|By Andy Balaskovitz|
After layoffs and declining revenue, Delta Dental is comfortable with its executive compensation. A former board member and a dentist who recently dropped his membership are not.
This story was corrected on May 16 to reflect that the state Office of Financial and Insurance Regulation has regulatory oversight of executive compensation at commercial dental insurance companies and Health Maintenance Organizations, but not nonprofits. The Internal Revenue Service has regulatory oversight of executive compensation at nonprofits. Also, an earlier version of this story stated that the 60 employees who were laid off in 2009 were called back. Those positions were filled, but not entirely by the employees who were laid off.
Three years ago, as Delta Dental of Michigan was laying off dozens of employees and losing big contracts with auto industry retirees, it was uncertain whether the nonprofit dental insurance company’s top officials would respond with pay cuts.
Delta Dental’s reply to City Pulse questions at the time about its top officials’ pay — which in four cases was more than $1 million — was: “Everything is under review.” The Okemos-based company also said it would evaluate first-class travel for officials, bonuses, health and social club memberships and consider scaling back expanding its headquarters on Okemos Road.
But based on tax filings with the Internal Revenue Service since then, it appears Delta has maintained the status quo when it comes to compensation. Former CEO Thomas Fleszar, who retired in April, made $1.5 million in 2010, the most recent filings show. It paid about $10.3 million to 18 of its top employees and $358,000 to 16 board members that same year. The final price tag for the office building was $91 million, $6 million more than what was initially projected, according to previous Delta Dental statements. The company spent nearly $2.4 million in 2010 for travel, including on first class and chartered plane rides. Some Delta Dental board members were paid more than $20,000 in 2010 for what IRS filings show averages to be five hours of work a week.
“I just found it pretty amazing, to tell you the truth,” said Peter Chiaravalli, a Lansing-based dentist who served two three-year terms on Delta Dental’s Board of Directors. Particularly, he said, this comes as business declined in the past few years. Delta Dental’s revenues dropped by nearly $90 million between 2008 and 2010, the company’s latest filings with the IRS show.
And today, Delta Dental has changed its tune. It’s not about evaluating and possibly scaling back such expenses, but that those expenses are on par for similarly sized nonprofit and for-profit insurance companies. Everything is as it should be is how the compensation story goes these days. And after the layoffs in 2009, a spokeswoman says Delta Dental filled those positions and added another 110.
But reviewing Delta Dental’s tax filings begs several questions: How much should CEOs of nonprofits make, particularly as revenues have declined? Should it be comparing itself to for-profit companies? And what separates Delta Dental from for-profit insurance companies?
‘We are not a 501(c)3’
“There’s a misconception out there as to what type of company we are,” said Sarina Gleason, senior public relations officer with Delta Dental. She pointed out five times in an interview last week that Delta Dental is not a 501(c)3 nonprofit corporation, but rather a 501(c)4. Most significantly, Delta Dental’s operating budget does not rely on donations from the community, like United Way or Goodwill, she said.
“We are considered social welfare, and our focus is oral health,” Gleason said. “I do think that a lot of people think that as a nonprofit we’re automatically lumped in with 501(c)3s. The way we operate is very different — we are a business and we provide insurance.”
Gleason referred repeatedly to Delta Dental as a business. But as a 501(c)4 — which allows an entity to be exempt from federal and state income taxes — Delta Dental is not supposed to be a business. According to the IRS, it is supposed to operate exclusively for the promotion of social welfare.
Gleason said Delta Dental executive compensations are reviewed annually and with the help of Towers Watson, a Manhattan-based consulting firm with offices in Ann Arbor and Grand Rapids. Salaries are compared not only with the nonprofit sector, but also the for-profit sector. “Our industry is so competitive, we have to really look at attracting and retaining leadership that is going to lead a successful business.”
As for board members, Gleason said, the IRS filings may not account for “anomalies,” and that there is more to it than a simple five-hour workweek. Yearly pay for board members ranged from $700 to $38,866 for the chairman, Terence Comar in 2010. Immediate past chairman James Hallan made $57,213.
IRS filings say each board member works an average of five hours per week, though Gleason said, “It may not be an accurate reflection of truly what is all involved in that.” But it’s “kind of the same philosophy we have with executive compensation: We need to attract and keep really good board members.”
Delta Dental also pays for first-class or chartered travel and memberships at “social” and “health” clubs for executives. Gleason said it’s “company policy” to fly at coach rates, though, and that “I don’t think first-class travel is the norm.” She added that the memberships are partly for “business use,” but she wouldn’t say specifically where those memberships are.
Also as a 501(c)4, Gleason said Delta Dental is “obligated to allocate money to the community,” as mandated by the federal government. In 2010, this included nearly $600,000 to the Delta Dental Fund for dental education and research programs.
Delta Dental of Michigan is a sister to Delta Dentals of Ohio and Indiana and has affiliates in Kentucky, New Mexico, North Carolina and Tennessee. Together, it’s one of the largest dental insurers in the country. The operation, called “the enterprise,” paid out $2.2 billion for dental treatment for 8.6 million enrollees, according to its website. The entities operate under the nonprofit holding company Renaissance Health Service Corp. Former CEO Thomas Fleszar retired earlier this year, and former chief operating officer Laura Czelada is now leading the company.
Delta Dental’s revenues steadily declined from 2008 to 2010, which is the latest year data is available, down $110 million. In 2009, the company lost $21.5 million, as expenses outpaced revenues. In 2010, the company made $35 million. Ninety-six percent of Delta Dental’s $1.35 billion in revenue comes from insurance payments from customers. Of the $1.31 billion in expenses, compensation for Delta Dental’s top officials and board members exceeded $10 million. “I would say executive compensation, it represents a relatively small amount of expenditures out there today.”
How much should nonprofit
Delta Dental is huge, as far as dental insurance providers go. Gleason said 93 percent of working dentists in Michigan are members. It’s also the insurance provider for the state of Michigan, Michigan State University, the Michigan Public School Employee Retirement System and the University of Michigan.
“They are the 900-pound gorilla,” said Chiaravalli, the former board member.
Michigan nonprofit dental companies are governed by Public Act 125 of 1963. Jason Moon, spokesman for the state Office of Financial and Insurance Regulation, said in an email that the state has “some regulatory oversight over the executive compensation” at commercial dental insurance companies and Health Maintenance Organizations, but not nonprofits. The IRS has regulatory oversight of nonprofits and has a three-step process for determining compensation levels, including comparing salaries to other similarly sized organizations and approval by the company's board.
From afar, the head of the National Council of Nonprofits sees a trend of picking out salaries from some of the largest nonprofits in the country.
“There’s been a fair amount of scrutiny in the media and politicians of nonprofits’ salaries,” said Tim Delany, president and CEO of the Washington-based National Council of Nonprofits. “What seems to have been lost is the similar review of what’s happening in the private sector. I think the Occupy movement was illustrative of how the American public is concerned about the private sector and the business community — salaries are way out of whack.”
Delaney, who declined to speak specifically about Delta Dental, added: “There should be attention, but not just singling out nonprofits.”
Delaney said federal legislation allowing for nonprofits includes “the understanding that there needs to be reasonable compensation. The entire debate is, ‘What is reasonable?’”
In legalese, this is called “rebuttable presumption.” In at least Delta Dental’s case, comparing itself with for profit companies is commonplace.
“There are a variety of factors that get poured into the equation beyond just what someone else is getting paid,” Delaney said, such as how many customers the company has and how large of a region it serves.
With more than 1 million nonprofits in the United States, excessive compensation “probably doesn’t happen that frequently but enough that a story everyday wouldn’t surprise me,” Delaney said. The “outliers,” he added, are “normally with large institutions with the resources — they’re the ones that then generate the stories. It’s a frustration felt by many nonprofits, these large institutional nonprofits are capturing a lot of ink in press coverage and making it look as though all nonprofit CEOs are overpaid when in fact that’s a very narrow set of circumstances. … It’s making it appear as everyone is fat and happy in the nonprofit sector when in reality most of us are running around with bloodshot eyes with no sleep and no resources.”
Pickets and politics
Meanwhile, a contingent of Delta Dental employees are upset over stalled contract negotiations. WLNS-TV reported last week that dozens of unionized Delta Dental employees picketed outside of the company’s new $91 million headquarters on Okemos Road on a recent Saturday. WLNS also reported that nearly 200 UAW union members are working without a contract at Delta Dental.
Repeated attempts for comment from UAW officials were unsuccessful. WLNS quoted UAW Local 889 unit chairwoman Barbara Smith as saying: “We feel that we’re part of the company being successful, and we just want our fair share of what we think we deserve.”
Negotiations have been ongoing since January. Delta Dental is reportedly asking for concessions the union is not willing to make. Smith also called the company a “dictatorship.”
Gleason would not discuss specifics about the informational picket and emphasized it was not a strike. “At this point, we’re just trying to work out an agreement,” she said.
On a national scale, a Republican congressman from Arizona introduced legislation this year meant to eliminate certain insurance practices that prohibit a secondary plan from paying any of the costs of care. (For example, if two people in a household each pay dental insurance premiums, some policies prohibit the second plan from covering costs.) The bill would also allow patients to assign benefits to dentists who may not participate in an insurance company’s network, rather than patients paying for services in full and waiting to be reimbursed by the insurance company.
The Dental Insurance Fairness Act of 2012 is now in a House committee. The American Dental Association supports the legislation, saying in a statement it would make dental insurance more “affordable and accessible,” but Delta Dental does not.
“Delta Dental has always opposed assignment of benefits because it really compromises the value and the savings that are associated with those dentists in our network,” Gleason said. “As part of our negotiated fees with our dentists within our network, it really ignores this aspect. … Our concern is that this legislation will permit dentists in general to charge patients more because they may have to have more than one policy.”
Because of its 501(c)4 nonprofit status, Delta Dental is allowed to participate as an organization in the political process, though Gleason said in a follow-up email that Delta Dental is “a strictly non-partisan organization.”
Filings from 2010 show Delta Dental made a $5,000 donation to Attorney General Bill Schuette’s administrative account, “On Duty for Michigan,” also known as a 527 account. It also gave $10,000 to the Kasich Taylor New Day Committee, a committee supporting the re-election and inauguration of Ohio Republican Gov. John Kasich. The company also gave $5,000 to Freedom Vote; $10,000 to Celebrating the Power of Michigan, Inc.; and $15,000 to the Michigan Economic Development Foundation. These contributions appear as “grants and other assistance to governments and organizations” on its tax filings.
Delta Dental’s Code of Ethics says the organization makes no contributions to candidates for federal office. But Delta Dental’s political action committee does. In 2011, it contributed to both Democratic and Republican congressional candidates, including David Camp, Hansen Clarke, John Dingell, Sander Levin, Debbie Stabenow and Mike Rogers. All of those contributions were between $1,000 and $2,500 each, according to CampaignMoney.com.
Dentists speak out
For a couple of local dentists — one of whom served two three-year terms on Delta Dental’s Board of Directors — the culture of compensation at Delta Dental is alarming.
“I was quite surprised,” Peter Chiararvalli said when he looked at the latest corporate filings with the IRS. It’s “kind of an interesting thing,” Chiararvalli said, that board members are paid more than $20,000 a year yet review and vote on annual salaries of top executives. “It’s kind of patting each other’s back.”
Chiaravalli said he earned about $14,000 over the eight years he served on Delta Dental’s board, or less than $2,000 a year (he filled out an incomplete term for another board member). Nine board members made over $20,000 each in 2010, while two others made less than $2,000. Lu Battaglieri, the former president of the Michigan Education Association, served several years on the Delta Dental board. That job paid $24,400 in 2010. In April, Battaglieri and his wife, Teri, were hired to full-time positions at Delta Dental. Lu Battaglieri now serves as senior vice president and chief relationship officer, while Teri Battaglieri works in Delta Dental’s “research and data institute,” Gleason said. Gleason added that she doesn’t think that’s “unusual,” and that it does not violate the company’s conflict of interest policy. If one of the Battaglieri’s reported directly to the other, Gleason said, “that would be unusual.”
Chiaravalli is also a member of Delta Dental’s network, meaning he is paid through insurance premiums for the dental services he provides.
“I would say that’s what got me most interested: Looking at the large salaries which I thought were inappropriate for a nonprofit organization,” he said. “If I were a purchaser, a school district struggling with budgets, I’d be a little concerned if the cost of Delta insurance is more than some other corporation. I’d be a little concerned about someone pulling down a multimillion dollar salary.”
Mark Johnston, another Lansing-based dentist, dropped his contract with Delta Dental recently, due to a combination of what seem like lavish salaries and Delta Dental coverage policies.
“It really has morphed over the last 30, 35 years into something that is now a lot different than where it started out,” said Johnston, who has offices on West Mt. Hope Avenue near the Country Club of Lansing. “Part of my frustration is that the providers — my friends, classmates, colleagues — keep getting less and less reimbursement and yet their costs keep going up and up and they really want to provide good quality care to their patients.”
Johnston also said a common form sent to patients from Delta Dental states that their dentist provided them too costly a service than what was needed and insurance won’t cover it.
“It makes the dentist look like a money-grabbing, greedy bastard,” Johnston said.
Johnston canceled his contract with Delta Dental recently, meaning he is a “non-participatory dentist.” If Delta Dental covers a patient, he submits a claim for the patient; the patient is paid for the insurance claim; and the patient then pays Johnston. He said “part of my frustration in canceling” had to do with the way his contract with Delta Dental was structured and the lack of flexibility he had with charging patients for services. Sometimes, he was unable to give long-time customers or those facing financial hardship a reduced rate if they didn’t carry insurance. “Now I can give them a break where I see fit,” Johnston said.
“A lot of people fear that if I drop my contract with Delta, my patients are going to go to another dentist who has that contract,” Johnston said, referring to the dilemma faced by dentists who may consider what he did. “I understand their fear, but at some point you’ve got to stand up and decide what’s best as a business decision.”
For Johnston, the “large compensation for executive staff there” and the “very elaborate” new building that are paid by customers buying insurance only add to his frustration. “You have to have a building, but maybe not the Taj Mahal. … When you see those compensations, it’s like, ‘Wow.’ I’m not opposed to businesses making profits, it just seems a little excessive.”
CEO compensation at nonprofit dental insurance companies and Health Maintenance Organizations based in Michigan that exclusively write dental insurance or have it as a major part of their business. It includes salary, bonuses and benefits. Executive compensation at Delta Dental is compared with similarly sized companies in both the nonprofit and for-profit sector.
This information is filed every three years with the state Office of Financial and Insurance Regulation. However, in form 990 filings with the IRS, compensation for former Delta Dental CEO Thomas Fleszar show he made $1.9 million in 2009 and $1.5 million in 2010. When asked about the discrepancy, Jason Moon, spokesman for OFIR, did not comment beyond: “The 990 is not filed with us.”
Thomas J. Fleszar, CEO Delta Dental Plan of Michigan, Inc.
William Nicholson CEO, President, COO Michigan Dental Plan, Inc.
John Morgan Jr., President Midwestern Dental Plans, Inc.
David Lynn Holmberg CEO, Chairman of the Board United Concordia Dental Plans of the Midwest, Inc.
Stacia Nalani Almquist, President United Dental Care of Michigan, Inc.
Sam Lentine, CEO/Secretary Golden Dental Plans, Inc.
Joseph Lentine, CEO (as of Jan. 1, 2010) Dencap Dental Plans, Inc.
2009: $50,700 (Senior CEO)
Richard Goren, CEO Commonwealth Limited Health Services Corp.
*Filings with the IRS show Fleszar made $1,951,984 in 2009.
**Filings with the IRS show Fleszar made $1,571,019 in 2010.
Source: Michigan Office of Financial and Insurance Regulation