feel the heat of scru­tiny from the pub­lic and politi­cians.

U. S. Rep. Jan Schakowsky ( D-Ill.) co-spon­sored a bill with Sen. Dianne Fe­in­stein (D-Calif.) to al­low rate re­view for in­sur­ers be­fore health­care re­form kicks in more fully in 2014. In in­tro­duc­ing the bill, Schakowsky sin­gled out the pay of An­gela Braly, chair­woman, pres­i­dent and CEO of in­surer Wel­lPoint, be­cause the com­pany was rais­ing its premi­ums by 39%, but Schakowsky said Braly’s com­pen­sa­tion was far from the most egre­gious. For now, Schakowsky said she prefers rate reg­u­la­tion to a law that sets com­pen­sa­tion.

“It’s out of that pot of money that they make their prof­its that en­able them to pay their CEOs their very high salaries,” Schakowsky said. “It’s cer­tainly some­thing that Congress needs to monitor, and it’s some­thing that the me­dia ought to ex­pose. It’s im­por­tant for the peo­ple who are scrap­ing to­gether the dol­lars to pay their health in­surance premi­ums to know what lux­u­ri­ous lives these CEOs are lead­ing. They’re liv­ing in a par­al­lel uni­verse.”

The heat could be turned up as a re­sult of

Thiry’s to­tal com­pen­sa­tion was nearly $29 mil­lion, but a spokesman said the com­pany’s share price has in­creased 1,300% since Thiry joined DaVita

Smith’s to­tal com­pen­sa­tion topped $20 mil­lion.

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