In AIS Health’s annual roundup of health insurer executive compensation data, four newly public startup insurers stand out because their CEOs’ total compensation in 2021 easily outstrips that of chief executives at major firms like UnitedHealth Group and Cigna Corp. However, experts tell AIS Health that the startups’ filings with federal regulators paint an unintentionally deceiving picture, as the CEOs of those not-yet-profitable firms are highly unlikely to collect hundreds of millions of dollars’ worth of stock awards listed there.
“They’re never going to realize, in one year, that much compensation,” says Ari Gottlieb, a principal at A2 Strategy Group who has been closely tracking the performance of the four startup insurers that went public in 2021: Alignment Healthcare, Inc., Bright Health Group, Inc., Clover Health Investments Corp. and Oscar Health, Inc.
Gottlieb tells AIS Health, a division of MMIT, that the stock awards that are largely driving the startups’ eye-popping total compensation figures — such as Clover CEO Vivek Garipalli’s $390 million or Bright Health CEO Mike Mikan’s $181 million — are based in part on the firms’ initial public offering (IPO) stock valuations, which were many times higher than what their shares are now worth. Clover’s stock, for example, opened at $15.30 per share when the firm went public in January 2021, and was valued at about $1.30 as of Dec. 1, 2022, and Oscar’s stock value dropped from $39 at the time of its IPO in March 2021 to about $2.90 as of Dec. 1, 2022.
Kevin Murphy, Ph.D., an executive compensation expert and business professor at the University of Southern California, echoes Gottlieb’s point about the startup CEOs’ compensation figures being a mirage. “The two highest numbers here are unusual cases — they’re cases in which the stock price has collapsed and so these awards won’t be worth anywhere near what was listed here.”
For example, when it comes to Garipalli’s performance-rated stock awards, Clover’s stock price would need to reach $20 to $30 “before that ever vests,” Murphy tells AIS Health. Meanwhile, the non-performance-related portion of Garipalli’s stock award vests over time, so it cannot be realized now — and would be valued at a lot less if it could be, Murphy says.
“The thing we’re calling $390 million, if he could cash it in right now — and he can’t, because not that much is vested — it would be worth about $20 million,” Murphy says. That’s what is so unique about publicly traded company CEOs’ compensation, he adds: So much of it is at risk because it’s largely concentrated in stock and option awards.
By contrast, “if you have a salary of $390 million, it would be $390 million. If you have a bonus opportunity of $390 million, it might swing between $350 million and $450 million, but it’s not that often going to be zero,” Murphy says.
All of Garipalli’s compensation comes from stock awards: He had no salary in 2021 “at his own recommendation” to Clover’s board of directors and “in accordance with his employment agreement,” per the company’s filing with the Securities and Exchange Commission (SEC). Since going public, none of the four startups — Alignment Healthcare, Bright Health, Clover and Oscar — has had a profitable quarter; combined, they lost $2.5 billion in 2021, the year in which all four firms debuted on the U.S. stock market.
Gottlieb says the most eyebrow-raising compensation move among startups comes from Bright Health, which recently unveiled that it will exit the Affordable Care Act exchanges in all 15 states in which it operates next year and stop selling Medicare Advantage plans in four states. Bright Health revealed in a Nov. 15 filing with the SEC that “in light of the need to retain key employees” during its “significant transformation,” the company is rolling out a “broad-based retention program for such employees comprised of an aggregate of approximately 27.4 million restricted stock units.” As part of that retention program, CEO Mikan will receive 7.6 million restricted stock units, and Chief Financial and Administrative Officer Catherine Smith will receive 2.8 million.
GuideWell CEO Beats Out Big Public Firms
Meanwhile, for the first time since AIS Health started tracking executive compensation in 2018, the CEO of a non-publicly traded Blue Cross Blue Shield affiliate out-earned all of the major public companies’ top executives. Patrick Geraghty, the CEO of Florida Blue and its parent company GuideWell Mutual Holding Corp., earned $24.6 million in total compensation in 2021, representing an 11.5% year-over-year increase.
Most of Geraghty’s total compensation — $18.5 million — comes from “other compensation,” which is how firms in their regulatory filings categorize everything that is not part of a CEO’s salary, bonus, stock awards, option awards or non-equity incentive plan compensation. A Florida Blue spokesperson tells AIS Health that within the $18.5 million “other compensation” figure, $8.5 million comes from a one-time, non-recurring retention bonus that Geraghty had earned over the past five years and was paid out in 2021.
The other components of Geraghty’s $18.5 million “other compensation” come from items such as long-term compensation and 401(k) contributions, according to the company. In addition to being the parent company of Florida Blue, GuideWell operates a host of businesses around the country, including non-health-insurance assets. And in February 2022, GuideWell closed its acquisition of Puerto Rico’s largest insurer, Triple-S Management Corp., in a deal worth $900 million.
Heidi Leeds, senior client partner and health insurance sector leader at the management consulting firm Korn Ferry, tells AIS Health that Geraghty’s $8.5 million retention bonus is not unusual among companies that she works with.
“There are a lot of not-for-profit plans out there, and there are a lot of for-profit plans out there, and the nonprofits don’t have equity, so if they want the same caliber of people [in CEO roles] that the for-profits are able to attract, they do have to come up with other mechanisms,” Leeds says. Therefore, “not all, but many of the nonprofit health plans that we work with do have a short-term and a long-term incentive,” with the long-term incentives typically paying out over a period of three to four years, she says.
Among the health insurers included in AIS Health’s executive compensation table, the biggest year-over-year compensation increases came from Capital Blue Cross (312%), CareSource (234%) and Health Care Service Corp. (101%). Two out of those three organizations had chief executives who were new to their role, as HCSC’s Maurice Smith became CEO in June 2020 and Capital Blue Cross’ Todd Shamash took the helm in April 2020.
In 2020, Blues affiliates also saw the biggest yearly increases in executive compensation, with Blue Cross Blue Shield of Minnesota’s Craig Samitt receiving a 109% raise and Independence Blue Cross’ now-retired Daniel Hilferty getting a 73% total compensation bump.
“When we recruit a new CEO, we generally do see a sign-on bonus, but a lot of times that is specifically to make up for what we call ‘forfeitures,’ or what the candidate has left behind at his or her other company as a result of leaving and coming to the new company,” Leeds explains. For example, the transitioning CEO “could be sitting on millions of dollars in equity that has not yet paid out.” Also, “even if I recruit from the not-for-profit world,” that individual could be already vested in a long-term incentive, have a pension or “there could be a retention bonus that the person has to pay back if they leave,” she adds. Furthermore, sometimes sign-on bonuses include the value of relocation costs if a newly recruited chief executive has to move a considerable distance, according to Leeds.
UnitedHealth May Be Giant, but CEO Pay Isn’t
Setting aside the case of the startup insurers, as has been the case perennially, the CEOs at a handful of large publicly traded health insurers commanded the highest compensation totals in 2021. UnitedHealth Group’s CEO received the biggest year-over-year increase in pay, with Andrew Witty’s $18.4 million total compensation representing a 43% bump compared to 2020. But Witty wasn’t at the helm in 2020, as he replaced David Wichmann as CEO effective Feb. 3, 2021.
Despite UnitedHealth Group owning the largest U.S. health insurer, Witty’s was the second-lowest compensation total in 2021 among the six national publicly traded insurers tracked by AIS Health (Aetna has not been included since it was acquired by CVS Health Corp). The CEOs at Centene, Molina, Cigna and Anthem all got larger paychecks than UnitedHealth’s CEO — earning in the $19 million to $20 million range — and just Humana’s Bruce Broussard earned less than Witty overall, at $16.5 million.
Although the big publicly traded insurer CEOs are technically the top-earning executives, Murphy points out that there’s a big catch: “A lot more of their pay is at risk than in the private firms. So much of their total compensation is coming in these forms that are tied to the stock price.”
Executive Compensation Data for Major Health Insurers, 2017-2021
By Jinghong Chen
SOURCES: AIS’s Directory of Health Plans. All data is compiled from individual health insurance companies, state insurance department documents and U.S. Securities and Exchange Commission filings.