Breaking: Blue Cross To Rebate Killingsworth $4M Severance To Customers

Here's the WBUR report, and below is the full release from Coakley's office and the full Blue Cross statement:

BOSTON — The state’s largest insurer plans to rebate $4.2 million to its ratepayers to offset the cost of a controversial severance package to former chief executive Cleve Killingsworth.

Attorney General Martha Coakley disclosed the decision by Blue Cross Blue Shield of Massachusetts on Wednesday following an investigation by her office.

Coakley said the probe determined that Killingsworth was entitled to the hefty severance package under his contract with the insurer, but that such contracts were “costly both in dollars and public perceptions.”

Killingsworth resigned in March 2010 after five years on the job. He left with a total compensation package of $11.3 million. That deal angered many Blue Cross members who are struggling to pay rising health care premiums.

“To put this issue behind the company and as a gesture of good faith to our customers and the community, the board has decided to credit customers the $4.2 million in severance that was paid to our former CEO,” said spokesman Jay McQuaide, reading from a prepared statement.

The rebate breakdown is just under $2 per person.

Blue Cross Blue Shield, a not-for-profit company, moved separately earlier this year to suspend pay for its board members, a practice that had also been sharply criticized by the attorney general.

This from Attorney General Martha Coakley's office:

BOSTON – Following an investigation by Attorney General Martha Coakley’s office, the Blue Cross Blue Shield (BCBS) Board of Directors has decided to rebate the full amount of departed CEO Cleve Killingsworth’s severance package, more than $4.2 million, back to BCBS customers.

The Board’s action was announced today as part of a full report issued by the Attorney General’s office that outlines the findings of its investigation.

The investigation found that, under the terms of his contract, Killingsworth was entitled to a significant payment upon his termination or non-renewal unless his removal was a result of intentional misconduct. Factors such as unsatisfactory performance, and poor management or negligence still did not relieve BCBS of the legal obligation to make such a significant payment. The investigation found that contracts with similar provisions are held by the chief executive officers of other major health care organizations in Massachusetts that the AG’s Office reviewed. Coakley’s report notes that these severance terms “diminish board independence, when triggered are costly both in dollars and public perception, and, in most cases, do not sufficiently advance legitimate corporate purposes.”

Following the AG’s investigation, the BCBS Board has decided to take the following actions:

· The Board will credit the amount of Killingsworth’s full severance package, $4.26 million, back to BCBS ratepayers; and
· To improve its oversight capacity, the Board will re-examine its recruitment and succession plans to assure a broader portfolio of Board experience and skills.

Coakley’s report notes the proactive steps the Board previously had taken to address concerns outlined in the report. For example, the new contract negotiated with CEO Andrew Dreyfus has much more reasonable compensation and severance terms, reversing the upward trend in CEO compensation at BCBS. It also notes that the Board has already ended the practice of combining the roles of CEO and Board chair and has established a process for review and approval of outside Board work by its CEO. Coakley’s report also noted that the Board, upon becoming concerned about the CEO’s performance, moved swiftly to identify performance issues and to initiate a change.

“Our investigation found that Mr. Killingsworth was contractually guaranteed to a significant payment upon his termination unless his removal was a result of intentional misconduct,” AG Coakley said. “The board has made the right decision to rebate this money because we did not believe customers should have to foot the bill for this severance amount. I want to thank CEO Andrew Dreyfus and the Board for their cooperation during this process.”

Coakley also noted the existence of similar severance terms at the other Massachusetts health insurers and providers reviewed by the AG’s office, and called on all boards to closely scrutinize the need for those terms in order to best protect charitable funds.

“We hope that board members at all charities will closely scrutinize these severance packages and work to put the protection of charitable assets above all other factors,” AG Coakley said. “These terms are highly costly, reduce the board’s ability to act independently, and in most cases do not advance a legitimate charitable purpose.”

Coakley’s investigation also revealed that Killingsworth served on the board of directors for as many as 14 organizations at one time while also serving as CEO of BCBS, including three organizations in which he was compensated for his service. The report also outlined concerns with BCBS’s CEO review process and urged the board to re-evaluate the breadth and depth of its membership’s subject matter expertise to assure that it has the skills necessary to independently perform its oversight responsibilities.

The AG’s investigation began in March when BCBS, as part of its annual filing with the Massachusetts Division of Insurance, revealed that Killingsworth, its former President and CEO, received a severance of approximately $4.26 million. The investigation focused on evaluating the terms of the contract, the process used by the Board to approve the terms, and the circumstances of the termination. As part of the investigation, the AGO interviewed BCBS personnel and reviewed the (i) contractual severance provisions for Killingsworth and his successor, Andrew Dreyfus, (ii) board and committee records, (iii) annual reviews of Killingsworth’s performance, (iv) consultant reports, and (v) severance provisions contained in CEO employment agreements with other charitable health care providers and insurers in Massachusetts.

The report finds that reporting requirements for charitable organizations did not fully encompass all aspects of executive compensation. As a result, the Attorney General’s Office will now require all senior executive employment agreements to be disclosed as part of charitable annual reports filed with the AG’s office and an explanation for the protection afforded.

Today’s action and report comes on the heels of a previous investigation and report by the Attorney General’s Office into the practice of compensating board members at the four major non-profit health insurers. The AG’s office found that there was no justification for compensating those boards of directors, and filed legislation that would empower the Attorney General’s Office to prohibit individual charities from paying directors without appropriate justification. Since that time, BCBS and Fallon voluntarily suspended compensation of their boards of directors while Harvard Pilgrim Health Care and Tufts have refused to halt the practice. Coakley’s office also announced that her office will publish an annual public report detailing board compensation levels and rationales for charities across the Commonwealth.

And here's the full statement from the Blue Cross Blue Shield board of directors:

BOSTON – July 6, 2011 – The Board of Directors believes today’s report by Attorney General Martha Coakley’s Office regarding the compensation paid to former CEO Cleve Killingsworth demonstrates that it acted appropriately and its actions have been consistent with its fiduciary responsibilities.

Mr. Killingsworth’s employment contract, established in 2005 when he became CEO, was the result of a thorough process that included comparative market data and independent consultants to ensure it was market competitive. In March 2010, after discussions that led to Mr. Killingsworth’s departure from the company, the Board was legally required to fulfill the commitments made in the 2005 contract.

The Board appreciates the fact that in areas where the Attorney General’s Office raised specific concerns, today’s report acknowledges that the Board has already taken action. For example:
 The Board has significantly modified the compensation and benefits for the CEO position.
 The Board has redesigned and strengthened its process and policies for reviewing the performance of the CEO. As the Attorney General’s report points out, both of these steps reflect the company’s sharper focus on improving the
affordability of health care for the community.

In addition, based on conversations with the Attorney General’s Office during this review, the Board has also decided to reexamine its existing recruitment and succession plans to promote and support both continuity and the consistent infusion of new talents, skills and ideas.

Finally, to put this issue behind the company and as a gesture of good faith to our customers and the community, the Board has decided to credit customers the $4.26 million severance paid to Mr. Killingsworth. The credit will appear on fourth quarter invoices and be paid to the applicable individual or group (employer).

Moving forward, the Board has directed President and CEO Andrew Dreyfus and the management team to remain focused on achieving the company’s number one priority of making quality health care affordable for our customers and the community. Achieving this goal is possible if all stakeholders work together in a spirit of collaboration and shared responsibility. In conducting its business, BCBSMA will continually review and update its governance and compensation policies to keep the company at the forefront of market practices, transparency, accountability and good corporate governance.The Board of Directors, Blue Cross Blue Shield of Massachusetts