Blue Cross does what it wants (contined) BY STEVEN STYCOS

EVEN WITHOUT a golden parachute, however, Battista is well paid. The 33-year Blue Cross employee, a Rhode Island College graduate, collected $578,761 in 2002 — 53 percent more than he received in 1999, his first full year as CEO, according to DBR reports. But critics are most outraged by a $600,000 insider loan received by a Blue Cross executive. According to Blue Cross’s most recent consolidated financial statement, "an officer of the plan" was loaned $340,000 at seven percent interest in August 2001. Then, just six months later, the same person was lent another $260,000 at five percent.

(Records at Warwick City Hall indicate that Ronald A. Battista purchased a piece of property in the Warwick Neck section for $155,000 on June 30, 2000, and then constructed a large, 3230-square-foot home (a deeds clerk says the typical ranch home is 1100-square-feet). In the most recent valuation, in 1995, the value of the home and property, which includes a partial water view, was put at $387,300.)

The Rhode Island Medical Society’s Warde and Ocean State Action’s Rosenberg strongly believe that the officer in question is Battista, which appears likely given the unique repayment terms of the "hook loan," which are made to discourage executives from leaving to take another job. As part of "the officer’s" employment agreement, the note to the financial statement explains, starting in March 2005, two percent of the loan will be forgiven for each month he continues working for Blue Cross. The rest will be forgiven in February 2008, if he is still working for the insurer.

Former Blue Cross board chairman Fogarty, a managing director of Phoenix Investment Management in Providence, defended the loan, saying, "I’m of the opinion it was for a legitimate purpose." But he refused to say what the purpose was. Fogarty refused to confirm that the loan was to Battista. Asked whether he denied that Battista was the loan’s recipient, Fogarty fell silent.

Rosenberg, however, is more voluble. Referring to Battista’s $500,000-plus compensation package, she says, "If he makes that amount of money, why can’t he go to a bank like anyone else? If he can’t, this nonprofit shouldn’t be giving him a loan." Warde, meanwhile, credits Battista for reversing Blue Cross’s losses in the late 1990s, but questions whether the executive’s large salary and loan are "appropriate for a little nonprofit in Rhode Island." (Nonprofit compensation increasingly rivals compensation in the for-profit world for CEOs, based on a survey of the 400 largest philanthropic nonprofits, according to a report in the current issue of the Chronicle of Philanthropy. Some of biggest gains are in deferred compensation, which charities typically pay to keep execs from leaving for other jobs.)

Ten other Blue Cross executives received more than $200,000 in compensation in 2002, according to the annual report filed with DBR, while UnitedHealthcare and Delta Dental of Rhode Island each had only one (see chart, above). Just two years ago, only six Blue Cross executives received more than $200,000 in pay and benefits.

The insurer also spends heavily on its board of directors, paying them a total of $637,028 in 2002. Thirty-two board members received between $10,000 and $25,000 in compensation in 2002, according to the DBR report, including AFL-CIO President Frank Montanaro, Superior Court judge Edward Clifton, former state Supreme Court Justice Florence Murray, and former Manpower Inc. president Sheldon Sollosy. According to the DBR report, Blue Cross started paying board members in 2001, shortly after Harvard and Tufts left the state. Fogarty declined to explain why.

A widely criticized, and more visible, administrative cost is Blue Cross’s advertising. During the 2002 Democratic primary campaign, the nonprofit purchased large ads in the Providence Journal to counter gubernatorial candidate Myrth York’s criticism of its recently negotiated contract with the state. In the spring of 2003, the company ran a highly visible campaign, plastering "87-10-3" advertisements in newspapers and on billboards, imprinting on the public psyche the message that 87 percent of premium dollars pay claims, while only 10 percent fund administration, and 3 percent go to reserves. That campaign was followed by warm and fuzzy ads featuring the message, "What’s behind all of the changes at Blue Cross? You are."

Doctors and consumers complain that this advertising squanders premium dollars. Rosenberg, whose organization frequently criticizes Blue Cross, calls the ads, "a slap in the face to people who pay good money every week from their pay check for health-care." Even the measured Pires observes, "The money would be better spent in provider rates or reduced customer rates, even if it’s a miniscule amount."

Like its reserves, Blue Cross’s marketing and advertising budget has burgeoned since the demise of Harvard and Tufts. In 1999, the company spent $2.3 million on promotion, but the amount climbed by 2002 to $3.8 million, according to the DBR reports. The sharp increase leads Warde to ask, "Why are they doing so much self-promotion in a market that they already dominate to a degree unparalleled in any other state in the union? It’s almost as if they are protesting too much." Answering his own question, he adds, "They know they don’t have a lot of friends. This is a strategy, if not to win friends, to improve their image."

WHILE AVERAGE citizens may gripe about Blue Cross’s advertising, health-care insiders complain about Blue Cross’s entrance into health-care planning. In 2000, Blue Cross spent more than $1 million on Project BluePrint, a survey of Rhode Islanders’ views on health-care. Then in 2002, the nonprofit spent $3 million on its Statewide Health Assessment Planning and Evaluation Study, or SHAPE, which projected the state’s future health-care needs. SHAPE II is currently underway.

In addition to arguing that the millions Blue Cross spent on SHAPE should have gone for lowered premiums or increased payments to doctors and hospitals, some worry that the insurer is assuming the planning role of the state Department of Health. As Warde warns, "It’s as if the attitude at Blue Cross was what’s good for Blue Cross is good for Rhode Island."

After analyzing Rhode Island’s population trends, SHAPE triggered serious study of a new hospital for northern Rhode Island (see "Shifting landscape," News, May 2). Although he acknowledges being part of an earlier plan to merge Landmark Medical Center with Roger Williams Medical Center, Landmark CEO Gary Gaube says, "We’re not actively at the table any longer." But, he says, a new nearby hospital would be a problem for Landmark. Blue Cross could make it worse by using its huge reserves to finance construction. Then, it could help bankrupt the financially fragile Landmark by threatening to refer patients to the new hospital if Landmark refused to accept low reimbursement payments. "It really tilts the playing field," Ocean State Action’s Rosenberg says of Blue Cross’s entrance into health-care planning.

The charge that Blue Cross is a bully extends beyond theories and name-calling. The nonprofit has been sued three times since 1999 for anti-trust and non-competitive practices. In December 1999, UnitedHealthcare sued Blue Cross, alleging that a $100 million contract to cover 26,000 current and retired state employees was awarded without competitive bidding. Superior Court Justice Michael Silverstein rejected the company’s claim. The contract became a political issue when Democratic gubernatorial candidates York and Pires blasted the deal for shifting risk from Blue Cross to the state, and giving the insurer about eight percent of premium dollars for handling claims. They also criticized then-Governor Lincoln Almond’s decision to accept a refund of only $7.8 million after an accounting firm concluded that Blue Cross owed the state $18.6 million.

In its ads defending the deal, Blue Cross said self-insured plans with administrative fees were common for large employers. It also claimed that the state’s audit firm "interpreted sections of the contract incorrectly," causing an over-estimate of the refund due. Blue Cross disagreed, and, the ad says, the matter was amicably resolved in mediation. Pires has a different view. "The people involved in the state’s end of negotiations," he says, "were absolutely out-negotiated by Blue Cross."

Six months later, York and Pires criticized another exclusive Blue Cross deal, this one with the Rhode Island Interlocal Intergovernmental Trust. In June 2002, the trust, a risk-sharing pool created by more than 30 Rhode Island cities and towns, negotiated with Blue Cross to provide an insurance plan to its members, explains trust executive director Thomas Dwyer. Again, Pires and York charged the contract was awarded without a bid, and that the 14 percent for administrative costs included in the deal was almost double the state’s rate.

Dwyer concedes the deal was not subject to competitive bidding, but he says it makes little sense to negotiate with anyone other than Blue Cross, because almost all municipal labor contracts specify that union workers will receive Blue Cross insurance.

The controversy over the state contract ended after Pires lost in the primary and York did likewise in the general election. But the trust contract is on hold, Dwyer reports, due to a pending lawsuit by Delta Dental of Rhode Island over the pact’s "dental tying penalty." Under the provision, any municipality that purchases health insurance through the trust is penalized if it purchases dental insurance from anyone other than Blue Cross. In the agreement’s first year, the penalty is $2.31 per member, per month. The fee then rises annually, according to a portion of the contract cited by Delta Dental in legal documents and confirmed by Blue Cross in other paperwork, reaching $7.56 per member, per month as of July 1, 2006.

Mary Sommer, Delta Dental’s director of corporate communications, declined comment. But in its legal complaint, Delta Dental charges the contract is illegal because it creates a monopoly. "The Dental Tying Penalty is such as to make it economically unfeasible for municipalities and school systems to purchase medical and surgical coverage from Blue Cross without also purchasing dental coverage from Blue Cross," the complaint charges.

Dwyer says, "Obviously, we would prefer not to have the dental agreement in it, as we would like a lower administrative fee," but Blue Cross insisted on both in negotiations. He nevertheless defends the trust agreement because it gives municipalities another option in their search for affordable employee benefits. Trust members may purchase the trust’s plan or negotiate their own with Blue Cross or any other insurer, Dwyer stresses.

In June, Blue Cross won the first round in a third anti-competitive action, when US District Court Judge Ernest Torres ruled that its prescription plans, which require patients to use Brooks, CVS, or independent pharmacies, do not violate anti-trust law (see "Critics rap closed prescription network," News, This just in, August 22). Thanks to Blue Cross’s huge market share, say Stop & Shop and Walgreens, the arrangement effectively bars them from 70 percent of Rhode Island’s pharmacy business. Blue Cross defends the deal, insisting it can win lower drug prices by guaranteeing pharmacies a high sales volume. Stop & Shop and Walgreens are appealing the decision.

GIVEN ALL THIS, what is the answer to Rhode Island’s health-care woes?

More competition, says Pires, would force down prices. State laws mandating insurance plans to provide particular coverage, such as that passed by the legislature this year for long-term treatment of Lyme disease, may discourage companies from doing business in Rhode Island, he adds. Perhaps, Pires suggests, the legislature should ban local governments and unions from specifying the insurance provider in their contracts. Unions could then negotiate health-care benefits, but local government could shop around for the best insurance deal.

He also suggests that the state expand the RIteCare program, thereby allowing small businesses to join, if they pay for the program’s cost. By creating an insurance pool, small companies would win better rates, Pires contends. Neighborhood Health Plan’s Koller agrees, saying the system is already proven, because RIteCare’s cost hikes have been less than the increases under the state workers’ Blue Cross plan. Expansion of RiteCare, says Koller, "is not going to solve everything, but it’s going to start to address small business concerns."

Rick Brooks, director of United Nurses and Allied Professionals, Rhode Island’s largest health-care union, also favors expanding RIteCare, but he suggests that it gain bargaining power by covering state and municipal workers. A supporter of a national single-payer system, Brooks warns that luring more for-profit insurance companies to Rhode Island will not lower costs, because more health-care dollars will be devoured by separate billing procedures, additional advertising, and additional marketing. Encouraging insurers to compete on price, he says, also spurs them to cut costs by skimping on payments to doctors and hospitals. An expanded RIteCare, however, "could be a different type of competition," he says.

Cooper, the corporate health-care advisor, and a former Blue Cross executive, has a more modest proposal: Rhode Island should follow New Hampshire’s example and require insurers to tell businesses how much they spent on the company’s claims. He insists that companies can negotiate lower rates if they’re armed with the total of premiums paid in one hand and claims paid in the other. "If that changed tomorrow," Cooper says, "that would immediately affect the rates of some companies."

Brooks also believes that Blue Cross should be more tightly regulated. With a virtual monopoly like Narragansett Electric or New England Gas, he says, Blue Cross should have to justify its payments to hospitals and doctors and seek permission to raise reserves or increase administrative costs.

Rosenberg, another single-payer backer, agrees. Ultimately, she says, it all comes down to, "What does the state get for them being a non-profit?"

Steven Stycos can be reached at stycos1@yahoo.com

THE PAYROLL COMPENSATION OF RHODE ISLAND’S TOP INSURANCE EXECUTIVES

Name Company Title 2002 Compensation

Ronald Battista Blue Cross President $578,761

James Purcell Blue Cross Chief operating officer $492,374

Joseph Nagle Delta Dental President & CEO $417,346

Lynne Urbani BlueCHIP* President $294,149

William Boffi Blue Cross Senior vice president $283,796

George Calat Blue Cross Treasurer $281,605

Elwood Bud Fisher UnitedHealthcare CEO $272,937

Maryanne Harmsen Blue Cross Executive vice president $269,223

Thomas Lynch Blue Cross VP-external affairs $236,896

Judith Sullivan Blue Cross VP & general counsel $227,669

James Joy Blue Cross VP-finance $219,449

Richard Farias Blue Cross VP-claims $217,989

Mathew Brannigan Blue Cross Assistant VP $217,229

Christopher Koller Neighborhood Health Plan CEO $164,264

* BlueCHIP is a wholly owned for-profit subsidiary of Blue Cross.

Source: Department of Business Regulation annual financial reports. The list includes CEOs and anyone else who received more than $200,000 in 2002 from one of Rhode Island’s major health insurers.