HEALTHCARE
May 3, 2010

Health Insurance: Millions Spent on Salaries, Not Care

Health insurance executives are paid millions to ensure stock prices stay high. Patient care is not a concern.

Last year was a very good year for H. Edward Hanway. The CEO of Cigna made $14.6 million in 2009. He retired on December 31. Here is some of what this money could have paid for, based on national averages:

  • Health insurance for 3,000 individuals ($4,824 each) or 1,100 families ($13,375 each)
  • 241 nurses ($60,000 per year each)
  • 209,000 additional prescriptions filled ($70 each)

Did Hanway contribute as much to the nation's health as 241 full-time nurses would have?

The total compensation for the top four executives under Ms. Braly at Wellpoint totaled $20 million in 2009, meaning Wellpoint paid out $33 million just to its top five executives.

Hanway's compensation isn't at all atypical. Ronald Williams, Aetna's CEO made over $18 million in 2009. And Angela Braly, the CEO of Wellpoint, made $13.1 million in 2009. This was a 51% increase over Ms. Braly's 2008 compensation, and it came at a time when Wellpoint's subsidiary, Anthem Blue Cross, proposed premium increases of up to 39% for Californians.

Hundreds of Millions of Dollars For Salaries, Not Care

And these are just the salaries of CEOs. Health insurance companies have many other highly compensated, top-level executives. At Wellpoint, at least three of them received compensation increases of up to 75% in 2009. The total compensation for the top four executives under Ms. Braly at Wellpoint totaled $20 million in 2009, meaning Wellpoint paid out $33 million just to its top five executives.

The ten largest health insurance companies insured roughly 118 million Americans in 2008. Taking Wellpoint's compensation figures as typical suggests that these 10 companies paid over $300 million dollars to their executives in 2009. While this is only a crude estimate, it serves to define a ballpark figure for overall executive compensation: hundreds of millions of dollars, at minimum. This is all money paid for by health insurance premiums that buys little or no health care. Some might call it a money pit for health care dollars.

Executive compensation isn't the only reason health care costs are so high. Hospital procedures have grown more costly and doctor's fees have also risen. But it's hard to imagine a health care system without doctors or hospitals. A health care system without health insurance executives is not only possible, it existed well into the 20th century. And the first widespread health insurance companies were non-profits.

The current health care system is nothing more than an accident of history. Melissa Thomasson, an economic historian and professor at the University of Miami (Ohio), published an article in 2003 which details the development of the U.S. health care system from its infancy. This article shows that the system in place today is not part of the natural order of the universe; it evolved through a series of historical accidents. There is nothing sacred about it.

How Health Insurance Plans Got Started

In the late 1920s, Baylor Hospital in Dallas became concerned that it had too many empty beds and too little income. It contracted with a group of Dallas teachers for them to pay 50 cents a month ($6 a year) and in exchange, Baylor would pay their hospital costs. This provided the hospital with a steady stream of income. When the Great Depression hit, almost every hospital in the country saw its patient load and income plummet, but not Baylor Hospital. The Baylor idea became hugely popular. It eventually evolved into Blue Cross, with coverage available in nearly every state. This was the origin of our employer-based health care system. A similar insurance program for physician costs, Blue Shield, also emerged.

While Cigna paid Hanway over $14 million to oversee the health coverage of 11.9 million people, Medicare's head, the acting administrator of the Centers for Medicare and Medicaid Services (CMS) makes around $140,000 a year overseeing the health insurance coverage of 40 million people.

By 1940, the growth of both Blues suggested to private insurance companies that selling health insurance could be profitable, an idea that was previously unthinkable to them. Because the Blues were non-profit, they were required to offer the same rate to both healthy and sick subscribers. Commercial insurance companies had no such requirement. As a result, they could often offer relatively healthy groups lower premiums than Blue Cross and Blue Shield could, and were able to take away some of their customers.

But it took World War II and the war economy to cement the idea of for-profit, worker-based health insurance firmly into place. During the war, factories were ramping up production and needed to attract workers. Wage and price controls made offering high salaries impossible. So employers turned to fringe benefits, such as private health insurance, instead.

In 1943, the Internal Revenue Service ruled that employer-based health care should be tax free in certain instances. A second law, in 1954, made the tax advantages much more widespread. These tax breaks caused the number of people with private insurance to soar. By 1951, the number of people with private health insurance (41.5 million) first surpassed the number enrolled in Blue Cross and Blue Shield (40.9 million). Employer-based, for-profit, health insurance was now the rule, not the exception, a trend that has continued to the present day. An estimated 170 million Americans are now covered by private health insurance companies. The current health care system wasn't inevitable. It arose because of a depression, a world war and government tax breaks. If it's not working, why can't it be replaced by a system that does work?

Toward A Better Health Care System

Medicare is one approach. While Cigna paid Hanway over $14 million to oversee the health coverage of 11.9 million people, Medicare's head, the acting administrator of the Centers for Medicare and Medicaid Services (CMS) makes around $140,000 a year overseeing the health insurance coverage of 40 million people. Medicare doesn't have a CEO. It doesn't have stock options or golden parachutes either.

Some states, notably Hawaii and Massachusetts, have tried their own approaches to crafting a better health care system. Since 1974, Hawaii has required all employers to provide health care benefits to any employee who works 20 hours a week or more. In 2008, Hawaii launched a program designed to cover every child from birth to 18 years old who didn’t already have health insurance. This program ended after only seven months, when the governor eliminated its funding, ostensibly over concerns that some families with private coverage were canceling it because they could now get coverage for free from the state.

In 2006, Massachusetts passed a health care reform law that required all residents to either have health insurance or face a fine of up to $912. Other provisions of the law extended the state's Medicaid program to cover children with family incomes up to 300% of the federal poverty level ($32,490 in 2009) and provided subsidized health insurance for individuals whose income was under 300% of the federal poverty level. Since implementation of the law, it is estimated that nearly two-thirds of those who were uninsured now have health insurance coverage.

While opinions vary widely on the effectiveness and desirability of the Hawaii and Massachusetts laws, these states certainly deserve credit for at least trying to address some of the flaws in the current system.

There is still strong disagreement over whether health care in the U.S. should be a right, a privilege or a commodity. Yet proponents of all three systems should be able to agree that health insurance executives, whose primary responsibility is to their stockholders, not to those whose health they oversee, are draining badly needed resources away from health care. Executive compensation isn't the only reason for the high cost of health care. Medical procedures and prescription drugs both cost far more in the United States than in the rest of the world. Malpractice costs and excessive testing (often to avoid malpractice problems) have also contributed to rising health care costs. Crafting a functional health care system will require finding effective solutions to all of these problems. Freeing up the hundreds of millions of dollars now going to health insurance executives would be a good start in that direction.

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