WellPoint's Former Manager-Queen Got $20.6 Million and Its Nobility Got Millions

Score another for our new would be royalty, that is, for the hired managers who run big corporations.  Early this month a few scattered reports came out showing just how much even apparently failed executives of big health care organizations can make on their way out the door. 

A New Fortune for the Abdicating Queen of WellPoint

Last year we discussed the abdication of Angela Braly, the former queen of giant insurance company WellPoint.  We then speculated about how much she might abscond with.  Now the Associated Press has reported:

 The compensation paid to outgoing Wellpoint Inc. CEO Angela Braly last year rose 56 percent, even as the company's shares slid on lower enrollment in its Blue Cross Blue Shield health plans.

Braly, who resigned in August, received 2012 compensation valued at $20.6 million, according to an Associated Press analysis of the company's annual proxy statement. Most of the increase came from stock options.

Braly, 51, became CEO in 2007. She received a $1.2 million salary last year, up slightly from $1.1 million in 2011. Her compensation included a performance-related bonus of nearly $1.4 million. More than 85 percent of Braly's compensation came from stock options and awards, which totaled $17.8 million. That total was up from about $10 million the year before.

She also received $179,618 in other compensation, including $3,700 spent on security measures for her and her family due to concerns about her safety 'as a result of the national health care debate,' according to the proxy, which was filed Tuesday with the Securities and Exchange Commission.

Despite Bad Financial Performance and Investors' Losses

Remember, though, that Braly was asked to leave:

 investors had grown frustrated with the company's performance, leading Braly to resign last August. 

In particular, in terms of financial performance

shares fell 8 percent last year to close 2012 at $60.92, while the Standard & Poor's 500 index rose more than 13 percent.

WellPoint's 2012 earnings were nearly flat compared to 2011. The insurer earned $2.65 billion, or $8.18 per share, last year, as total revenue climbed 1.6 percent to $61.71 billion.

A slightly different analysis by the Indianapolis Business Journal came up with similar results,

 WellPoint’s membership growth came mainly from its acquisition of Virginia-based Amerigroup Corp., which operates Medicaid managed care plans for states. The rest of WellPoint’s existing business lost customers during 2012.

And while WellPoint has boosted earnings per share by continuing to buy back shares, overall profit was unchanged last year compared with about $2.6 billion in 2011.

WellPoint raised its dividend in 2012 and acquired 1-800-Contacts Inc. But its stock price fell 8 percent to close the year at $60.92 per share. Even taking into account dividends, WellPoint shares lost 6.3 percent of their value during the year.

So while the nominal owners of the company, the investors, lost money on their investments, the CEO who presided over this loss left with a huge pile of cash.

The Royal Court of WellPoint Also Prospered

Incidentally, the Indianapolis Business Journal also showed that WellPoint executives who did not leave generally got big increases in their compensation, again while the company owners to whom they ostensibly report lost money,

WellPoint Inc.’s top brass all enjoyed double-digit bumps in 2012 compensation, according to a proxy released April 2, even though the stock price fell and the company admittedly did not meet its financial goals.

The Indianapolis-based health insurer’s board of directors approved higher salaries and larger potential stock awards heading into 2012 after most of its top executives saw their pay hold steady or decline in 2011.

The company’s performance merited its executives receiving only 83 percent of their target stock awards. But because the board had already established larger pools of stock to award to executives, the value of those awards still rose over previous years. Bonus amounts fell in 2012 compared with the previous year.

The extra cash and stock drove up Chief Financial Officer Wayne DeVeydt's overall pay 11.9 percent to nearly $4.4 million.

Ken Goulet, executive vice president of WellPoint's commercial insurance business, saw his total compensation rise 18.2 percent to nearly $4.4 million.

And Lori Beer, executive vice president of information technology, enjoyed a 17.9-percent boost. She earned $3.2 million, although that was still below the nearly $4.5 million she received in 2010.

John Cannon, the general counsel, saw his compensation more than double to nearly $6.5 million. But that was partly because WellPoint hiked his salary by $350,000 and gave him a $500,000 bonus for agreeing to serve as interim CEO after the August resignation of former CEO Angela Braly.

Despite Angry Policy-Holders and Ethical Missteps

So the compensation given the outgoing CEO and some of the remaining top hired managers seemed wildly out of proportion to the company's financial results.  Could the generosity they received be based on how well the company performed in other dimensions?  That, of course, seems equally improbable.

The Los Angeles Times noted,

 Braly had also caught the ire of consumers and even President Obama in 2010 for trying to raise rates by up to 39% in California. The national outrage that ensued helped Obama win approval for his healthcare overhaul in Congress.

Furthermore, as we have discussed again and again, most recently here, WellPoint has a very sorry record of ethical misadventures.   (The updated list is at the end of this post.)  So one could certainly not justify the huge payments given WellPoint hired managers by their upstanding ethical leadership.

Summary

In a new book just published by Robert A G Monks, entitled Citizens Disunited, the author describes one of the biggest problems affecting the US economy and society as the rise of "manager-kings."  Clearly, Angela Braly could be called the former "manager-queen" of WellPoint.  The company seemed to be run primarily for the benefit of the queen and her court, while its investors lost money, its customers became outraged, and it stumbled from one ethical quandary to another.

In the eighteenth century, British colonial subjects in North America succeeded in a revolution that lead them out from under the rule of a British King.  How many examples do we have to have before there is action to repudiate the rule of our new manager-kings and queens?  And to turn health care back into a calling meant to put patients' and the public's health first, rather than a feudal society meant to benefit its nobility?

As we have said again, again, again,...

True health care reform would decrease the size and scope of health care organizations, and make their leaders accountable to ownership, when appropriate, and to the community at large for patients' and the public health. 



Appendix: WellPoint's Ethical Misadventures

• settled a RICO (racketeer influenced corrupt organization) law-suit in California over its alleged systematic attempts to withhold payments from physicians (see 2005 post here).
• subsidiary New York Empire Blue Cross and Blue Shield misplaced a computer disc containing confidential information on 75,000 policy-holders (see 2007 story here).
• California Anthem Blue Cross subsidiary cancelled individual insurance policies after their owners made large claims (a practices sometimes called rescission).  The company was ordered to pay a million dollar fine in early 2007 for this (see post here).  A state agency charged that some of these cancellations by another WellPoint subsidiary were improper (see post here).  WellPoint was alleged to have pushed physicians to look for patients' medical problems that would allow rescission (see post here).  It turned out that California never collected the 2007 fine noted above, allegedly because the state agency feared that WellPoint had become too powerful to take on (see post here). But in 2008, WellPoint agreed to pay more fines for its rescission practices (see post here).  In 2009, WellPoint executives were defiant about their continued intention to make rescission in hearings before the US congress (see post here).
• California Blue Cross subsidiary allegedly attempted to get physicians to sign contracts whose confidentiality provisions would have prevented them from consulting lawyers about the contracts (see 2007 post here).
• formerly acclaimed CFO was fired for unclear reasons, and then allegations from numerous women of what now might be called Tiger Woods-like activities surfaced (see post here).
• announced that its investment portfolio was hardly immune from the losses prevalent in late 2008 (see post here).
• was sanctioned by the US government in early 2009 for erroneously denying coverage to senior patients who subscribed to its Medicare drug plans (see 2009 post here).
• settled charges that it had used a questionable data-base (built by Ingenix, a subsidiary of ostensible WellPoint competitor UnitedHealth) to determine fees paid to physicians for out-of-network care (see 2009 post here). 
• violated state law more than 700 times over a three-year period by failing to pay medical claims on time and misrepresenting policy provisions to customers, according to the California health insurance commissioner (see 2010 post here).
• exposed confidential data from about 470,000 patients (see 2010 post here) and settled the resulting lawsuit in 2011 (see post here).
• fired a top executive who publicly apologized for the company's excessively high charges (see 2010 post here).
• California Anthem subsidiary was fined for systematically failing to make fair and timely payments to doctors and hospitals (see 2010 post here).
• management was accused of hiding the company's political contributions from the company's own stock-holders (see 2012 posts here and here).
• settled charges that its Anthem subsidiary cheated former policy-holders out of money owed when that company was converted from a mutual insurance company (see 2012 post here)

Reason for Hope? - Novartis Rescinds Vasella's Golden Parachute

Enormous compensation of hired health care executives, out of all proportion, if related at all to whether their work had any positive effect on patients' or the public's health, has long been a concern on Health Care Renewal.  For example, back in 2006, we posted repeatedly (look here for links) about the billion dollar plus fortune amassed by the then CEO of UnitedHealthcare which vividly contrasted with the company's avowal to "make health care more affordable."

We have posted many such stories.  Yet maybe there is a whiff of change in the air.  For the first time that I can recall, a gigantic pay package to a top health care executives has been rescinded after public protest.

Novartis' Golden Parachute for Vasella

This is how the New York Times described the huge golden parachute that was initially proposed:

A plan by Novartis, one of Switzerland’s biggest drug makers, to pay its departing chairman $78 million to keep him from sharing his knowledge with competitors has added fuel to an already heated debate about executive pay.

The announcement of the payment to the chairman, Daniel Vasella, was made last Friday, just two weeks before a Swiss referendum to give shareholders more power to determine executive compensation. Mr. Vasella, who had previously said that he would step down as chairman at Novartis’s annual shareholder meeting on Friday, is to receive the sum, 72 million Swiss francs, over six years. 

In a statement, Mr. Vasella said that 'it has been very important to Novartis that I refrain from making my knowledge and know-how available to competitors and to take advantage of my experience with the company.'

Unprecedented Resistance by Shareholders, Politicians and the Public

The plan to provide this "golden parachute" met stunning resistance from Swiss citizens and company shareholders.  As the Times reported,

Swiss lawmakers and shareholder activists criticized the company over the weekend for not making the amount public earlier. They also contended that the planned payment was just the latest of several bad decisions by Novartis on executive pay.

Ethos, a Swiss group of investors, on Monday called on Novartis to immediately cancel the contract with Mr. Vasella and take back any money already paid.

Christophe Darbellay, president of the Christian Democratic People’s Party, told a Swiss newspaper, SonntagsZeitung, that Mr. Vasella’s compensation was 'beyond evil.' Simonetta Sommaruga, the Swiss federal justice minister, told another newspaper, SonntagsBlick, that the payment was an 'enormous blow for the social cohesion of our country' and that such 'help-yourself mentality' was damaging confidence in the economy. 

Even Swiss identified as pro-business or right-wing joined in the criticism.  As reported by the Swiss Broadcasting Company, 

Philipp Müller, president of the centre-right Radical Party which traditionally has close links with the business community, is quoted as saying Vasella was 'taking liberal Switzerland to the henchman'.

Other politicians described the latest figure as 'disgusting' and denounced the recklessness of top managers.

The director of the Swiss Business Federation, which has been leading the fight against the initiative, said he was surprised by the 'dimension of the payment' to Vasella.

A Golden Parachute Despite a Past Record of Misadventures

Maybe there would have been even more outrage if those in Switzerland had known about Novartis' track record of misadventures, at least in the US, while Vasella had been leading it.  In particular,

-  In 2011, as we noted here, a company subsidiary paid $150 million to settle charges by several US states that it had misrepresented pricing information

-  In 2010, as we noted here, the company settled US federal civil and criminal charges in connection with its marketing of multiple drugs for $422.5 million.  The charges included giving kickbacks to physicians disguised as speakers' honorariums and fees for serving on advisory boards.  

-  In 2010, as we noted here, the company settled separate US charges that it made false claims to support off-label marketing of its drug tobramycin for cystic fibrosis for $72.5 million. 

- In 2008, as we noted here, the company settled charges in the US state of Alabama that it defrauded Medicaid for $33.7 million.

However, these legal escapades were not mentioned in the recent media coverage of the proffered and then withdrawn parachute. 

The Company Backs Down.

Nonetheless, what was really surprising was that the outrage made the company back down.  Per the Wall Street Journal, 

Novartis AG on Tuesday abandoned a 72-million-Swiss-franc ($78 million) exit package for its chairman, bowing to pressure from shareholders and Swiss politicians after four days of increasing criticism.

The Swiss drug maker said its board and Chairman Daniel Vasella agreed to cancel a six-year noncompete and related-compensation agreement designed to prevent him from joining or advising rivals and which would have paid him 12 million francs a year.

The agreement was scheduled to take effect on Friday, when Dr. Vasella, 59 years old, is planning to leave the Basel-based company at its annual shareholder meeting

Furthermore,

In the Novartis statement on Tuesday, Dr. Vasella acknowledged that his offer hadn't soothed public opinion: 'I have understood that many people in Switzerland find the amount of the compensation linked to the noncompete agreement unreasonably high,' he said. 

In addition, as Reuters noted, Vasella actually admitted he made "mistakes,"

'The fierce reaction and reproaches that were made as a consequence of the many-sided discussions about my compensation did leave its mark on me,' 59-year-old Vasella said in his opening address to 2,688 shareholders gathered at Novartis's annual general meeting in Basel.

'I made two avoidable mistakes: the first was to even negotiate this contract. And the second to believe that giving up this individual payment to charities would be considered as something positive by society.'

Of course, it is hard to believe that Novartis had previously paid him as lavishly as it did  - the New York Times had reported that his pay just prior to resignation was 12.4 million francs, "about $13.4 million a year" -  without securing an agreement to protect trade secrets.  Many businesses routinely add confidentiality clauses, trade secret protection, and non-compete clauses to contracts of many employees.  Thus adding a $78 million golden parachute ostensibly just to protect trade secrets and defection to the competition seems like impossibly gilding the lily.  Furthermore, if Novartis really thought that Vasella was likely to run to another firm at the drop of a hat, it would have made no sense to entrust someone thought to be at risk of such disloyalty with top leadership positions.

Reason for Hope

At least Chairman Vasella admitted "mistakes," and at least the ridiculous pay package was rescinded. This incident does show that it is possible for public and shareholder outrage over gargantuan payments to executives to have some effect.  That seems like real progress, and a reason to hope. 

Of course, executives of public for-profit corporations are supposed to be working for shareholders.  Thus their general impunity from shareholders' control up to now remains inexplicable.  Furthermore, executives of pharmaceutical companies and other health care corporations seemingly should be responsible for putting patients' and the public's health ahead of their own enrichment.  Thus their ability up to now to ignore public concern about their companies' actions, and to avoid personal responsibility for their companies' bad actions also remains inexplicable.

But progress may now be possible.  In and outside of Switzerland, shareholders of publicly-held for-profit health care corporations should demand accountability from the executives who are supposed to be working for them.  In and outside of Switzerland, health care professionals, policymakers, and the public at large should demand accountability from leaders of health care organizations for the effects of their organizations on patients' and the public's health.