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HEALTH PLANS: Wellpoint and United — not much to be proud of…(with 12 noon EST UPDATE)

It is getting pretty difficult to find something nice to say about the nation’s two largest health plans. Wellpoint’s Blue Cross of California unit, already fined by the fairly tame CA Dept. of Managed Healthcare, is now being sued by California hospitals for what appears to be a general systematic cancellation of high-cost member policies. It’s worth noting that they don’t seem to be investigating the applications of those members who didn’t make any claims. Lisa Girion, on her way to health care journalistic stardom at the LA Times has more:

A class-action lawsuit filed Friday on behalf of all California hospitals accused Blue Cross of California of routinely violating state law by refusing to pay hundreds of hospitals statewide for patient care it authorized.The suit is the latest salvo in a growing controversy over actions by Blue Cross to cancel the individual health insurance of sick policyholders, sometimes saddling canceled patients with huge medical bills. Although Blue Cross contends that the cancellations are justified partly to crack down on fraud, consumer advocates and policyholders say some revocations are carried out simply as a way for Blue Cross to avoid paying expensive claims.

Larry Glasscock, the CEO of Anthem, (now Wellpoint) has been pretty quiet in the press, but Wellpoint’s pre-merger figurehead Len Schaeffer has historically not been–and it’s his side of the company that evidently was causing all the trouble. In fact as I’ve pointed out here before, although Schaeffer accurately understands what the problems in health care are (practice variation and a lack of IT use) the solutions he used over the years don’t solve those problems, but instead relied on better risk selection and more aggressive pricing to make Wellpoint very profitable. What exactly was his "value-add" to society for all that money he "earned".

for whom the bill tolls

But of course in the lexicon of earners he’s a chump compared to Bill McGuire at UnitedHealth Group. It does appear though that McGuire may be fired by Monday as an external investigation suggests that the stock options he received were all illegally backdated. Whether or not it was illegal, his actions suggest staggering greed. He already had wealth beyond anyone’s imagination. What exactly was the point in cooking the books and effectively stealing from shareholders to add more?

I guess with the amount of sycophants he surrounded himself with, like these ones quote in the WSJ he really felt he was worth every penny of the $1.6 billion, or whatever:

"We’re so lucky to have Bill," Ms. Mundinger, a longtime
compensation-committee member, told the Journal earlier this year. Of his rising
pay, she said: "He needs to be compensated appropriately so that his business
model has believability in the market."

It wouldn’t be quite so bad if the bulk of these profits and vast riches were made back in the 1990s. At least then health plans were acting as what Uwe Reinhardt used to call "bounty hunters" and saw their mission as removing the excess earnings of hospitals and specialists, even if they were redirecting some of them to their executives. But at least Malik Hassan (Healthnet) and Len Abramson (US Healthcare) were clearly going after the providers and were delivering lower rates of premium growth (and in some years negative growth) to their customers, the big employers.

But in the past six to seven years, that has all changed. The health insurers have completely given up trying to figure out how to lower costs, and have just stuck big increases onto their customers. What’s worse is that as overall premiums and costs have gone up, the share that the insurers have kept has increased! Thus, they are screwing their customers, and at the same time keeping a bigger share of larger revenues–which has resulted in those huge profits and stock option gains.

And even worse, they’ve all got heavily into the business of destroying what was left of the risk pool by providing high-deductible highly underwritten plans such as Tonik (Wellpoint), or even worse buying scumbag quasi-fraudulent plans such as Rooney’s Golden Rule (United).

I know that the employers and taxpayers are dumb, but that doesn’t mean it’s been a good thing for McGuire, Schaeffer et al to take advantage of them.

There are obviously talented and good people working in many parts of health plans, as I’ve documented elsewhere. Several major innovations have come from within them, particularly in population and disease management. But recently the people in the executive suites have shamed their organizations and harmed not only their industry, but the health care system and society as a whole.

And, eventually, that will mean that when time comes to make an argument in favor of why we should have a private sector health care insurance industry, the rational moderate voices in support of some role for health insurance intermediaries–of whom barely count myself as one– will be that much weaker.

UPDATE: McGuire is indeed gone. What happens to his $1.6bn of in the money vested options is less clear. Wall Street doesn’t seem to care–the stock is flat today.

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11 replies »

  1. Shareholders making profit from peoples Health, you all should be ashamed of yourself, this isn’t toothpaste they’re selling. To strive for profits over people is just evil. I hope all of you are on the operating table someday, when the insurance Co. decides to stop the operation half way, just so they can make a profit, that is what you all deserve or worse. People are being denied coverage, because they are deemed too risky, people with families, this is the devils work, without a doubt. This is not a great country anymore, everything is about money even peoples health.

  2. Alex pontificates:
    > Backdating isn’t defensible.
    > It’s free money with no risk
    So is a salary free money with no risk. Is a salary defensible? The WSJ has reported extensively on both McGuire and the practice of backdating and other executive compansation issues.
    > can someone with better math skills than
    > mine tell me how much McGuire pimped himself for?
    If I read things right, the value of his un-excercised options before repricing was $1.9B and after $1.1B. So I guess he thought he was pimping himself for $800M more than he actually got.
    t

  3. Saw today in the NY Times that Helmsley has the same problem with backdating of his options. Indeed, the first options he got from United were backdated to five months before he even worked for the company, giving him a built-in $7.26-a-share raise on the day he started. Meet the new boss, same as the old boss?
    Just out of curiousity, I’d like to know if anyone has calculated just how much money backdating of options got McGuire. Take the high and low from each year back to 1994, apply the difference to the current value of what he now owns, plus what he has sold over the years, and I think you’d have the number.
    Unless I’m wrong, in comparison to the total, I bet it’s fairly small. I have a theory about the personality of the CEO type that they just can’t stand losing, no matter how small the stakes. So they will do foolish, even self-defeating things, just to avoid losing.
    My poster child for this is Martha Stewart and her ImClone fiasco. The lady is worth millions, and yet engages in insider trading so she doesn’t lose on an investment of $234,000. Someone figured out, though, that had she traded the shares the next day, which would have made her clean, the total loss to her would have only been $45,000. I may be a little off on the numbers, but you can see where I’m going with this. She risked jail time, a felony conviction, and loss of credibility for what she probably spends on curtains in a year.
    I will say she has recovered nicely. But she has lost a lot. Her company suffered financially, she was demoted to a non-executive role, she lost board seats on other companies, and her TV show was cancelled. She’s capable enough to build it back, but how much farther ahead would she have been had she done the right thing? A damn sight more than $45,000, I would say.
    So can someone with better math skills than mine tell me how much McGuire pimped himself for?

  4. Backdating isn’t defensible. It’s free money with no risk, but that’s not enough. I used to think there was going to be a massive shareholder suit regarding executive compensation, but my hopes have faded. There’s like 100 open investigations at major companies on this. Unfortunately, it appears the f-tards who actually are in charge of the compensation approve of this shit. That’s the problem with capitalism, the damn capitalists.

  5. I haven’t seen the report, but if it’s right, then it just shows what he did before (the backdating) was pure greed. After all he could have priced the options on the actual day of the grant, or the high for the year they were granted in. If he continued to do well (and the stock went up) then he would still have more money than any one human could possibly need, and he’d still have his job. And if not, well they were just options and a their lowest possible value was zero–so there was no personal risk.

  6. Update. Reported that McGuire has agreed to reprice all of the options he received from 1994-2002 to the annual high share price.

  7. Rick – Those of us in the money management business like to see senior management own a significant stake (relative to their net worth) in their companies because we think it aligns their interest with that of investors. Warren Buffett calls it eating your own cooking. I am not a big fan of stock options because of the lottery ticket aspect of them. Restricted stock is better because the executives share in the downside risk of ownership, but it has its detractors as well. Many companies (including the one I work for) have stock ownership guidelines that require executives to own stock in the company equal to one to five times (depending on management level) annual base pay. If they want to use some or all of their bonus or any other resources available to them to buy the stock in the open market on the same terms available to evey investor, we applaud that. By the way, many of these pay packages are driven by executive compensation consultants who advise the Compensation Committee as to how much they need to pay senior managers to be competitive with other companies, especially in the same industry. Part of that was driven, in turn, by the requirement to disclose the total compensation paid to the five highest paid executives in the annual proxy material. So it goes — unintended consequences.

  8. “deferred compensation, to me, is a deal with the devil”
    Rick, I agree with you and, speaking of the devil, it’s probably relevant to recall that stock options increased greatly in importance for executive compensation after the Congress passed legislation disallowing corporate tax deductions for salary paid in excess of (I think) $1 million per year.
    So one of the few laws that Congress did not enact – the law of unintended consequences – strikes again.

  9. Barry, I’m really on your wavelength. I had a slight variation on your proposal for CEO pay, although I wasn’t nearly as generous as you are. I suggest taxing the company (not necessarily the executive himself) when the CEO’s pay exceeds 60 times (or some other number, negotiable in the legislative process) the lowest-paid, full-time equivalent in any company. That would force all sorts of interesting choices. If compensation committees truly believe their company’s own press releases about the water-walking abilities of their CEOs, they can pay them above that 60X (or whatever number), and take on the tax liability as they see fit. I can see competitive scenarios where they might need to do so to keep an extraordinarily good executive from leaving, one of the difficulties of hard “cap.” Or they could bring up the bottom of the scale, not a bad thing in my book.
    I agree with the notion, though, that a CEO is merely a salaried employee. A very highly paid one, whose decisions may have far-reaching consequences for the fortunes of the company and its employees, but a salaried employee nonetheless. His downside risk is ultimately less than that of investors.
    I certainly like to see CEOs having a financial stake in the outcome of their decisions, so I wouldn’t want to restrict too heavily their ability to buy stock in their own companies, as long as it’s a very open, straightforward process.
    But deferred compensation, to me, is a deal with the devil. So to speak.

  10. While I have no problem with CEO’s who create a lot of shareholder value through their leadership getting rich, I don’t think we need to make them billonaires to incentivize them to work hard on behalf of the investors. At some point, we need to say enough is enough. I think Dr. Maguire could have easily purchased stock early in his tenure and/or throughout his tenure with some of his compensation and ridden the 50 fold appreciation to considerable wealth. If he did that, he would have purchased on the same terms available to any shareholder at the time and incurred the same downside risk during his ownership.
    As for how much is enough, it’s hard to say. About 30-40 years ago, CEO’s made roughly 40 times as much as the average worker in their company. Today, it’s more like 400 times with much of the difference related to stock options. Congress contributed to this mess by limiting the tax deductibility of executive pay to $1 million unless it was performance related. Personally, I think CEO total compensation should be capped at around 100 times that of the average worker in their company. To the extent that they can build wealth by purchasing the stock in the open market with after tax dollars, the sky’s the limit just like it is for all of us.
    I have long felt that one does not get rich in America by working for a salary, even a high executive level salary. People get rich by being an owner or partner in a successful business. For executives, that usually means owning stock in your company. For movie stars and athletes, they are, in effect, the business because of their ability to sell tickets and attract attention among people who admire them or want to see them perform. I have excluded inherited wealth for purposes of this discussion.

  11. What’s fair compensation for a guy who has outperformed the S&P by 5500%? Seriously. As an investor I want my CEO tied to the stock, as a shareholder I’d be pissed about the insane compensation packages (and the back dating), but what is fair compensation for a guy who has outperformed every CEO in America?

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