Managed care CEO salaries rise on par with private industry

November 1, 2007

National Reports-The handful of health plans that represent the largest number of enrollees are publicly traded and therefore likely to have reported salaries and bonuses at the high end of the scale. However the majority of HMO chief executives are not part of these plans, industry experts say.

NATIONAL REPORTS-The handful of health plans that represent the largest number of enrollees are publicly traded and therefore likely to have reported salaries and bonuses at the high end of the scale. However the majority of HMO chief executives are not part of these plans, industry experts say.

"In fact, a number of these plans are not-for-profit and have been in business longer than the for-profit larger plans, so when we talk about salaries of health plan CEOs, we should make a distinction between multistate for-profit holding companies and the more classic regional and local plans where responsibilities and goals are different," says William DeMarco, president and CEO of DeMarco and Associates, a healthcare management, marketing and strategy advisory services consultant in Rockford, Ill.

For example, DeMarco says, as of spring 2007, CEO median not-for-profit salary was $298,475 versus for-profit salary at $312,060. Average salary including bonus ranges from $250,000 to $1,016,515.

"This shows the emphasis on managing the medical-loss ratio through a combination of case management and disease management techniques, especially in the Medicare area," he says. "Large holding companies as well as local plans are attempting to manage more specialized populations with an array of product lines versus the one-size-fits-all products offered earlier. These positions are competitive."

Further, he says that he continues to see outsourcing of basic claims and reporting through various specialized vendors to allow smaller plans to achieve the same scale of cost and capability of larger plans.

HOW COMPENSATION COMPARES

Managed-care executive compensation is similar to that of administrators in large local and regional health systems.

"The difference being that while hospitals continue to focus on revenue maximization and facility expansion goals, HMO execs focus on risk management and growth, leveraging premium and marketshare against provider price concessions and capacity," he says. "As pay-for-performance and performance-based contracting becomes more the norm for hospitals to obtain and retain managed care agreements, we see this skill set will become more and more a critical part of hospital and health plan executives' training."

CEO salaries continue to rise and are on par with private industry increases of 6% to 8%, but bonuses are not always linked to performance, which has drawn opposition from consumers and providers alike.

"Because of the rapid change atmosphere of health plan operations, which can include data companies, insurance companies, software companies and drug plan companies, the comparator for CEO salaries is more in the high-technology industry, versus the hospital industry so tech and biotech will continue to lead the agenda in investor-owned compensation committees," he says.

Publicly traded insurers also are paying top executives more in bonus compensation than they had in previous years, according to Atlantic Information Services' Jill Brown. Brown, the managing editor of Health Plan Week, notes that earnings-related measures still predominated in determining 2006 bonuses, while other factors included enrollment growth and the performance of specific business lines. These companies also are lessening their reliance on stock-based compensation in overall pay packages, Brown says, and are more likely to use restricted stock grants and time-vested cash grants rather than stock options.

"Restricted stock grants are seen as more valuable, since executives own the stock at the end of the vesting period, versus options, which executives must purchase once vested-and only if the stock price has risen above the original option issue price," she says.

Some believe many of the for profits' far-end salaries and bonuses have created a backlash against insurance companies in general. "However the earnings performance of United stock and other companies' stock represents a success in terms of return on investment," DeMarco says.

Some of these companies are global with a combination of subsidiaries that blend their risk-based premium revenue with non-risk revenue from information and software acquisitions, radiology management companies, etc. "Wall Street likes this balance, so rewards to the management who orchestrates these stock price increase strategies will continue for this publicly traded group, while others in the community health plan side will seek different rewards of patient satisfaction and successful management of care as their definition of success and be rewarded for their abilities to make this happen," DeMarco says.