For Immediate Release - April 14, 2011

AG Coakley Determines That Compensation of Board Members at Non-Profit Health Insurers is Not Justified

Will Publish Annual Public Report Detailing Board Compensation Levels And Rationales And File Legislation That Would Allow AG's Office To Prohibit Charities from Compensating Directors

BOSTON - There is no justification for board members to be compensated at the Commonwealth's four major not-for-profit health insurers, Attorney General Martha Coakley said today in a report issued by her office. Coakley also announced that her office will publish an annual public report detailing board compensation levels and rationales as well as file legislation that would allow the Attorney General's Office to prohibit charities from compensating directors.

Listen to audio from today's press conference:

The report pdf format of AG Director Compensation Report issued today by the Attorney General's Office is the result of an extensive investigation into the compensation of board members of Massachusetts' four major charitable health insurers: Blue Cross Blue Shield, Fallon Community Health Plan, Harvard Pilgrim Health Care and Tufts Health Plan. As part of that investigation, the health insurers were given extensive opportunities to justify the rationale for compensating their board members in contrast to the overwhelming majority of charitable board members, including those at large hospitals and universities, who volunteer their time.. The Attorney General's Office found that the rationales provided by the health insurers were unsupported.

During the course of the investigation, the boards at both Blue Cross Blue Shield and Fallon agreed to suspend board compensation, while the Harvard Pilgrim and Tufts boards affirmatively decided to continue compensating board members.

"The vast majority of board members at charities volunteer their service, and for good reason," AG Coakley said. "Compensation of board members creates unavoidable conflicts of interest and diverts resources otherwise focused on achieving the mission of the charity. These organizations enjoy significant tax and other benefits due to their charitable status, and we asked them to justify why they should be treated differently from other charitable boards. We found their explanations to be unjustified."

"We believe Blue Cross and Fallon did the right thing by suspending compensation of their directors, and commend their actions," AG Coakley added. "We do not believe that Harvard Pilgrim nor Tufts have an adequate basis to continue to pay their board members, and we once again urge them to discontinue the practice in the interest of their charitable purpose."

As outlined in the report, the organizations submitted similar explanations for why their charities are unique and thus required their board members to be compensated. Harvard Pilgrim and Tufts stood by those rationales while voting to continue compensating their board members. Among the explanations provided by the insurers were:

  • Their organizations were more complex and required more highly skilled directors;
  • Their directors committed significant time and effort to their board duties; and
  • Nationally health insurers pay their directors and, as a result, they must do likewise to compete for directors.

The Attorney General's Office found these and other explanations to be unsubstantiated. The report notes that it found no basis to support that their organizations were "more complex, more regulated, have thinner margins, or enjoy more skilled and experienced directors, than (for illustrative purposes only) our large hospital systems and their uncompensated boards."

It also found no evidence that board members at the health insurers commit more time to their duties than do volunteer board members at other charities. Harvard Pilgrim publicly indicated that its board worked a total of 2000 hours in 2010, which averages to about three or four hours per week per board member.

The Attorney General's Office found the rationale that the health insurers had to compete with other national health insurers for directors to be "irrelevant." In fact, the report noted, "nearly all of your directors live and work in Massachusetts, which suggests at minimum that none of your organizations compete nationally for talent."

As a result of this extensive review and findings, AG Coakley will take two actions. First, to bring further transparency to the issue of director compensation, the AG's Office will require annual statements from all Massachusetts based public charities that compensate independent directors explaining, in detail, the basis and rationale for the practice. Those statements, director compensation levels, and AG evaluations will form the basis of an annual public report on director compensation practices at public charities.

The AG's Office also will file legislation, sponsored by Senator Mark C. Montigny and House Ways and Means Vice Chair Martha M. Walz, aimed at prohibiting these organizations from continuing to compensate directors without approval from the Attorney General's Office.

Specifically, the proposed legislation would:

  • Prohibit Massachusetts-based public charities from compensating their directors unless they obtain approval from the Chief of the Attorney General's Public Charities Division; and
  • Provide the AG's Office with the authority to rescind any such approval upon a finding that the amount of compensation paid is more than reasonably necessary.

"Since I filed the first executive compensation bill four years ago, we have seen some egregious cases of misuse and waste at public charities," said Senator Mark Montigny. "Non-profits are granted favorable statuses in exchange for what they are supposed to provide for our communities. The public is rightfully outraged that some of these organizations have given excessive compensation packages to top executives, and even board members, who are supposed to be volunteers, instead of using money to fulfill their missions and help those most in need. The time has come to put an end to these abuses."

"Massachusetts is laden with talented people who generously volunteer to serve their communities. This legislation is necessary to ensure that those who are serving on non-profit boards of directors fulfill their responsibilities without inappropriately enriching themselves," said House Ways and Means Vice Chair Martha Walz. "Volunteering on a non-profit board is a time-honored tradition that should be jettisoned only in the rarest of circumstances."

The Attorney General's report on Director Compensation can be viewed here pdf format of AG Director Compensation Report on the Attorney General's website.

The Non-Profit Organizations/Public Charities Division supervises non-profit organizations that are public charities to safeguard the public's interest in these organizations and to ensure the proper solicitation and use of charitable funds. The Division reviews annual public charity filings, works with organizations to address and cure potential violations, and, when necessary, conducts civil investigations and enforcement actions.

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