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Patrick Springer, Published January 31 2010

Blue Cross Blue Shield reworking incentive program

The pay plan for executives at Blue Cross Blue Shield of North Dakota is being revamped to include incentive targets including health cost containment and quality of care.

The new executive incentive plan, still a work in progress, is a response to an examination by state insurance regulators that concluded a “pay at risk” reward system virtually assured success.

A consultant advising Blue Cross Blue Shield of North Dakota also concluded its incentive was not challenging enough, said Paul von Ebers, the Blues’ chief executive officer.

“We accept that recommendation and want to toughen up what it takes to meet our goals,” he said.

Adam Hamm, North Dakota’s insurance commissioner, said he has not yet been able to evaluate the proposal, or get a detailed presentation from Blue Cross Blue Shield.

“We want to drill down on all the materials,” Hamm said. “I’m looking forward to meeting with them face to face,” an exchange he hopes will take place in the next few weeks.

Hamm directed the company to draft new polices to ensure that salaries and benefits are based on the North Dakota market and to implement “meaningful measures” to improve performance, including incentive pay.

One major shift in emphasis in performance goals is to reward executives for achieving targets that include health cost containment and quality.

Traditionally, the Blues’ executive incentives were heavily weighted on the company’s financial performance. Revenues, largely based on premiums, were rewarded – an indicator that ignored rising costs to consumers.

A major customer, the North Dakota Public Employees Retirement System, or NDPERS, pushed for management incentives that benefit consumers – with cost control topping the list.

“We felt the incentives should be member-based and not just based on company performance,” said Sparb Collins, executive director of NDPERS. “Our concern is the overall cost.”

Blue Cross Blue Shield representatives recently met with the NDPERS board, but Collins said he has not seen the proposed new executive pay incentive plan and is reserving judgment.

“I want to see the details,” he said.

Health care inflation in North Dakota has averaged about 8 percent a year over the past decade, von Ebers said. He would like to see a gradual reduction – 6½ percent, for instance, in three or four years, and ultimately about 5 percent.

“Our sense is we’re going to have to chip away at this,” von Ebers said, noting that health costs in North Dakota are below the national average. “It’s also going to take working with our members to get there.”

The examination found questionable administrative costs, including a sales reward trip to Grand Cayman Island, other travel costs and severance pay. Those problems have been addressed, von Ebers said, by new policies.

The company is also striving to boost productivity, with plans to leave many staff vacancies unfilled when they occur from normal turnover.

This year, Blue Cross Blue Shield will freeze administrative costs constant, at $16.23 per member per month, von Ebers said, although staff received a 2½ percent wage increase.

Personnel costs, in salaries and benefits, comprise 52 percent of the Blues’ administrative costs, which totaled $96.7 million last year and are budgeted at $93.2 million this year.

“We have to find productivity,” von Ebers said. The company has the equivalent of 916 full-time employees, down from 918 last year.

“That will continue to decline this year as part of our commitment to increase efficiency,” said Denise Kolpack, the Blues’ vice president for communications.

The pay plan still strives to provide total compensation – base pay and incentives – that falls in the midrange of similar companies.

Initial results of a pay survey found that the Blues’ executive compensation was in line with large North Dakota employers. That suggests “broad-scale” changes aren’t called for this year, consultants concluded.

Except for financial stability goals, which are easy to measure, no major changes are planned for the executive pay plan this year because standards continue to be defined, but will begin full implementation next year.

Other health insurers, including Wellmark Blue Cross Blue Shield, which covers South Dakota and Iowa, have adopted measures aimed at restraining costs and improving quality.

“We’re not alone in this,” von Ebers said. “But we do think it’s a constructive change.”

The tougher goals mean that executives would meet their target goals 50 to 60 percent of the time, and their “stretch” goals 10 to 15 percent of the time, Kolpack said.

Failure to meet all of their goals would decrease the incentive portion of executives’ compensation, called “pay at risk,” but still would enable their pay to reach the midrange over a 10-year period, according to Watson Wyatt, the consulting firm.

Blue Cross Blue Shield of North Dakota’s 13-member board of directors, each paid $30,000 a year, is scheduled to discuss board compensation at its February board meeting, Kolpack said.

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