North Dakota insurer gets the blues, ordered to make changes
Insurance Commissioner Adam Hamm announced Tuesday that he gave Blue Cross Blue Shield of North Dakota a 30-day deadline to address what he called "inappropriate" and "excessive" administrative expenses.
In response to the findings and Hamm's directives, the Blues' board chairman and new chief executive pledged to act quickly, and expect to beat the deadline with their plans to streamline costs and improve accountability.
Hamm's directives stem from the findings of an examination by his office detailing expenses that mushroomed by
$64.2 million over five years, with more than two-thirds of the increase spent on employee compensation.
Items on the reform list include a "pay at risk" program that examiners determined almost assured payouts, travel policies and severance packages.
"I've directed the company to address these matters immediately," Hamm said. He refrained from giving reporters a "black and white" figure of misspent funds, but added:
"All totaled, there's millions of dollars of excessive expenses that were documented in this report."
During the five-year examination period, Blue Cross Blue Shield reported administrative costs totaling $418.3 million that are reflected in premium costs. Administrative costs amount to about 7 cents of every $1 of premiums paid.
Hamm publicly released the report, obtained earlier by The Forum, Tuesday afternoon after the Blues agreed to its official release even though a 15-day "silent period" had not run.
"The majority of these items have been discussed long before the audit," said Dennis Elbert, chairman of the Blue Cross Blue Shield board, adding that the board adopted a seven-point oversight plan in June.
Hamm ordered the probe last March, after news reports of a controversial sales reward trip to the Caribbean island luxury resort. Michael Unhjem, the Blues' chief executive at the time, was fired in the fallout of that disclosure.
Unhjem's replacement, Paul Von Ebers, said the examination report provides a road map to help him address administrative expenses.
"There will be a revised incentive program for executives for the year 2010," Von Ebers said, adding that the plan should be completed before the end of the year.
Elbert, who is chairman of the business program at the University of North Dakota, said pay for executives and other employees was based on surveys of similar Blue Cross Blue Shield plans.
The target for compensation levels, with input from consultants, was to be at the mid-range for comparable companies. New compensation guidelines will take into account North Dakota pay levels for comparable positions.
Calling the "pay-at-risk" payouts bonuses, Von Ebers said, was inaccurate because they are part of employees' regular compensation. Base pay levels are set below the mid-range level in the firm's pay comparison studies.
But Hamm said nothing really was at risk in the so-called "pay-at-risk" program, which examiners concluded had set goals so low they "virtually assure success."
"For senior management, it was heads you win, tails you win," Hamm said, adding that the pay plan was not in the best interest of policyholders, who own the not-for-profit, mutual insurance company.
Among the other steps Hamm demands the company:
* Adopt policies eliminating "unreasonable expenses regarding retirement parties, gifts, luncheons, banquets and other similar expenses."
* Enact travel policies eliminating payments beyond what the federal government allows, and to use charter aircraft only where cost savings can be documented. The report documented $400,066 in charter air costs among more than $15 million in total travel costs over the five years for the Blues and its affiliates.
"The Board should also enact policies to reduce nonessential travel and out-of-state meetings," Hamm's letter to the company said.
* Implement policies to eliminate severance packages when there is no legal obligation. Examiners said the company paid almost $3.5 million in severance packages, including $2.5 million to Unhjem even though examiners concluded he had violated his contract, and $924,302 to three other executives, although only one had a severance clause in a contract.
* Scrutinize investments thoroughly to "identify risk exposure and potential obligations." Hamm's team concluded a $3.5 million hotel investment was risky, with profit potential that did not match the risk level.
"Health care premiums are for health care," Hamm said. "They are not for hotel investments."
The company said the hotel investment already has returned a $1.6 million profit but it is working to revise its investment portfolio policy.
"The ball is in their court," Hamm said, referring to the steps the company now must take. He credited the board with taking some steps already, including firing Unhjem, but said more action is needed.
Von Ebers said the company looks forward to fixing the problems - and working collaboratively with health providers on even more fundamental issues of assuring high-quality health care at affordable costs.