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Health-care executives were paid more than reported -
The nonprofit companies vary in their interpretation of an IRS rule on disclosing deferred compensation.
Star Tribune: Newspaper of the Twin Cities (Minneapolis, MN)/PLS format
November 30, 2001
Author: Glenn Howatt; Staff Writer

In a time of rising health care costs, top executives at some nonprofit health-care companies in Minnesota have been getting paid more than previously disclosed.

Blue Cross and Blue Shield of Minnesota told the Star Tribune this week that former Chief Executive Andy Czajkowski received an additional $334,000 in 1999, driving his compensation up to $1.1 million from the $772,862 that Blue Cross had reported last year.

HealthPartners, the state's third largest health plan, acknowledged that it did not include some unspecified long-term pay on its 2000 public filing, but said it will modify its statements next year to include all compensation.
And Allina Health System, the network of hospitals and clinics that formerly owned Medica health plan, said it changed its reporting last year after auditors from the Internal Revenue Service (IRS) discovered that some deferred compensation was not being disclosed.

"We are troubled about whether the health care companies are reporting all of the compensation of their executives," said Attorney General Mike Hatch. "We have reason to believe that not all compensation is reported, including deferred compensation and bonus payments."

A Star Tribune review of the largest nonprofit health-care companies' disclosure documents showed that some top executives received pay increases of more than 20 percent last year.

Hatch and others criticized the increases, especially since health care costs have been increasing steadily since 1997 and are currently estimated to run between 15 and 20 percent higher.

"It raises questions when executives give themselves double-digit pay increases," said Hatch, whose office has been investigating health-care nonprofits' finances. "For the last year we've seen double-digit premium increases. Businesses are struggling to pay for health care costs."

Earned income

Most companies said that the pay raises were earned by executives for achieving performance goals, and that executive pay levels are in line with regional and national norms.

Blue Cross' chief executive, Dr. Mark Banks, topped the list at $1.1 million. His 44-percent pay increase was the result of a promotion last year to the top job and a long-term bonus, the company said. Top officers at the largest health systems made between $500,000 and $900,000, while executives at middle-sized firms generally made between $100,000 and $300,000.

"In order to attract and retain top-level management in a highly competitive field like health care, we need to compensate at a competitive level," said Ryan Davenport, spokesman for Fairview Health Services.

Fairview's top executives received pay increases between 30 and 40 percent last year because they met goals on patient satisfaction, employee satisfaction and financial performance, Davenport said.

Tax-exempt nonprofits are required by IRS regulations to disclose finances and spending to the public, including executive compensation.

"It is also one of the best ways to maintain public trust," said John Pratt, executive director of the Minnesota Council of Nonprofits. "Donors and members of the public have a right to know where the money comes from and where the money goes to."

Required by law

One of the IRS regulations requires that nonprofits include all deferred or long-term compensation that an executive has earned for a year, even if the compensation was not paid or vested.

Companies have interpreted the rule differently.

"We have been advised that those deferred payments do not qualify for the report," said HealthPartners spokeswoman Sara McFee. "Our policy is to fully report those deferred amounts of money when they are actually paid."

The deferred-compensation programs at HealthPartners don't pay out until an executive has stayed with the company for a certain number of years. The system was established to discourage executives from taking jobs at other companies, said Chief Executive George Halvorson.

Although the company did indicate on its IRS filing that it had deferred programs, it didn't report how much money that the executives had earned in 2000 under the program. After the Star Tribune asked about the amounts, the company said it would change its policy in the future.

"We will specifically identify those monies on future filings," said McFee, but added that the company could not disclose the amounts immediately.

Allina learned its lesson about reporting such amounts after it was audited by the IRS in 1999 and 2000. The company now discloses long-term pay on its Form 990, including amounts that executives have earned but have not received.

These amounts included more than $80,000 for former Chief Operating Officer David Strand and more than $400,000 to former Medica Chief Operating Officer Karen Vigil.

Laurie Lafontaine, vice president of audit services for Allina, said deferred payments aren't made unless the executives satisfy certain requirements, such as noncompete agreements. Still, she disagrees with the IRS interpretation.

"I don't think that is fair, but when you get in issues with IRS it is easier to disclose than to continue to argue the issue," she said. "My suspicions are that not everybody is doing it to the letter we are."

The exception

Unlike other nonprofits, Blue Cross is not bound by IRS regulations for nonprofit reporting because it is taxed by the federal government, so it files a traditional tax return that is not publicly available.

Blue Cross disclosed Czajkowski's additional 1999 pay after the Star Tribune asked about the pay of Banks, the new chief executive. Blue Cross said he received a $1.1 million pay package in his first year as CEO. That appeared to be about 40 percent higher than the $772,862 that Blue Cross had said Czajkowski had earned.

Spokesman Karl Oestreich said Czajkowski's additional pay was part of a three-year bonus program. He received the money after the original public disclosure had been made, Oestreich said.

But the disclosures suggest that Blue Cross is the first nonprofit Minnesota health care firm to pay a top executive more than $1 million.

Oestreich defended the $1 million pay packages, saying they were justified for a company that has grown significantly while holding the line on administrative costs. He also said Blue Cross determined the compensation using research on health plans of a similar size.

At HealthPartners, Halvorson said many executives saw a 20 percent increase in pay because they met performance goals. But the same executives did not meet their goals in 1999, which skews the comparisons between the two years, Halvorson said. The nearly 50 percent increase for Mary Brainerd was partly the result of her promotion to chief operating officer, Halvorson said.

At Delta Dental Plan of Minnesota, Chief Executive Michael Walsh had a 49 percent pay increase for a 2000 compensation of $336,446. The company provides or administers dental benefits for more than 1.3 million Minnesotans and 1 million subscribers outside Minnesota.

A Delta spokesman said that although the increase looks significant, the bonus was actually the payout of an incentive plan that had spanned several years and was not a bonus for one-year performance.

Still, the large increase is likely to draw criticism from dentists who have complained that Delta's payments to dentists are too low and that its review of dental claims has been heavy-handed.

"I'm not surprised that the compensation for executives, particularly in the dental market, would go up," said Kim Harms, a dentist and former president of the Minnesota Dental Association, who said Delta's position as the dominant dental insurer in Minnesota has given it extraordinary power.

The Minnesota Nurses Association, which won three-year pay increases of 20 percent for registered nurses this year after negotiations at Twin Cities-area hospitals and a strike at two of them, also questioned the executive pay.

"If there were enough RNs to provide excellent nursing care, and we were assured all Minnesotans had access to decent health care, then the magnitude of these salaries might be warranted," said Monica Vollmuth, president of the union. "Until then, however, we must continue to question spending priorities."


- Glenn Howatt is at

<PRE>. . Health-care executive salaries . Disclosure statements for 2000 show the highest-paid executives at nonprofit health plans and health-care organizations in Minnesota. . Name/ Title Company Total Percent

compensation change Mark Banks, CEO Blue Cross and Blue

Shield of Minnesota $1,136,991 44 Karen Vigil, former COO Medica $914,647 8 Gordon Sprenger, former CEO Allina Health System $860,011 7 George Halvorson, CEO HealthPartners $813,955 12 David Page,CEO Fairview Health Services $762,128 37 Michael Wood,CEO Mayo Foundation $686,727 1 Robert Waller, president Mayo Foundation for Medical

Education & Research $661,404 -2 Richard Niemic, SVP Blue Cross and Blue

Shield of Minnesota $637,552 25 David Strand,former COO Allina Health System $635,414 9 Timothy Hanson,CEO HealthEast $618,751 12 Mary Brainerd, COO HealthPartners $611,695 47 Peter Person, CEO St. Mary's/Duluth Clinic

Health System $589,517 10 Robert Spinner,former pres. Allina Health System,

Allina Hosp. Div. $581,721 15 Brock Nelson, CEO Children's Hospitals & Clinics $579,230 1 David Wessner, CEO Park Nicollet Health Services $565,687 4 William Maxwell, COO Fairview Health Services $555,680 11 John Frobenius, Co-CEO CentraCare $480,924 -1 Scott Anderson, CEO North Memorial Health Care $470,327 -19 Gordon Alexander, president Fairview Health Services,

Fairview Univ. Med. Center $468,538 36 Terry Finzen, CEO Regions Hospital $349,883 -1 Michael Walsh, CEO Delta Dental Plan of Minnesota $336,446 49 Margaret Perryman, CEO Gillette Children's

Specialty Healthcare $320,581 1 Nancy Feldman, CEO UCare Minnesota $260,323 -2 . Source: Health-care companies </PRE>
Section:  NEWS
Page:  01A
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