CareFirst pays well as a nonprofit

Microsoft's directors are paid less than those of Md. insurer

Curran raises concerns

The money dwarfs pay `of other, similar nonprofits in state'

January 01, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

CareFirst BlueCross Blue- Shield's plan to become a for-profit company has touched off heightened examination of how the state's largest health insurer pays its executives and its board of directors.

Just after the plan was announced in November, Attorney General J. Joseph Curran Jr. wrote to legislative leaders expressing concern that "the compensation for [CareFirst's] executives and board members dwarf the pay of other similar nonprofits in the state, most of which pay their board members nothing at all."

And Joseph A. Schwartz 3rd, lobbyist for the state medical society, complained at a recent legislative hearing that CareFirst pays its directors more than what Microsoft board members receive.

CareFirst's 21 board members were paid, on average, about $37,600 a year in the three years since CareFirst was created, according to filings with the Maryland Insurance Administration. Microsoft board members are paid $35,000 a year.

The exact amount a CareFirst director is paid depends on how many meetings he attends and whether he chairs any committees or the boards of subsidiaries. CareFirst's board Chairman Daniel J. Altobello received $71,964 in 2000, the most recent year reported.

In 2000, William L. Jews, CareFirst's chief executive officer, got just over $2 million - $810,199 in salary and $1.2 million in bonuses.

Curran said in a recent interview that as the state considers whether to allow the conversion from nonprofit to for-profit, he would review CareFirst's compensation to make sure it is appropriate for a nonprofit.

"We want a nonprofit to grow and be stable, but we have to see that its overhead is reasonable," Curran said. "I want to see what are its assets, and have they been managed carefully. The assets have to be managed for the benefit of the members."

Those who see CareFirst's pay as high tend to compare it with other nonprofits.

"We were appalled when we learned that CareFirst, as a nonprofit organization, is paying its directors," said Calvin Pierson, president of the Maryland Hospital Association. Pierson said he believes no Maryland hospitals pay their board members.

Only 2 percent of the nation's nonprofits pay their boards at all, and most pay only nominal fees, according to a survey by BoardSource, a Washington organization formerly known as the National Center for Nonprofit Boards.

Others, however, including several compensation consultants interviewed, say Blue Cross plans are different from charitable nonprofits, and need different compensation policies.

"You can't compare them to Kennedy Krieger [Institute] or Johns Hopkins or the Boys and Girls Clubs," said Timothy C. McNamara, partner and managing director in the Baltimore-Washington regional office of Boyden Global Executive Search. "They're competing in the for-profit arena. You need to compensate your board and your executives to attract talent."

McNamara has been a consultant on compensation for government agencies, nonprofits and for-profits, but not for Blue Cross insurers.

"It's challenging to set up compensation plans for nonprofits," said Kevin J. Murphy, a professor of finance at the University of Southern California.

"You're missing some of the key metrics" used to judge performance in the for-profit world, such as stock price, explained Murphy, who has consulted on compensation for both for-profits and nonprofits.

Also, several compensation consultants said, nonprofits can't offer stock options, which are an important part of compensation for executives and directors at publicly traded companies.

Beyond that, Blue Cross and Blue Shield plans occupy an unusual place in the nonprofit world.

"In 1937, CareFirst's predecessor was started to deal with uncompensated care," Curran said in an interview. The state decided, according to the attorney general, "to give appropriate tax relief to help a nonprofit deliver health benefits."

Over time, as for-profit companies began competing aggressively in the health insurance market, many Blues plans began behaving as "near-for-profit" companies, said Carl J. Schramm, a health economist who did a study of CareFirst for the Abell Foundation.

As they began acting more like commercial insurers, Blues plans lost their federal tax exemption in 1987. Like many other Blues plans, CareFirst continues to get state tax breaks based on its nonprofit status.

In Maryland, Blue Cross and Blue Shield maintained separate boards - both unpaid - until the end of 1984, when the two merged, according to CareFirst's written response to questions about compensation. (The company declined interviews, but provided written answers through its media relations staff.)

"The decision was made - based on what was happening elsewhere and in order to attract highly capable board leadership to lead a larger, more complex company - that board directors should be compensated beyond their expenses," the CareFirst response said.

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