Thursday, March 02, 2006

Gouging

The cover story from today's Post-Standard is about Excellus (the local arm of the Blue Cross Blue Shield network) and their record profits from last year. From the numbers that are reported in this article, I have no idea if Excellus is ripping off its customers or not. They posted a $198 M profit on revenues of $4.43 B, which works out to a profit margin of about 4.5%. Excellus is a nonprofit health insurer, so they don't really have a profit margin, per se. According to the article, their profits would have been $133 M excluding unusual one-time events, which brings their margin down to 3%. These numbers don't seem unreasonable to me.

The article also mentions that five executives earned more than $1 M and another 53 earned at least $200,000. The print edition listed all 58 of these employees by name and salary, but I couldn't find this information in the online version of the article. The article doesn't directly take a position on whether or not these salaries are excessive, but the fact that it took the time to list all of them in a separate table is suspect. The article doesn't compare these salaries to comparable health insurance companies so I have no idea of they are in line with the industry or totally exorbitant.

Perhaps the most telling clue about the non-so-hidden agenda of this story is the full-page ad that Excellus purchased in today's Post-Standard that compares their financial performance with some of their local competitors. The figures that they include in their ad show Excellus to be a great deal when compared to their competitors, of course. I don't expect an advertisement to present an unbiased look into the finances of the company that purchased the ad, but the fact that the company felt the need to run this ad the day that the story about their profits broke shows that either they are ripping everybody off and they know it or that they knew the article was going to portray them in a negative light.

This article was given the lead in today's paper for one reason, to manufacture outrage against health insurance providers. If any other local business posted an 88% jump in profits, the article about it would have been written in an entirely positive tone, would not have included a table of the most highly compensated employees at the company, and it would have been the cover story on the business section, not the front page.

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4 comments:

MDS said...

I do think having five executives making more than $1 million a year is excessive for any nonprofit. The IRS allows organizations to become 501(c)3s because they're spending the money to do public good. If they have enough money that they can pay that kind of a salary, wouldn't it be better spent providing health care to people who can't otherwise afford it?

dhodge said...

Like I said, it would be nice to know how these salaries compare with other nonprofit health insurance companies. These salaries do seem somewhat lavish to me as well. To a certain extent, you have to put up the cash if you want to get high quality employees, but I don't really buy into the argument that you need to pay a king's ransom to get a high-quality management team.

MDS said...

I blame the IRS as much as I blame Excellus. The IRS rules about 501(c)3s are extremely vague in many respects, just saying things like nonprofit executives must earn a "reasonable" salary. Imagine if your 1040 EZ just said you had to pay a "reasonable" amount of taxes.

A lot of nonprofits claim their salaries have to compete with the private sector, but I've never bought that. Their mission is different from those of private businesses, and their employees need to understand that pay won't necessarily be commensurate with that of private businesses.

dhodge said...

I agree with you, if your nonprofit is doing important work that truly benefits society, you should have no trouble finding qualified people to lead your company without having to pay them seven-figure salaries. You won't get any job applications from wannabe celebrity CEOs, but that's not necessarily a bad thing.