MONTPELIER – State regulators have reached an agreement with Blue Cross and Blue Shield of Vermont under which the company will reduce its overhead by $3 million to make up for excessive pay to the nonprofit's former head.
"It is going to come out of administrative expenses of the company," said Paulette Thabault, the commissioner of the state's Department of Banking, Insurance, Securities and Health Care Administration. "It is going to put additional pressure on the company to operate more efficiently and to address rising medical trends."
After William Milnes Jr., the former head of the insurance company, retired in 2008, the state began investigating the roughly $7 million paid to him in the final year of his employment and for his retirement, according to the agency.
"Although the department does not set salary levels or approve retirement plans for insurance executives, the investigation showed that the compensation paid to Mr. Milnes simply was not reasonable when compared to similarly sized managed care and health insurance companies," Thabault said.
But since the state is already supposed to be regulating insurance rates by the company – including its administrative overhead – where will the money come from to reduce costs to insurance purchasers by $3 million over the next two years?
Effectively from the company's reserves, where money beyond that needed for operations and payment of claims is deposited, said Kevin Goddard of Blue Cross and Blue Shield of Vermont.
"It will come out of our reserves or what otherwise would have been a contribution to the reserves," he said. "We are a company being operated on very thin margins."
Total reserves for the company as of the end of April were roughly $86 million. The company brings in roughly $600 to $700 million in premiums annually.
Blue Cross and Blue Shield of Vermont had said earlier it could attempt to recover some of the money paid to Milnes after his decade as CEO of the insurer.
"It was not successful," Goddard said.
Blue Cross and Blue Shield, based in Berlin, insures about 150,000 people.
Insurance rates include two portions, one part to cover the claims by beneficiaries, and another to cover administrative expenses. The $3 million must come from the latter portion, Thabault said.
"This order requires them to make this administrative expense line smaller," she said. "This is a positive outcome for Vermonters. I am satisfied that the company was cooperative through the process. I expect they will work hard to implement this order."
In a statement, the company noted that state regulators had praised changes it has made to executive compensation. "Compensation decisions are by their very nature subjective," said Don George, the head of the company.
But BISCHA noted in its announcement that while it does not directly set pay "the large bonuses routinely given to Mr. Milnes by the company board of directors also had the effect of increasing the value of an already generous retirement package."
Under the order, the insurance company must take steps "to hold harmless the company's subscribers from the excessive compensation paid to the company's former chief executive officer, Mr. Milnes, between and including 2001 and 2008. Such actions may include recovery of the excessive compensation from Mr. Milnes or from any other legally responsible party, or such other actions that the company may propose and the commissioner approves."
The insurance company must also take several other steps under the order. The company must submit a "medical cost containment plan" explaining how Blue Cross and Blue Shield will lower the growth rate of health insurance costs and it must annually report to the agency what compensation it gives to its executives.
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