Obamacare Revamp Would Fatten Insurer Tax Break for CEO Pay

(Bloomberg) -- Health insurance companies stand to gain a bigger tax break for CEO pay in the Obamacare revamp.

The bill unveiled Monday would scrap the limitation for insurers on how much executive compensation is tax deductible. The new proposal lifts the guaranteed deduction to $1 million from $500,000 established by the Affordable Care Act and also lets insurers deduct any pay linked to performance.

The threshold set by the Obama administration was designed to discourage companies from letting any increases in revenue go to executive bonuses rather than patient care. The measure would be removed at the end of 2017 if the proposal put forth by Republicans, called the American Health Care Act, becomes law. It would also bring insurers on par with other public U.S. companies.

The $500,000 cap was part of “a big push to ensure that government dollars are kept separate from compensation dollars,” John Trentacoste, a managing director at executive pay consulting firm Farient Advisors, said in an email.

Republicans are seeking to phase out key parts of former President Obama's signature health care program and help citizens purchase insurance via an age-based tax credit. It's not clear whether the plan can win the support of House conservatives or clear the Senate. President Trump is also seeking to curb drug prices and said Tuesday in a tweet he's pursuing a new system for industry competition. The tweet pushed pharmaceutical stocks down.

Industry Pay

Starting in 2013, the ACA lowered the deduction limit for health insurers to $500,000 for a company's CEO and three other top-paid executives. It also removed the deductibility for pay above the guaranteed limit that's linked to company results.

It's difficult to discern whether the mandate has helped curb executive payouts because compensation levels are set based on a myriad of factors. Reported pay for UnitedHealth Group Inc.'s Stephen Hemsley grew by 20 percent over the two years after the $500,000 deduction limit was put in place as the company's revenue doubled. Pay for Cigna Corp.'s CEO David Cordani rose by 28 percent over the same period while Joseph Molina, CEO of Molina Healthcare Inc., saw his pay fall by almost 14 percent. In 2015, Hemsley received a pay package of $14.5 million, Cordani $17.3 million and Molina $10.3 million.

Also, the tax breaks companies can receive under the ACA provision are relatively small when measured against tens of billions of dollars in revenue the industry reaps. The topic therefore tends to get more attention publicly than in boardrooms.

The idea to reduce the deductibility of executive compensation was first hatched in the early 1990s and signed into law by President Bill Clinton. The move was intended to curb the rise in executive pay and ensure company bosses only got paid if their businesses and shareholders did well. Instead, it made $1 million the default salary for public company CEOs and helped spur the use of stock options and other equity awards, which sent executive pay soaring during the bull market of the 1990s.

To contact the reporter on this story: Anders Melin in New York at amelin3@bloomberg.net.

To contact the editors responsible for this story: Brandon Kochkodin at bkochkodin@bloomberg.net, Alan Mirabella, Margaret Collins