Should the board members of nonprofit health insurance companies be compensated?

A few days ago, the Boston Globe ran a story detailing the fees paid to the board members of Blue Cross Blue Shield of Massachusetts (between $47,400 and $53,900 a year), Harvard Pilgrim Health Care (between $20,000 and $30,000 a year) and Tufts Health Plan (between $11,500 and $29,000 per year). In response, Paul Levy of Running a Hospital questioned in a recent post why some health insurers compensate their boards:

I think we would think it somehow untoward if hospital board members were compensated. Going further, we would certainly be offended to learn that board members of other public charities like religious institutions, colleges and universities, day care centers, or town sports leagues were compensated. And yet, in each case, we expect those board members to meet a high standard of care with regard to their fiduciary responsibilities.

I do not write this to give any sense that I begrudge the insurance company board members their annual retainer and meeting fees, but I wonder how the custom evolved that they should be paid. Has it always been such, or is this a recent development? Is there is anything special expected of them in return for that payment that we do not expect of unpaid board members serving other non-profits? Looking forward, should we extend this compensation practice to other major non-profit organizations that demand a high standard of care from their board members?

Here in Rhode Island, we addressed similar questions with our own Blue Cross--a nonprofit--a couple of years ago. We concluded that Blue Cross' board members should not be compensated. Here are a few of the things we looked at and how we reached our decision.

Prior to 2004, the Blue Cross board had been compensated, but new legislation required my office to approve any further board compensation. In 2005, Blue Cross submitted an application requesting board compensation that would have averaged about $25,000 per year per board member.

Blue Cross’ reasons for requesting compensation for their board centered on three arguments: (1) Blue Cross’ board compensation should be commensurate with the board compensation paid by other Blue Cross plans, (2) compensation was necessary to retain and recruit qualified board members, and (3) the level of work performed by Blue Cross board members is particularly complex.

Blue Cross submitted several analyses in support of its request: (1) a report by Michaud Economic Consulting, a consulting firm engaged by Blue Cross, (2) two surveys of board compensation by the BlueCross BlueShield Association and (3) an opinion letter by SpenserStuart, a consulting firm engaged by Blue Cross.

The Michaud report concluded that Blue Cross' board members were "entitled to annual compensation in the range of $75,000-$130,000" based on factors such as the complexity of Blue Cross’ business, the need to compare Blue Cross' board compensation with that of for-profit businesses, the potential liability of Blue Cross board members, the opportunity costs to board members of their service to Blue Cross and the high workload of board members, and the need to attract and retain quality board members.

We did not find the Michaud report particularly persuasive because it failed to address certain critical issues central to its conclusions, such as: (1) How is Blue Cross’ business is any more complex than that of other health care-related entities or nonprofits, such as hospitals, health systems or universities, which do not compensate their boards? (2) How much more difficult is the workload for Blue Cross board members than for the board members of other health care-related entities or nonprofits? (3) Since Blue Cross is a nonprofit entity, why should the compensation standards employed by for-profit entities be applied to Blue Cross’ board? Finally, the report provided no support for the assertion that Blue Cross would not attract board members without compensation. Blue Cross' board had, in fact, recently added new, quality members.

Blue Cross also provided two BlueCross BlueShield Association surveys that showed that most Blue Cross plans compensate their boards. We found this particularly interesting. It showed that most Blue Cross plans--including nonprofit Blue Cross plans--compensated their boards quite handsomely. Included among the results of these surveys were the following tidbits:

Of 39 Blue Cross plans responding to the survey, 37 expected to pay their board members in 2005. The average total cash compensation for board chairs of nonprofit Blue Cross plans in 2004 was $58,171 (range: $10,000-$272,500).

Average total cash compensation for board members of nonprofit Blue Cross plans in 2004 was $28,561 (range: $7,000-$63,333).

Average total cash compensation in 2004 for board chairs of Blue Cross plans of a similar size (by membership) to our Blue Cross was $47,040 (range: $24,400-$81,400).

Average total cash compensation in 2004 for board members of Blue Cross plans of a similar size (by membership) to our Blue Cross was $28,767 (range: $20,662-$64,400).

Although this data seemed to support Blue Cross’ argument for board compensation, like the Michaud report, it was not particularly convincing to us—mainly because it raised more questions than it answered. For example, while compensation of Blue Cross board members appeared to be the norm among Blue Cross plans—even nonprofit Blue Cross plans—nothing in the report answered our "whys?": Why are Blue Cross boards different from other nonprofit boards? Why are Blue Cross boards different from the boards of other health-related entities? Why do Blue Cross boards appear to pay so much more than other nonprofit insurers that do provide board compensation?

In addition to reviewing the materials provided by Blue Cross, we undertook our own analysis. We sought guidance from a number of outside sources, including information from local, large nonprofit organizations, and tried to identify generally accepted standards or guidance regarding nonprofit board compensation.

We first looked to large, regional (Rhode Island, Massachusetts and Connecticut) nonprofits (i.e., with assets or revenues in the millions of dollars). We obtained information about regional board compensation from a variety of sources, including telephone interviews, publicly available documents, and the internet. Based on this research, we determined that regional nonprofits generally do not compensate their board members. In fact, this appears to be the standard practice for Rhode Island, Massachusetts and Connecticut nonprofits. A partial list of Rhode Island, Massachusetts and Connecticut nonprofits that, at the time of our research (2005), did not compensate their boards included:

Boston College
Boston University
Brandeis University
Brown University
Bryant University
Care New England Health System
Fallon Community Health Plan, Inc.
Greater Providence YMCA
Harvard University
Johnson & Wales University
Lahey Clinic
Landmark Medical Center
Lifespan
Massachusetts General Hospital
Memorial Hospital of Rhode Island
Neighborhood Health Plan of Massachusetts
Neighborhood Health Plan of Rhode Island
Newport County YMCA
Providence College
Rhode Island School of Design
Roger Williams Hospital
Roger Williams University
Salve Regina University
South County Hospital
Tufts University
United Way of Rhode Island, Inc.
Yale University
YMCA of Pawtucket, Inc.

We also sought to identify objective, national standards or guidelines for board compensation in the nonprofit sector. Perhaps the most prominent source for such guidelines identified we found was The Panel on the Nonprofit Sector. The Panel, convened by the Chairman of the U.S. Senate Finance Committee in October of 2004, brought together thousands of people involved with charities and foundations for a thorough examination of the sector’s governance, transparency, and ethical standards. It held hearings in 15 locales, invited comments and discussed its recommendation with a committee of distinguished advisors from outside the nonprofit sector. In June of 2005, the Panel issued its final report, entitled “Congress and the Nonprofit Sector, a Final Report to Congress and the Nonprofit Sector on Governance, Transparency, and Accountability.” With respect to board compensation, the Panel found:

Although some charitable organizations reimburse expenses related to board work, the vast majority of board members serve without compensation. In fact, board members of public charities often donate both time and funds to the organization, a practice that supports the sector’s spirit of giving and volunteering. (p. 61)

In its recommendations the Panel stated that it

generally discourages payment of compensation to board members by charitable organizations. In cases where compensation is deemed necessary due to the complexity of the responsibility, the time commitment involved in board service, and the skills required for the particular assignment, among other factors, charitable organizations should, as a recommended practice, review information on compensation provided by organizations comparable in size, grantmaking or program practices, geographic scope, location and with similar board responsibilities (for example, number of meetings, length of terms, and number of domestic or international site visits expected) to determine the reasonableness of any compensation provided to board members. (p. 62)

Other organizations have taken a similar position. For example, the Minnesota Council of Nonprofits suggests that, “Board members should receive no monetary compensation for their board duties other than reimbursement for board-related expenses.”

Also, according to Board Source (formerly the National Center for Nonprofit Boards), nonprofit Board compensation “is quite rare. According to a recent survey conducted by NCNB and Stanford University, only 2 percent of the over 1,300 organizations completing the survey compensated their board members, and for the majority, the fees were nominal.” However, “[b]oard compensation is more common in particularly complex nonprofits, such as health care systems or large foundations.”

Finally, we compared the proposed Blue Cross board compensation to the board compensation provided by entities of a similar size (multi-million dollar), in a similar industry (health-related), with a similar level of complexity, and a similar location (regional). The results, at the time of our research (2005), were as follows:

Care New England Health System
• Rhode Island’s second largest health system, comprised of Butler Hospital, Kent Hospital, Women & Infants Hospital of Rhode Island, Care New England Wellness Centers and Care New England Home Health
• 6,526 employees
• $510 million in revenues (2004 figures)
• 30 board members
• No board compensation

CareGroup Health Care Systems
• Large Massachusetts health system, comprised of Beth Israel Deaconess Medical Center, Mount Auburn Hospital, New England Baptist Hospital, Deaconess-Glover Hospital, and Deaconess-Nashoba Hospital
• Over 13,000 employees
• 18 board members
• No board compensation

Fallon Community Health Plan, Inc.
• Nonprofit health plan based in central Massachusetts
• $679 million in revenues (2003 figures)
• 182,000 members
• 500 employees
• No board compensation

Harvard Pilgrim Health Care, Inc.
• Large Massachusetts health plan
• $2.3 billion in revenues (2004 figures)
• 785,387 members (2004 figures)
• 11 board members
• Average board compensation is $12,583 (2003 figures) (only non-salaried board members—excludes President/CEO, who is salaried and also on the board) • Board salaries range from $0 to $19,925 (2003 figures)
• One board member is not compensated and another is only compensated $1,300 annually. (2003 figures)

Lahey Clinic
• 295 bed hospital, located in Burlington MA
• $183 Million in revenues (2003 figures)
• 28 board members
• No board compensation

Landmark Medical Center
• 214 bed hospital
• $86 million in revenues (2002 figures)
• 19 board members
• No board compensation

Lifespan
• Rhode Island’s largest health care system, comprised of Rhode Island Hospital and its Hasbro Children’s Hospital, The Miriam Hospital, Bradley Hospital and Newport Hospital
• 10,597 employees
• $1.7 billion in revenues (patient revenues and research funding) (2004 figures)
• $1.6 billion in total assets (2004 figures)
• 16 board members
• No board compensation

Massachusetts General Hospital
• 893 bed hospital
• Operates the largest hospital-based research program in the United States
• Over 19,500 employees
• 14 board members
• No board compensation

Memorial Hospital of Rhode Island
• 294 bed hospital
• 10,597 employees
• $162 million in revenues (2003 figures)
• 18 board members
• No board compensation

Neighborhood Health Plan of Massachusetts
• Managed care plan (including Medicaid and commercial managed care)
• 120,000 members (2004 figures)
• 15 board members
• No board compensation

Neighborhood Health Plan of Rhode Island
• Medicaid health plan
• $136 million in revenues (2003 figures)
• 75,000 members (2004 figures)
• 13 board members
• No board compensation

Partners Healthcare System, Inc.
• Large Massachusetts health system, comprised of Brigham and Women’s Hospital, Massachusetts General Hospital, McLean Hospital, Newton-Wellesley Hospital and North Shore Medical Center
• 5 board members
• No board compensation

Roger Williams Hospital
• 162 bed hospital
• $125 million in revenues (2002 figures)
• 19 board members
• No board compensation

South County Hospital
• 100 bed hospital
• $66 million in revenues (2002 figures)
• 19 board members
• No board compensation

Tufts Associated Health Maintenance Organization, Inc.
• Large Massachusetts health plan
• $2.3 billion in revenues (2004 figures)
• 747,000 members (2004 figures)
• 11 board members
• Average board compensation is $17,000 (2003 figures)
• Board salaries range from $500 to $26,000 (2003 figures)

Tufts-New England Medical Center, Inc.
• A 451 bed private, nonprofit facility affiliated with the Tufts University School of Medicine.
• 8 board members
• No board compensation

Yale-New Haven Hospital, Inc.
• A 944 bed private, nonprofit facility affiliated with the Yale School of Medicine.
• 8 board members
• No board compensation

Based on this analysis, it appeared clear that Blue Cross’ request for compensation was outside the standard practice for large, similarly complex, regional, nonprofit health-related entities. On this list, we noted that two Rhode Island entities, Lifespan and Care New England Health System did not compensate their boards. Both are large, complex health systems. Both entities have thousands of employees, multiple facilities and annual revenues in excess of $500 million. Yet, neither entity compensated its board. Likewise, we noted that other regional nonprofit health plans, such as Neighborhood Health Plan of Massachusetts, Neighborhood Health Plan of Rhode Island and Fallon Community Health Plan did not compensate their boards. Finally, we did observe that both Harvard Pilgrim Health Care, Inc. and Tufts Associated Health Maintenance Organization, Inc. compensated their boards. Yet, we could find no reason why these health plans chose to compensate their boards and why others, such as Fallon Community Health Plan, Inc., chose not to compensate their boards. It appeared, therefore, that the practices of Tufts and Harvard Pilgrim, were not the norm.

So, Mr. Levy, as to your question, we never did figure out why some nonprofit health insurers compensate their board. We did, however, figure out the following: (1) many nonprofit health insurers don't compensate their boards, (2) most nonprofit health-related organizations don't compensate their boards, (3) several organizations have addressed this issue and have concluded that compensation is not appropriate for nonprofit board members, and (4) no one could sufficiently explain to us why the Blues are any different with respect to their complexity or mission or any other factor so as to convince us that Blue Cross boards merit compensation when most other nonprofit boards are not compensated.

Sphere: Related Content

Cavalcade of Risk #47

Regulating Health Insurance will host next week's edition of the Cavalcade, scheduled for Wednesday the 12th. Please make sure to get your submissions in by Monday (the 10th). PLEASE include:

■ Your blog's url
■ Your post's url
■ The post's trackback URL (if available)
■ A (brief) summary of the post

You can submit them via: Blog Carnival or email.

Sphere: Related Content

Marketing, medicine . . . what's the diff?

In some cases, apparently not much.

The NY Times reports today on a study appearing in today's Journal of the American Medical Association that may explain the popularity of some high cost drugs over cheaper alternatives. The study measured whether there was a greater placebo effect on study participants when the participants were told that one of the placebos cost much more than the other. From the Times article:

The investigators had 82 men and women rate the pain caused by electric shocks applied to their wrist, before and after taking a pill. Half the participants had read that the pill, described as a newly approved prescription pain reliever, was regularly priced at $2.50 per dose. The other half read that it had been discounted to 10 cents. In fact, both were dummy pills.

The pills had a strong placebo effect in both groups. But 85 percent of those using the expensive pills reported significant pain relief, compared with 61 percent on the cheaper pills. The investigators corrected for each person’s individual level of pain tolerance.

“It’s a great finding,” said Guy H. Montgomery, an associate professor of cancer prevention at the Mount Sinai School of Medicine who was not involved in the research. “Their manipulation of price affected expectancies of drug benefit, and pain is the ultimate mind-body phenomenon.”

Previous studies have shown that pill size and color also affect people’s perceptions of effectiveness. In one, people rated black and red capsules as “strongest” and white ones as “weakest.” Other information like the country where the drugs were manufactured can also affect perceptions.

“It’s all about expectations,” said the lead researcher, Dan Ariely, a behavioral economist at Duke and the author of a new book, “Predictably Irrational: The Hidden Forces That Shape Our Decisions” (HarperCollins). His co-authors on the report were Rebecca Waber, Baba Shiv and Ziv Carmon.

“When you’re expecting pain relief, you’re secreting your own opioids,” Dr. Ariely added. “And when you get it on discount, you doubt it, and your body doesn’t react as well.”

The results of this study may trigger another wave of placebo marketing efforts by Big Pharma, similar to the marketing push for Sucrosa, Appeasor, Inertra and Pacifex shortly after their FDA approval in 2003.

Sphere: Related Content

RHI Health Blog of the Week

The RHI Health Blog of the Week is awarded to an exceptional health-related post appearing during the previous week (Wednesday to Tuesday).

This week's award goes to: Jason Shafrin's "Doctors, Patients, and the Racial Mortality Gap" at Healthcare Economist. Jason discusses a recent paper that looks into the racial mortality gap for chronic heart failure (CHF), one of the leading causes of death for the elderly and one of the major components of the racial mortality gap. The paper finds that, while doctor quality and socioeconomic factors account for 5% and 20%, respectively, of the CHF mortality gap, the vast majority of the mortality differences are due to the fact that blacks are less likely to take their medication than whites. From the paper:

I show that doctor quality significantly influences patient outcomes. While minority patients visit slightly less competent doctors, this does not explain the large gap in survival. Individual doctors are found to treat their patients similarly regardless of race. On the patient side, I demonstrate that variation in compliance triggers a racial mortality gap. Differences in patient response to treatment significantly alter survival probabilities. Considerable reductions in medical costs could be achieved by convincing patients of the importance of strictly following the therapy regimen. I estimate that targeting compliance patterns could reduce the black-white mortality gap by at least two-thirds.

The award is presented every Wednesday. If you would like to nominate someone for the RHI Health Blog of the Week, please contact me.

Sphere: Related Content

Rhode Island government ranks near the bottom in performance

The Pew Center on the States has issued report cards for all 50 states that evaluate each state government's performance in serving the public. The report, Grading the States 2008, evaluates and grades each state based on a range of areas, from budget and finance to roads and bridges.

Where did Rhode Island rank among all the other states? A very disappointing second to last--49th out of 50.

Our overall score was C- (down from a C+ in the 2005 report card). We scored a D+ is the "Money" category (looking at the state's long-term outlook, budget process, structural balance, contracting/purchasing system, and financial controls and reporting), a D in the "People" category (evaluating things like strategic workforce planning, hiring, retaining employees, training and development, and managing employee performance), a C+ in "Infrastructure" (capital planning, project monitoring, maintenance, and coordination), and a C in "Information" (strategic direction, budgeting for performance, managing for performance, and performance auditing and evaluation).

A few gems from the report card include:

"Auditors haven’t issued Rhode Island’s financial reports a clean bill of health in more than 30 years"

"There is one maintenance worker for every 75 state bridges, which Namvar Moghadam, the administrator for highway and bridge maintenance, admits 'isn't a whole lot.'"

"The state has performance measures but they do not drive budgeting or management decisions."

"Rhode Island tried to create an integrated financial information system in 2002. Because of a lack of resources, however, it was never fully implemented."

Who finished at the top? Washington, Virginia and Utah all received the highest grade of A-. New Hampshire finished dead last with a D+.

Sphere: Related Content