CalPERS Board Opposes $345 Million In Merger Bonuses for PacifiCare Executives;

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FTCR Says Schwarzenegger Should Give Back $78K In PacifiCare Campaign Contributions

Santa Monica, CA — Citing huge cost increases for patients and shareholders, today the board of the California Public Employees Retirement System (CALPERS) — the state’s largest health care purchaser — voted to call on PacifiCare of California, United Health and the Department of Managed Health Care (DMHC) to remove $345 million in executive bonuses proposed as part of the pending merger of the two HMOs. The Foundation for Taxpayer and Consumer Rights (FTCR) said that the $345 million in bonuses is “enough money to provide health care to 115,000 Californians for an entire year” and congratulated CALPERS for its opposition to payouts.

“It is obscene to allow HMO executives to feed at the trough at a time when 6.5 million Californians cannot afford health care and millions more are underinsured,” said Jerry Flanagan of FTCR. “Huge payouts to HMO executives undermine patient care and the stability of the merged company.” CALPERS is a significant quantity of PacifiCare and United Health.

The DMHC, whose director is a Schwarzenegger appointee, can — along with the Department of Insurance — approve or deny the merger. PacifiCare has contributed $78,500 to Governor Schwarzenegger’s various fundraising committees. Schwarzenegger’s four appointees to the CALPERS board voted against a proposal directing CALPERS to call on PacifiCare and United Health to reduce the executive compensation payments. The motion was approved 7-4.

“Governor Schwarzenegger should return the $78,500 in campaign contributions and require his administration to oppose the merger unless significant patient protections are adopted,” said Jerry Flanagan of FTCR. “These political contributions — presumably made with the intent to curry favor during the merger review process — squander premium dollars paid by California families and business owners, many of whom are struggling to afford their health insurance. Regulators should not act on the pending merger until Governor Schwarzenegger returns the money to PacifiCare.”

A second proposal directing CALPERS to call on the DMHC to reduce the pay packages was approved unanimously. Today’s votes by the CALPERS board came at the behest California State Treasurer Phil Angelides.

In addition to the executive bonuses, at risk is $389 million in excess reserves that could be removed from the state unless protected by regulators. FTCR said that future health insurance rate increases must be reviewed to ensure that merger costs are not passed on to patients and business owners. According to documents filed with the state in June of this year, PacifiCare has at least $389 million in excess reserves — enough money to provide coverage for 130,000 Californians for an entire year (based on annual cost of $3,000 per person). The $345 million in bonuses could provide health care for another 115,000 Californians for an entire year.

“Patients need new protections to ensure that premiums reflect the cost of medical care, not the greed of health care profiteers and Wall Street financiers,” said Jerry Flanagan, Health Care Policy Director for FTCR. “Health care should no longer be treated like a second class citizen in California. The voter-approved insurance reforms of Proposition 103 have saved California drivers $23 billion by requiring insurers to prove that their rates are not excessive or unfair. Health insurers should be required to play by the same rules as auto and home insurers.”

Internet Campaign

FTCR is now collecting signatures on an Internet petition calling on regulators to crack down on insurance company greed by regulating health insurance premiums in the same manner as auto and home insurance premiums under Prop 103.

The Internet campaign features a flash animation depicting former CEO Leonard Schaeffer as a “pig person from outer space (PPO)” for his $250 million payout following a recent merger involving Blue Cross of California’s parent company, WellPoint. A PPO is type of health insurance plan that commonly charges patients large out-of-pocket costs.

Click here to view the animation and petition.

Executive Bonuses

In addition to the $345 million in merger-related bonuses to top executives, Howard Phantsiel, PacifiCare CEO, will receive $130 million in additional “retirement payments” as part of a deal worked out prior to the merger announcement. Under the terms of the proposed merger top executives will receive:

* $245 million in accelerated stock options;
* $15 million in change-of-control payments;
* $85 million more in cash bonuses and stock if they stay with the merged company.

Click here to view more information about the executive compensation package.


Also at risk is PacifiCare of California’s $389 million in excess premium-funded reserves that could be removed by UnitedHealth unless regulators require the funds to remain in the state. According to PacifiCare’s June 30 quarterly filing to the Department, the company has more than 500% of state required reserves (TNE) levels.

FTCR called on DMHC to oppose the merger unless the companies agree that excess reserves will be kept in the state and: i) refunded to PacifiCare enrollees whose premiums have paid for the reserves; or, ii) held in trust to provide health care for the thousands of California families that cannot afford skyrocketing health care costs.

Click here to view PacifiCare’s quarterly filing with the DMHC.

Market Consolidation

In 2000, UnitedHealth abruptly dropped out of the HMO/PPO market in California to focus on larger national accounts. Questioning whether UnitedHealth plans to pull PacifiCare out of the California market to focus on Medicare prescription drug coverage, FTCR says regulators must investigate the effects the merger will have on increased market consolidation. Currently, five companies, including PacifiCare, control over 80% of California’s HMO market.

If PacifiCare were to be removed from the California market, or its membership significantly reduced, the result would be more consolidation and less competition. All California patients would likely face fewer choices, higher premiums and copays, and higher uninsured rates.

Merger Conditions

FTCR called on regulators to not approve the merger unless company executives provide legally binding commitments to:

* Allow state regulators to review all future rate increases and to deny increases deemed to be excessive, unfair, or discriminatory (similar to requirements already in place for auto and home insurers under Prop 103);

* Guarantee that patients will not face rate increases to pay for any costs associated with the merger including executive bonuses and financing costs;

* Guarantee that patients will not face new restrictions on which hospitals and doctors they can visit or limit access to necessary prescription drugs and medical treatments;

* Not cherry-pick the most profitable accounts, and leave patients stranded.

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The Foundation for Taxpayer and Consumer Rights is the state’s leading nonpartisan consumer advocacy organization.

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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