Health in­surer CEOs score 2016 pay raises de­spite un­cer­tain fu­ture

Modern Healthcare - - NEWS - By Shelby Liv­ingston

The health in­sur­ance in­dus­try last year braced for tremen­dous change. Pres­i­dent Don­ald Trump and his ad­min­is­tra­tion promised to up­end the reg­u­la­tory frame­work in­sur­ers had been op­er­at­ing un­der for six years. The Af­ford­able Care Act’s in­sur­ance ex­changes sparked mil­lions in re­ported losses at big in­sur­ers, which threat­ened to exit the mar­ket. An­them and Aetna failed to al­ter the in­sur­ance land­scape in pro­posed merg­ers with Cigna Corp. and Hu­mana, re­spec­tively.

In a rocky year for the in­dus­try, CEOs were re­warded for en­sur­ing their com­pa­nies weath­ered the storm by de­liv­er­ing rev­enue and earn­ings growth de­spite the chaos.

Most of the CEOs at eight of the largest pub­licly traded in­sur­ance com­pa­nies got a pay raise last year. Com­bined, those eight ex­ec­u­tives made $171.8 mil­lion in to­tal com­pen­sa­tion in 2016 based on re­al­ized stock gains, essen­tially un­changed from last year, ac­cord­ing to a Modern Health­care anal­y­sis of com­pany proxy state­ments filed with the Se­cu­ri­ties and Ex­change Com­mis­sion.

The anal­y­sis in­cluded Aetna, An­them, Cigna Corp., Cen­tene Corp., Hu­mana, Molina Health­care, Wel­lCare Health Plans and Unit­edHealth Group. Com­pa­nies re­port to­tal com­pen­sa­tion, which com­prises salary, stock and op­tion awards, bonuses and other com­pen­sa­tion. But those stock and op­tion awards may not be re­al­ized for a few years. Re­al­ized com­pen­sa­tion, how­ever, takes into ac­count stock vested and op­tions ex­er­cised dur­ing that year.

For some con­text, the CEOs’ com­bined 2016 re­al­ized com­pen­sa­tion would be enough to cover the aver­age an­nual pre­mium for about 59,150 peo­ple en­rolled in the most pop­u­lar plan on the Health­Care.gov fed­eral mar­ket­place last year be­fore fi­nan­cial as­sis­tance.

In a rocky year for the in­dus­try, CEOs were re­warded for en­sur­ing their com­pa­nies weath­ered the storm by de­liv­er­ing rev­enue and earn­ings growth de­spite the chaos.

Ex­ec­u­tive com­pen­sa­tion at the lead­ing pub­licly traded health in­sur­ance com­pa­nies has been climb­ing for years, said Mike Hal­lo­ran, se­nior part­ner in ex­ec­u­tive com­pen­sa­tion at con­sul­tancy Mercer. The pay tracks closely with the size and scale of the com­pa­nies, many of which have grown dra­mat­i­cally in terms of rev­enue.

For ex­am­ple, Aetna’s rev­enue nearly dou­bled to $63.1 bil­lion last year from $34.2 bil­lion in 2010, when Mark Ber­tolini took over as CEO. Ber­tolini made $41.7 mil­lion in 2016 based on re­al­ized stock gains, while he made $10.6 mil­lion his first year at the helm of the com­pany. Last year, he made the most of all the CEOs an­a­lyzed.

Ber­tolini’s pay in­creased in 2016 de­spite sev­eral stum­bles dur­ing the year. Like many other in­sur­ers, Aetna strug­gled to turn a profit on the ACA’s in­sur­ance ex­changes. It lost $450 mil­lion from in­di­vid­ual ex­change plans in 2016.

The $37 bil­lion tie-up with Hu­mana, which Ber­tolini spear­headed, ul­ti­mately failed af­ter a fed­eral court blocked the deal say­ing it would harm com­pe­ti­tion. It was an ex­pen­sive fail­ure: In 2015 and 2016, Aetna spent $775 mil­lion in trans­ac­tion and in­te­gra­tion-re­lated fees, ac­cord­ing to SEC doc­u­ments. More­over, Aetna had to pay Hu­mana a $1 bil­lion breakup fee.

Still, Aetna’s board of di­rec­tors re­warded Ber­tolini an an­nual bonus at 115% of his tar­get for de­liv­er­ing “strong fi­nan­cial per­for­mance,” grow­ing mem­ber­ship, and ex­pand­ing the in­surer’s Medi­care Ad­van­tage foot­print. Aetna’s 2016 rev­enue grew by 4.7% over 2015, though its profit dropped by 5% year over year to $2.3 bil­lion.

Hu­mana CEO Bruce Brous­sard’s pay in­creased dra­mat­i­cally to $17 mil­lion from $4.8 mil­lion in 2015. The spike was largely due to Brous­sard cash­ing in on stock awards from years past.

He was also re­warded by the board for de­liv­er­ing 2016 ad­justed earn­ings per share of $9.57, up from the tar­get of $8.85, “de­spite an ex­tremely chal­leng­ing op­er­at­ing en­vi­ron­ment due to our pro­posed merger agree­ment with Aetna,” the com­pany’s proxy fil­ing states. That ad­justed fig­ure ex­cluded costs re­lated to the Aetna merger and the pay­ments Hu­mana is owed un­der the ACA’s risk-cor­ri­dor pro­gram. Hu­mana spent about $127 mil­lion in 2015 and 2016 on fees re­lated to the Aetna deal.

It’s not sur­pris­ing that nei­ther Ber­tolini’s nor Brous­sard’s pay suf­fered from the merger’s fail­ure. Betsy Field, a se­nior ex­ec­u­tive com­pen­sa­tion con­sul­tant at risk man­age­ment firm Willis Tow­ers Wat­son, noted that “typ­i­cally you wouldn’t see com­plet­ing a merger as a goal in your an­nual or long-term in­cen­tive plan.” Still, Brous­sard’s to­tal pay bal­looned de­spite lower profit. Hu­mana’s 2016 profit was $614 mil­lion, down from $1.3 bil­lion in 2015, due to mem­ber­ship losses in Hu­mana’s in­di­vid­ual com­mer­cial and group Medi­care Ad­van­tage plans. Hu­mana dras­ti­cally re­duced the in­di­vid­ual plans it sold on and off the ACA ex­changes in 2016.

An­them like­wise strug-

gled with ACA ex­change plan losses, but that didn’t hurt CEO Joseph Swedish’s pay­check. He made $17.1 mil­lion in to­tal pay based on ac­tual stock gains. That’s up 8.5% over 2015, even though An­them’s $54 bil­lion deal with Cigna didn’t pan out. The merger was blocked by a fed­eral ap­peals court on Fri­day.

Swedish re­ceived a $2.8 mil­lion bonus in 2016, largely for meet­ing the com­pany’s ad­justed earn­ings per share goal of $11 per share. That mea­sure is weighted at 85% of the bonus. An­them rev­enue to­taled $84.9 bil­lion, up 7.2% year over year. Profit fell 3.5% com­pared with 2015 to $2.5 bil­lion.

About 90% of the typ­i­cal health in­surer CEO’s pay is tied to the fi­nan­cial per­for­mance of the com­pany, Hal­lo­ran said. Of that, the lion’s share of in­cen­tive pay is stock per­for­mance.

Cigna CEO David Cor­dani’s pay was slashed by more than half last year. He made $22 mil­lion in 2016, down from $49 mil­lion the year be­fore when he cashed out a lot of stock. The pay swing also re­flects Cigna’s fail­ure to meet its fi­nan­cial goals. Cor­dani earned just 50% of his tar­get an­nual bonus be­cause the com­pany didn’t meet goals for ad­justed in­come from op­er­a­tions, which slipped to $2.3 bil­lion in 2016 from $2.4 bil­lion the year be­fore .

Stephen Hem­s­ley, head of the na­tion’s largest health in­surer, Unit­edHealth, made $33.4 mil­lion in to­tal com­pen­sa­tion based on re­al­ized stock gains, up 66.1% over 2015.

Hem­s­ley’s non-eq­uity bonus was $4.9 mil­lion be­cause the com­pany beat per­for­mance goals for rev­enue and op­er­at­ing in­come. The com­pany also met tar­get goals for em­ployee en­gage­ment and team­work, which are mea­sured based on sur­vey re­sults. Unit­edHealth recorded 2016 rev­enue of $184.8 bil­lion, up 17.6% year over year.

At the same time, Unit­edHealth re­warded Hem­s­ley for en­rolling al­most 2.2 mil­lion new mem­bers in 2016 and im­prov­ing its Medi­care Ad­van­tage star rat­ings, ac­cord­ing to the proxy. The com­pany’s ad­justed earn­ings per share grew by 25% to $8.05, with to­tal share­holder re­turn at 38%.

Cen­tene CEO Michael Nei­dorff earned slightly less than Hem­s­ley at $32.2 mil­lion, down 27% over last year. His stock gains were lower than in 2015, ac­count­ing for most of the de­crease in pay.

De­spite the Med­i­caid in­surer’s stock price fall­ing 14% in 2016, Nei­dorff still earned a $3.9 mil­lion an­nual bonus.

The proxy cited Nei­dorff’s role in clos­ing the com­pany’s $6 bil­lion ac­qui­si­tion of in­surer Health Net, mak­ing Cen­tene the largest Med­i­caid in­surer in the coun­try by mem­ber­ship and rev­enue. The deal helped boost the com­bined com­pany’s rev­enue by 78% to $40.6 bil­lion over 2015. Cen­tene’s to­tal mem­ber­ship was 11.4 mil­lion in 2016, an in­crease of 6.3 mil­lion mem­bers over 2015.

Ken­neth Bur­dick of Wel­lCare Health Plans made $4.7 mil­lion, up from $3.3 mil­lion the year be­fore. His an­nual bonus was $2.7 mil­lion, or 183% of the tar­get, for meet­ing fi­nan­cial— rev­enue and earn­ings per share, for in­stance—and qual­ity goals, such as cus­tomer sat­is­fac­tion.

Molina CEO Dr. J. Mario Molina’s pay to­taled $3.8 mil­lion, about half of what he made the pre­vi­ous year. The lower pay “rep­re­sented a dis­ap­point­ing year with re­spect to our fi­nan­cial re­sults,” the proxy stated. While Molina’s rev­enue in­creased to $17.8 bil­lion in 2016, the com­pany didn’t reach pre­de­ter­mined goals for net profit mar­gin and earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­za­tion, or EBITDA.

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