Blue Cross Blue Shield defends bonuses amid rate hike request

Bonuses to 4,000 employees come amid rate hike requests, layoffs at the nonprofit insurer

Christina Rogers / The Detroit News

Despite pay freezes and executive pay cuts in 2009, Blue Cross Blue Shield awarded bonuses to roughly 4,000 nonunionized employees in May for reaching targeted performance goals last year, The Detroit News has learned.

The performance awards come as the state's largest insurer seeks to cut about 1,000 jobs by year's end and hike rates on policies covering more than 400,000 people who buy medical insurance directly from Blue Cross.

The nonprofit insurer has said repeatedly it is losing hundreds of millions of dollars each year on its individual plans -- policies for people not covered by employee benefits -- and needs to make cutbacks to strengthen its financial outlook.

The bonus plan was disclosed in a May 18 memo to Blue Cross employees from CEO Daniel Loepp that was obtained by The Detroit News.

The incentive pay, which is a percentage of a worker's base salary, is intended to reward workers for meeting business targets established in 2007 by the insurer's board of directors, Blue Cross officials said Wednesday. The awards are only paid if corporate goals are met and vary according to a worker's level within the company, Blue Cross said.

In the memo, Loepp told employees the rewards would be included in their May 21 paychecks. Blue Cross wouldn't disclose the percentages used in calculating incentive pay.

The insurer recognizes that some might consider the bonuses inappropriate during a time of job cuts and rate hikes.

"We are sensitive to the economy and its impact," said Andy Hetzel, Blue Cross's vice president for communications. "Our non-bargaining employees have accepted a pay freeze in 2009, we have cut spending and our executives have taken pay cuts twice this year."

But during a challenging time, incentive pay helps to keep workers engaged and motivated to "deliver the high levels of performance every day," Hetzel said.

"It benefits the company and our stakeholders to pay employees what they've earned," he said, adding that many in the executive ranks have sacrificed to make the bonuses possible, including Loepp, who volunteered to take a 55 percent cut on his 2009 bonus.

Loepp, who earned $727,575 in bonuses in 2008, said in the memo that he'd recommended to the board a 5 percent to 20 percent award reduction for executives and director-level employees this year. Compensation packages for Blue Cross's top executives are reported annually to the state.

The performance bonuses, which were less than the prior year, were approved by Blue Cross's 34-member board and were paid to managers, analysts, director's assistants and other nonbargaining employees.

About 80 percent of the incentives were paid to employees below the executive ranks, Blue Cross said.

Performance bonuses have come under intense scrutiny during the past year with critics questioning whether a company should reward leaders while business is struggling in the wake of last year's financial meltdown.

"It's a real political dilemma," said Jim Nelson, a compensation specialist for Minneapolis-based Integrated Healthcare Strategies. Many incentive programs were established well before the markets crashed last fall. Compensation boards then feel a "moral obligation" to pay incentives to workers who've met predetermined goals, Nelson said, but often risk marring the company's public image, especially if it has recently made job or pay cuts. Retaining workers also is a consideration, he said.

Loepp noted that employee performance was "generally excellent in 2008, given the challenging business environment and financial pressure caused by Michigan's broken individual health insurance system."

The "broken system" refers to the challenges Blue Cross says it's facing as more newly unemployed Michigan residents flock to its individual plans.

As Michigan's insurer of last resort, Blue Cross must take all residents, regardless of their health, which has allowed for-profit insurers to "cherry-pick" Michigan's healthiest consumers, while leaving the state-regulated insurer with the sickest and costliest members -- a model that's financially unsustainable in the long term, Blue Cross has argued.

Last year, the insurer, which has 4.7 million members, posted a net loss of $144.9 million, in part because of red ink incurred on investments and some insurance lines, including individual policies.

In January, Blue Cross said it would reduce its 8,200-employee workforce by 12 percent in 2009, mostly through buyouts, and cut senior pay by nearly 9 percent as part of a broader plan to bolster its finances.

Additionally, it's seeking rate hikes on all individual plans, including those covering 209,000 seniors who buy Blue Cross's Medigap plans, a move being challenged by Attorney General Mike Cox, a Republican candidate for governor.

cvrogers@detnews.com (313) 222-2401