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AIS's Health Business Daily
Featured Story March 4, 2010
North Dakota Blues Plan Institutes a New ‘Pay-at-Risk’ Incentive Program Reprinted from The AIS Report on Blue Cross and Blue Shield Plans*, a hard-hitting independent monthly newsletter on business strategies, products and markets, mergers and alliances, and financing of BC/BS plans. *Not affiliated with the Blue Cross and Blue Shield Association or its member companies. By Liana Heitin, Editor (lheitin@aispub.com) Blue Cross Blue Shield of North Dakota is rolling out a new incentive pay plan for all employees after the state insurance commissioner directed the insurer to re-evaluate its executive incentive program and move toward tying pay to quality-of-care improvements.
BCBSND has opted for a “pay-at-risk” plan, which means that a portion of every employee’s salary is not guaranteed. Vice President of Corporate Communications Denise Kolpack would not divulge details of the previous pay plan, except to say that differences between the old and new plans were “primarily the addition of the new financial trigger, the threshold [performance level] and the overall effort to make the goals more aligned with strategic goals.” According to an article published in The Forum of Fargo-Moorhead, a local North Dakota newspaper, the Blues plan’s executive incentives previously were based on the company’s financial performance, with executives earning rewards tied to premium revenue.
Thomas Wilson, compensation expert and president of The Wilson Group, explains that “as a not-for-profit plan, you can’t use profitability [as an incentive measure] — so you use some surrogate of profitability. But when you focus on revenue and members, there’s no attention to [consumer] costs.” He says he applauds the commissioner’s efforts to promote quality of care and the responsible use of resources.
The state insurance commissioner, Adam Hamm (R), declined a request for an interview, saying he would not disclose any more details until he receives a final plan from the insurer.
The not-for-profit Blues plan has been under public scrutiny since it reportedly paid out $15 million in employee bonuses, financed a $35,000 retirement party and rewarded sales executives with a $238,000 trip to the Grand Cayman Islands — all before requesting double-digit premium increases. Then-CEO Michael Unhjem’s employment was terminated following the March 2009 island getaway, but on the way out he received a $2.2 million severance package.
The new CEO, Paul Von Ebbers, told The Forum the North Dakota Blues plan was advised by a private consultant to make its incentive plan more challenging and wants to “toughen up” at the commissioner’s recommendation.
Kolpack explains that under the new pay-at-risk plan, “once a salary for each employee is determined based on median market averages, a portion of the salary is withheld and not paid unless the goals are achieved. It is not considered a bonus. Additionally, the higher the grade level, the higher the portion of the salary at risk.”
However, Wilson says pay at risk is “a question of expectations.” If an employee only expects to make the base salary, then the at-risk money “is icing on the cake.” The plan is really no different from a bonus pay plan, he says, since “they’re not taking anything away.…You have an opportunity to make an extra 10% to 15%. Everything is exactly the same [as a bonus] — it’s just the label on the bottle.” It’s also referred to as performance compensation, he says.
A short statement about the pay changes, provided by Kolpack, says that the new plan adds a risk-based capital trigger that requires the company to maintain an RBC level between 450% and 750% in order for employees to receive their payout. It explains that RBC is the “minimum amount of money an insurance company needs to support its overall business operations.” As of November 2009, the company’s RBC was 519%, the memo states. Investment bank Oppenheimer & Co. Inc. estimates that Blues plans’ average RBC rose to 708% at the end of the second quarter of 2009 from 696% at the end of 2008.
The document also lays out the three new performance levels: The Threshold level has an 80% to 90% chance of achievement, the Target level has a 50% to 60% chance and the Max level has a 10% to 15% chance. The levels will be based on achievement targets from the five previous years.
In determining executive incentives, Wilson, who is not working with the North Dakota Blues plan, recommends that his clients create a scorecard with three to five metrics, including goals that benefit both the company and consumers “so that the payout is really a combination of conflicting measures.…If you’re able to reduce costs and increase the quality of care, that in fact shows leadership — that’s where rewards should come into play,” he says. Wilson emphasizes the importance of comparing company results to those of outside organizations, rather than to what the company did last year.
BCBSND’s new performance measures will go into effect for 2010 and the incentives will be paid out starting in March 2011, according to Kolpack. |
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