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Saturday, November 22, 2003 - Page updated at 12:00 AM

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High pay of Premera executives questioned

Seattle Times staff reporter

Top officials at Premera Blue Cross significantly out-earn their counterparts at comparable insurance companies, receive raises that average twice as much, and rank in the top 75th percentile in executive pay despite Premera's below-average financial performance.

But compared against a group of executives at large investor-owned insurers, Premera's officials are underpaid by a substantial margin.

Those were among the conclusions in a report by consultants hired to advise Washington's insurance commissioner on whether to permit Premera to convert to for-profit status. The PricewaterhouseCoopers analysis — which Premera acknowledged was critical of many of its executive-compensation practices — was one of seven key expert reports released by the Insurance Commissioner's Office yesterday.

Premera quickly posted its own expert reports countering many of the consultants' findings.

Mountlake Terrace-based Premera, the state's largest health insurer, is trying to become the first nonprofit health insurer in Washington to convert to a stock-traded company. The state hired third-party consultants to advise Insurance Commissioner Mike Kreidler before he rules whether to approve the conversion.

Those consultants concluded that the conversion could lead to higher insurance premiums and reduced coverage. They also said that Premera's plan doesn't ensure that 100 percent of the company's value will be transferred to a new nonprofit foundation it would create upon conversion to carry on its original mission, as required by law.

Further, the consultants rejected Premera's core argument that the conversion is necessary to strengthen its financial future.

Premera disputed much of the state consultants' findings. Some of the sharpest disagreements involve executive-compensation matters.

According to the state's experts, Premera's five top executives in 2002 ranked in the 75th percentile in salaries and bonuses when compared with comparable insurers: Blue Cross and Blue Shield plans and other for-profit and nonprofit insurers.

At the same time, Premera's corporate performance when measured by operating income and other indicators was in the 38th percentile compared with the same peer group.

The state experts found that salaries for Premera's top officials rose by an average annual compounded rate of 7.5 percent during the past five years, compared with 4.1 percent for the peer group.

Scott Forslund, a spokesman for Premera, said the state's reports are misleading. For instance, Premera does not have a chief operating officer, and Executive Vice President Yoram "Yori" Milo, handles many of those duties, Forslund said. Milo's salary, bonus and payouts from Premera's long-term incentive plan in 2002 placed him in the top 25 percent among executive vice presidents in the peer group.

Forslund said Andrew Bao-Hwa Wang, Premera's former chief actuary, also had responsibilities that exceeded his title. The consultant said Wang's 2002 pay of $693,000, (the report included most but not all of his total compensation) was about 67 percent higher than the median salary of $414,000 for his position among one of two peer groups of insurers looked at by state experts. Forslund said Premera's board of directors has consistently aimed for the median in setting executive compensation.

Premera's experts argue that the state consultants relied on arbitrary measures to compare the company's performance against that of other Blues.

Foes of Premera's conversion plan pointed to the executive-compensation report as one of many reasons why Kreidler should block the conversion.

Rick Spoonemore, an attorney representing a coalition of consumer groups opposed to the conversion, contends that Premera's executives stand to collect even bigger paychecks if conversion is approved. The state's experts calculate that Premera's top officials now earn 22 percent less than the median salary and bonuses for their peers at publicly traded insurers.

"The implications are that executive salaries (will go) through the roof," Spoonemore said. "Where is that money going to come from? They're either going to have to raise premiums or cut back on reimbursement to make up the difference."

Premera maintains that the conversion could potentially have a "favorable impact" on premiums.

Kyung Song: 206-464-2423 or ksong@seattletimes.com

Copyright © 2003 The Seattle Times Company

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