William Milnes became a poster boy for runaway executive pay when he retired as CEO of Blue Cross and Blue Shield of Vermont in 2008 with a $7.2 million golden parachute. In the media firestorm that followed, Milnes retreated to his Florida residence. But he resurfaced last year when he sued his former employer for an additional $575,000 in severance pay he says BCBS still owes him.
That case has gotten increasingly personal since, as the messy details of his divorce from Blue Cross have been revealed.
Milnes’ response: He is seeking even more money. On July 5, he filed a motion asking for “prejudgment” interest of 12 percent on the $575,000. Calculating interest back to 2009 — when those “incentive bonus" payments came due — Milnes says Blue Cross owes him an additional $200,000 for the delay.
Blue Cross has countered that Milnes was unable to perform his job duties as a result of a stroke in 2007 and has sought medical records to prove it — a move Milnes’ lawyers have described as “a fishing expedition” designed to harass and embarrass their client. Blue Cross also subpoenaed both his wife and his financial adviser to testify about Milnes’ motivations for retirement.
U.S. District Judge J. Garvan Murtha quashed both BCBS requests.
Milnes spent 10 years at the helm of BCBS, during which time he restored the nearly bankrupt company to stable financial footing — a success even Blue Cross acknowledges in court filings. With three years left on his contract, Milnes and Blue Cross struck a deal in which he would voluntarily retire at the end of 2008 — at which time he received $6.5 million under a “supplemental executive retirement plan.”
The parties also signed a severance agreement that would pay Milnes an additional $575,000 in long- and short-term incentive bonus payments over the next three years.
But the company never paid that bonus money. When Blue Cross asked the state to approve a rate increase of 34 percent in 2009, the state Department of Banking, Insurance, Securities and Health Care Administration launched an investigation of Milnes’ multimillion-dollar pay package to determine whether it was “excessive” under state insurance law.
In 2010, BISCHA — since renamed the Department of Financial Regulation — concluded that the nonprofit Blue Cross and Blue Shield had paid Milnes at least $3 million in excess compensation between 2001 and 2008. Under state law, the agency couldn’t order Blue Cross to withhold money from Milnes or force him to pay any of it back. But it could — and did — order the HMO to make it up to subscribers by reducing their rates by an equal amount.
Blue Cross is using that precedent to argue that it can’t pay Milnes the $575,000 in bonus pay because it would “clearly” constitute excessive compensation under the state’s 2010 order — subjecting the company to further sanctions. In proceedings before BISCHA in 2009, Blue Cross had defended its payments to Milnes as “reasonable” and opposed on legal grounds any suggestion that it recover a portion of the money from Milnes.
But in the fallout that followed Milnes’ highly publicized golden parachute, Blue Cross privately asked the executive to voluntarily refund a portion of his retirement pay. In a 2009 letter from Blue Cross to Milnes’ financial adviser — which is now evidence in the court case — Blue Cross vice president and chief administrative officer Christopher Gannon wrote that the company was “disappointed” in Milnes’ decision not to do so.
“We hoped Bill would show a greater appreciation for the difficult situation in which his compensation arrangements have placed the company, as well as the adequacy of the payments he has already received,” Gannon wrote. The payout, he noted, “has attracted the attention of our state regulator, local politicians and even our Congressional delegation. It has also generated significant negative publicity for BCBSVT in the local press.”
Does Blue Cross have a legitimate defense? Milnes’ lawyers say no. Assuming that state regulators would find payment of the $575,000 bonus compensation “excessive” is pure speculation, the lawyers argue. And even if the state determined it to be so, the solution is not to withhold payment but to hold subscribers harmless, as Blue Cross did before by lowering rates.
Would paying the bonus money reopen the state’s investigation of Milnes’ compensation? Cliff Peterson, the Department of Financial Regulation’s general counsel, says the state would “definitely pay attention” if Blue Cross tried to bill that amount back to subscribers. But he’s quick to add, “I can’t prejudge a rate filing that may never happen.”
Insurance companies such as Blue Cross and Blue Shield carry reserves for just such liabilities, Peterson says, adding, “I would expect them to pay this out of their reserves, and I would not expect it to have any effect on their capital and reserves that would cause any problem for us.” Translation: $575,000 is a drop in the BCBS bucket.
Likewise, Department of Financial Regulation commissioner Steve Kimbell, a former lobbyist for Blue Cross, says he isn’t sure whether paying Milnes the $575,000 would reopen state regulators’ investigation. “I haven’t looked at the order my predecessor issued to the company,” he says. “This is the first conversation I’ve had about this issue in a year and a half.”
Milnes filed his lawsuit for the severance pay in 2011, but the case was put on hold last winter because of another health problem — the details of which are also splashed across the pages of the court case. According to his attorneys, Milnes was hospitalized in January with a “serious medical condition” that turned out to be bacterial endocarditis — an infection in the heart that was complicated by a previously implanted pacemaker. He spent several days in and out of a Florida intensive-care unit and remained in “poor health” through April of this year. With his condition now “greatly improved,” his lawyers say the case can finally move ahead.
Medical fitness — and its relationship to Milnes’ employment contract — is at the heart of the Blue Cross argument. The company alleges the former CEO’s 2007 stroke is what prompted the company’s early-retirement offer. “Significant impairments that impeded his performance” motivated BCBS to buy out Milnes, including diminished stamina and an inability to drive. Blue Cross claims “aspects of his personality had undergone changes [that interfered] with his work relationships.” And that his wife, Rebecca, encouraged BCBSVT employees and board members to urge Milnes to retire “for the sake of his health.”
But Milnes claims in the lawsuit that he was prepared to fulfill his employment contract and work through 2011 — and would have, if not for the early-retirement agreement, complete with $575,000 in bonus pay. His attorney, David Pocius of the Burlington firm Paul Frank + Collins, notes that a year after the stroke, Blue Cross extended Milnes’ employment contract and raised his base salary from $475,000 to $525,000.
“Think about it. If there was such a concern — even a little concern — why allow his contract to get extended another year and then on top of it give him more money? It defies common sense,” Pocius says. “He had health issues. He went back to work. He was doing his job. He was prepared to finish the term of his contract.” To Pocius, it’s a simple breach-of-contract claim.
Why is Milnes seeking prejudgment interest? “It happens in every case in America,” Pocius replies. “Vermont has a statute that says prejudgment interest is 12 percent. Mr. Milnes has been out this money the entire time and the statute is what it is. It certainly is the principle. It’s a contract; it’s what he agreed to. But it’s also the money because it’s money out of his pocket that could be used for his retirement, for his investments, for his health, for x, y and z.”
Blue Cross’ attorney, R. Jeffrey Behm of the Burlington firm Sheehey Furlong & Behm, referred questions to the company. BCBS spokesman Kevin Goddard, vice president of external affairs, declined to comment on a pending lawsuit.
On a related note: Blue Cross has nearly finished reimbursing subscribers through rate reductions for the $3 million in excessive compensation it paid to Milnes, according to Peterson of the Department of Financial Regulation. It’s got about 10 percent left to pay back — or roughly $300,000.
The irony, however, is that the money came out of the company reserve account, which is funded by insurance premiums paid by policyholders. That’s the same pool the company would likely draw from if it’s forced to write Milnes a check for $775,000, and counting.