Blue Cross reports drop in profit, but higher pay for top execs

Brad Wilson, BCBS CEO
Brad Wilson, BCBS CEO None

Blue Cross and Blue Shield of North Carolina’s net income declined by two-thirds in 2012, but the state’s largest health insurer nonetheless doled out significantly higher bonuses to top executives.

Net income fell to $57.7 million, versus $177.1 million in 2011 as the Chapel Hill-based insurer spent more on medical care and ramped up its investment in technology.

Revenue for 2012 rose 4.1 percent to $5.7 billion due to an uptick in membership and higher premiums. Membership rose by more than 140,000 to 3.74 million.

CEO Brad Wilson’s compensation package totaled $2.5 million in 2012, a 37 percent increase from 2011. The bulk of that increase stemmed from a $1.6 million bonus, up from $983,600 a year ago. His salary was $854,692, up from $804,614 in 2011.

Compensation for the top 10 Blue Cross executives, including Wilson, rose 43 percent in 2012. Among the other top executives: Maureen O’Connor, executive vice president and chief strategy and innovation officer, pulled down $1.7 million, up 41 percent; Gerald Petkau, chief financial officer, received $1.6 million, up 68 percent.

Blue Cross officials justified the compensation packages as appropriate for an organization of its size and stressed that the impact on premiums is negligible.

“Less than a tenth of a percent of every premium dollar goes to executive compensation,” spokesman Lew Borman said Friday during a conference call with reporters. He added that some of the executives have taken on more responsibilities.

Chief Financial Officer Gerald Petkau said the bonuses are determined by performance measures that include membership growth, customer service and satisfaction and “financial stability.”

Adam Linker, a health policy analyst for the N.C. Justice Center, an advocacy group for poor and working-class people, agreed that executive compensation isn’t the force behind rising insurance premiums. But he lamented that Blue Cross is handing out such bonuses all the same.

“It just creates a bad public perception,” he said. “It does distract from having a conversation on what is driving premiums higher.”

Blue Cross is a not-for-profit that annually releases its financials on the same day it files a detailed annual report with the state Insurance Department. Unlike nonprofits, not-for-profits aren’t exempt from paying taxes; last year Blue Cross paid more than $92 million in local, state and federal taxes.

Spending on claims and medical expenses rose 8.4 percent to $4.5 billion in 2012. Although the increased membership was a factor, Petkau said that higher medical costs were the primary driver.

“In 2012, we spent 87 cents of every (premium) dollar on medical care for our customers,” Petkau said. That was up from 85 cents in 2011.

In addition, Blue Cross increased its spending on technology by more than $75 million last year. That included the formation of a joint venture with its counterpart in Kansas City to revamp claims processing, enrollment and billing for its individual and small group customers.

Consequently, the insurer’s profit margin fell to 1 percent, down from 3.2 percent in 2011.

“This last year the company had a focus on preparing for the future and full implementation of health care reform,” Petkau said.

For 2013, Blue Cross sought an average rate increase of 9.94 percent for individual customers but ultimately settled for an increase that averages 8.14 percent after negotiation with the state Insurance Department.

Blue Cross is quoting an average premium increase of 8.8 percent for its small-business customers.