STUDY BLASTS HMO PAY

Health management organizations that argue they need to raise prices to cover soaring costs first should consider trimming executive compensation, a health care consumer group contends.

Seeing what it regards as an inconsistency between HMOs' cries for cutting costs and raising rates against the robust salaries of top executives, Washington-based Families USA Foundation found that top executive of companies that own or operate HMOs earned $2 million on average in 1997.

However, some insurers and compensation consultants contend that the group's research is flawed and also note that the compensation of the executives is in line with other industries.

The consumer group evaluated 15 publicly traded companies that own 74 HMOs. Using public information on each company's five highest-paid executives in 1997, Families USA analyzed both cash compensation and pending, unexercised stock options for 79 executives. From that, the consumer group developed a list of the 25 highest-paid executives.

In 1997, the 79 executives earned an average of $2 million in salary, bonus, allowances, long-term incentive payouts and exercised stock options, according to Families USA. Among the top 25, the average was $5.1 million.

"The hypocrisy of the industry on the issue of health care costs is startling," Families USA Executive Director Ron Pollack said in a statement. "They lose money in 1997 but spend millions to compensate their top executives, spend millions on advertising and lobbying to kill patient protections, and then they go around scaring the American public saying they will need to raise premiums to cover the very minor costs of comprehensive patient protections."

Lorie Slass, communications director for the consumer group and co-author of the survey, said excessive executive compensation is often ignored by the HMOs. "These are companies that time and again are asking consumers to be cost conscious, but as executives, they're not being cost conscious with paying their salaries."

According to the survey, top executives of CIGNA Corp., Oxford Health Plans Inc., United HealthCare Corp., Aetna Inc. and Humana Inc. were compensated the most among the 15 companies tracked.

Earning $30.7 million in 1997, Stephen Wiggins, former chairman and chief executive officer of Oxford Health Plans Inc. topped the list of the 25 highest-paid executives.

CIGNA Chairman and CEO Wilson Taylor, who earned approximately $12.5 million, ranked a distant second. Third on the list was William McGuire, CEO of United HealthCare Corp., with earnings of $8.6 million.

Some insurers said the study's conclusions are flawed, however, because it examines the top executives of publicly traded holding companies, rather than the head of HMO operations.

As a multiline insurer, "our executives are responsible for substantially more than a health care business," said a spokesman for CIGNA Corp.

"The thing I find interesting is that nowhere on either of these lists is an executive from Aetna U.S. Healthcare," said an Aetna Inc. spokeswoman, referring to separate rankings of executives with the largest compensation and the largest unexercised stock option packages.

In addition, Aetna executives' pay is competitive with other companies comparable in size, she said. Aetna Inc.'s former chairman and CEO, Ronald Compton, was ranked seventh on the list of highest-paid executives for his earnings of almost $5.4 million.

A spokeswoman for Oxford Health Plans in New York said: "Because Oxford's compensation packages are paid by the shareholders and not by the groups, they have no impact on the price of providing health care. Looking at compensation packages by including long-term compensation that was accrued over many years in a one-year time frame, the survey gives very misleading results," she said.

In addition to cash compensation, the Families USA researchers included in the compensation figures allowances, long-term incentive payouts and exercised stock options.

Two recent Business Insurance surveys of CEO cash compensation found the average bonus and salary of executives to be about $1 million for agents and brokers and about $1.5 million for insurers and reinsurers. BI's figures, though, exclude stock options (BI, Aug. 31; July 20).

To find capable individuals to lead a corporation, it is necessary to be competitive, said Brooks Chamberlin, managing director and head of the global insurance recruiting practice for Korn/Ferry International, a New York-based recruiting firm. "There's a supply-and-demand equation at work here," Mr. Chamberlin said.

The authors of the Families USA survey are not "comparing apples to apples," he said. Mr. Chamberlin noted that the survey includes executives of publicly traded HMOs as well as multiline insurance companies whose executives run multiple operations, of which running an HMO may be only a small part. "In that sense, I don't think the study is completely valid," he said.

Heidi Toppel, practice leader for Watson Wyatt Worldwide's eastern region executive compensation practice in Boston, said the $2 million average compensation figure generated by this survey is "not really meaningful" because each executive has a different deal with the respective company and a different job description. Even so, she said, that level of compensation is "consistent with what we see in non-health care industries."

What some don't remember when looking at publicly traded health care organizations, said Ms. Toppel, is that a fundamental part of upper management's job is to create value for shareholders.

That is different from a non-profit organization, whose "alignment is to the community and community service," she said.

Families USA's Ms. Slass said the organization has not decided whether this survey will become an annual effort. Regardless, she said she hopes the report prompts HMO executives to "be less disingenous about why they don't support consumer protections."

Copies of the survey are available for $15 from Families USA Foundation, 1334 G St. N.W., Washington, D.C. 20005; 202-628-3030.