Unhealthy incomes

Illustration by Bob AulIf shoddy care, billing snafus and discourteous phone operators weren't enough to make you hate your health maintenance organization (HMO), the Los Angeles Times may have done the trick.

On May 24, the newspaper published its annual list of Orange County's highest-paid business executives. Compiled by the consulting firm Watson Wyatt Worldwide, the list included 187 executives who oversee 145 different local companies. While only about a dozen of these suits work for health-care organizations, seven are employed by an OC company: Cypress-based PacifiCare Health Systems.

If the Times is correct, PacifiCare's seven best-paid executives raked in a total of more than $11.3 million last year, a figure that excludes tens of millions of dollars in additional stock options the HMO awarded them. Three PacifiCare executives ranked among the top 50 highest-paid OC executives, including PacifiCare chief executive officer Alan R. Hoops, who ranked ninth.

The lowest-paid PacifiCare executive to make the list, chief financial officer Robert Stearns, earned only $605,300 last year, ranking him 152 out of the 187 OC executives listed by the Times. But don't feel sorry for Stearns. PacifiCare offered him a handsome consolation prize: $27.3 million in stock options, the largest such bonus given to an Orange County executive last year.

According to the Times, such gifts show that stock options, while not risk-free, are “a growing incentive” to “top earners in public companies.”

Unfortunately, that's exactly the problem with PacifiCare and other publicly traded HMOs: they're run by executives whose bulging stock-option packages may turn out to be completely worthless if the HMO doesn't remain “competitive” in the marketplace. Stock options are therefore a powerful incentive for HMO executives to keep their eyes on the prize—the bottom line—which often translates into layoffs and higher workloads for hospital staff, along with shedding any service deemed unprofitable.

PacifiCare is a perfect example. In early 1997, the HMO was the first to remove three important mental-health medications—Prozac, Zoloft and Risperdal—from its list of covered drugs. At the time of its decision, 15 percent of PacifiCare's 2 million members suffered from various mental illnesses—including depression, for which Prozac is by far the most widely used medication. Thus, with little effort, PacifiCare executives saved the HMO a substantial amount of money—which is exactly what they pay themselves to do.

In August 1998, about 1,200 Colorado physicians asked to be dropped from PacifiCare's 1999 provider directory. The doctors complained that they were being reimbursed by the HMO for only about 75 percent of the costs involved in providing care to their patients. Was PacifiCare operating on a shoestring budget in Colorado? Hardly: in 1997, the HMO's Colorado branch clocked $26.4 million in profits.

Other favorite methods by which HMOs like PacifiCare have amassed huge fortunes—while simultaneously running down the quality of American health care—are mass mergers and acquisitions. Sometimes, however, these can prove to be tricky. When PacifiCare acquired OC-based FHP International in 1997, for example, Pacificare's shareholders filed a class-action lawsuit charging the HMO with insider trading, failing to disclose financial losses, and various other misrepresentations.

As a result of the FHP disaster, PacifiCare's stock dropped in 1998 from a B+ to a B rating. According to the Times, PacifiCare credited Hoops for “turning around” the HMO after the FHP deal went sour.

How did Hoops do last year? According to the Times, he racked up $4.72 million in “total compensation,” along with $2.5 million worth of PacifiCare stock options. While that kind of money could solve Orange County's homeless problem for a year, it was just business as usual for Hoops. According to a recent report by the Washington, D.C.-based Families USA Foundation, Hoops had acquired at least $15 million in stock options by 1996, the fifth-largest benefit package for any HMO executive in America.