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Living High at a Health Care “Co-op”

October 11, 2009

Health care co-operatives have been proposed as an alternative to over-priced insurance companies with their highly compensated executives and out-of-control administrative costs. But the record of Blue Cross Blue Shield of North Dakota, a non-profit member co-op, demonstrates that the co-op model doesn’t inoculate insurance businesses from corruption and greed.

North Dakota Blue Cross Blue Shield (BCBS) is the largest insurer in the state, with about 450,000 members in and around the area. Earlier this year, reports of a $238,000 company-paid staff trip to the Cayman Islands prompted an in-depth investigation by the state insurance commissioner. The investigation exposed $15 million in executive bonuses, $400,000 in charter airplane costs and a $35,000 retirement party, among other questionable expenses paid from policyholders’ premiums. While executive salaries and perks at the company were skyrocketing, BCBS was proposing to increase premiums by 15-20%.

Board members were responsible for oversight but failed to reign in then President and CEO Michael Unhjem’s excessive spending. Earlier in its history, the BCBS Board was comprised of unpaid volunteers, but Board members during Unhjem’s reign were paid around $30,000 for their commitment to about 18 days of meetings annually. In regard to the out of control executives, one member defended the Board’s role, stating “As a Board member, you hire good talent and let ’em fly.” The Board member also stated that Board salaries were not just for meeting attendance, but also because “There’s a lot of behind-the-scenes stuff that we do.”

According the Insurance Commissioners’ report, in the five-year period from 2004 to 2009, BCBS incurred additional expenses of more than $64 million over this period, 68% of which resulted from increased salaries and benefits, mostly for top executives. Compensation to Unhjem in 2004 was just over $700,000; by 2008, it was over $1 million. Performance based payouts to Unhjem increased by 111% over the 5-year period, despite worsening underwriting results. In addition, the report showed how, to make sure that performance-based measures would be achieved, the company simply lowered expectations, creating “target goals” that the were set “at levels that virtually assure success.”

The report also exposed details of an investment deal Unhjem had brokered in violation of state insurance codes. Unhjem was socially acquainted with the principals of Concierge Inc., a hotel developer. Unhjem brokered a deal with Concierge that put all the burdens of potential losses on BCBS while giving Concierge the bulk of the profit potential. The deal gave BCBS a 40% stake in building a Hilton Garden Inn hotel and water park near the Fargo headquarters of BCBS. In exchange, BCBS put up $3.5 million, purchased the land for nearly $2 million, and was guarantor on the commercial construction loan. Concierge Inc held a 60% interest in the project without making any tangible capital contribution. The deal outlined repayment to BCBS over 5 years with 10% interest, but included no provisions in the event that the repayment terms were not met.

Unhjem was fired earlier this year, receiving a total severance package worth $2.5 million. He had renegotiated his severance in 2007, after a 2006 arrest for drunk driving. In 2008, BCBS of North Dakota lost $28 million, including $9 million from operations.

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