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Blue Cross Blue Shield of North Dakota details expense changes

FARGO -- Blue Cross Blue Shield of North Dakota has trimmed its executive pay guidelines and is now using a regional benchmark for comparing its executive compensation.

Also, new performance targets are being drafted for executives of the health insurer, whose salary ranges and levels have been frozen, according to a letter to state insurance regulators released Monday.

Paul von Ebers, the Blues' chief executive, and board chairman Dennis Elbert wrote in response to a directive by Insurance Commissioner Adam Hamm to take steps to ensure that its expenses benefited members.

Hamm's directives followed an examination of costs, including executive compensation and travel, that led the insurance commissioner to conclude that "millions" of dollars of health insurance premiums were misspent.

In their response, Blue Cross Blue Shield leaders said the following changes are being implemented:

• The so-called "pay-at-risk" incentive program for executives has been discontinued for 2010, and a new plan is expected by January.

"The Board is likely engage an outside consultant to work with the Board and management to design a longer-term program with goals and corresponding incentives tied to longer-term strategic improvement as a company," the letter said.

Last year, Blue Cross Blue Shield reduced a consultant's salary-range recommendations by 10 percent, changes that became effective this year. The comparison was based on a national research of like-sized health insurance, insurance and service-oriented businesses.

"While the Board feels the past use of consultants and standards was based on accepted industry practice, the Board changed its philosophy for 2010 and beyond to include a local analysis, and has directed Blue Cross Blue Shield of North Dakota (BCBSND) human resources to analyze executive compensation against like-sized North Dakota companies from al industries."

All executive salaries will be set based on North Dakota and western Minnesota standards, "blended with regional and national data as appropriate to give the board adequate information to make decisions," the letter said.

• Employee benefits also are being trimmed, with the goal of falling at the midrange of a North Dakota comparison group.

The intent is to make benefit offerings that are competitive - but not overly competitive - with lower-paid staff paying 10 percent of their health premiums, while higher-paid staff and executives will pay up to 30 percent.

• Policies call for limiting retirement parties to a "modest level of celebration and cost for all employees regardless of grade level" and also scale back its service award banquet.

• Travel policies now call for reimbursements using the federal government rate for employees and directors, and require the "lowest lodging rates possible." Alcohol will not be reimbursed for board or employee meetings, banquets or functions.

• Out-of-state management and board travel will be limited to business meetings and educational meetings that can't be done in North Dakota. Also, charter flights will be limited to "rate situations where other transportation is not available or not practical to meet important business needs."

• Managers secured changes to an agreement involving the Blues' $3.5 million investment in the Hilton Garden Hotel in Fargo, which examiners concluded was illegal because it fell outside the board's control.

• Investment policies now may call for appraisals if market value is not readily available. "Allocation of profits and losses to individual and for-profit partners must be proportionate with ownership interests." Hamm had concluded that the hotel exposed the insurance company to much higher risks than its partners.

"Arrangements should be negotiated at arm's length and be commercially reasonable for the parties to enter into," the letter said.

• Severance packages now will be limited to "reductions in force and layoffs only," with severance levels reduced to 75 percent of previous levels for executives.

"These changes provide severance benefits that are more in line with North Dakota standards and are meant to provide a basic level of protection for employees affected by a reduction in our workforce."

The letter was submitted Friday, but Hamm's office did not release it until Monday. The company considers attachments to the letter confidential, and Hamm is still reviewing that information.

Hamm, who was traveling Monday, was not available for comment. Blue Cross Blue Shield spokeswoman Denise Kolpack also was not immediately available for comment.