The Pennsylvania insurance commissioner has deemed the compensation of the chief executives of Highmark Inc. and Independence Blue Cross “reasonable” under state law.

The examination and finding is part of the aborted merger between the two largest health insurers in the state, which ended in January when the companies jointly withdrew their proposal, filed in April 2007. The report “carried over” when the proposal was withdrawn, according to the Pennsylvania Insurance Department.

“Our report concludes that the compensation packages of Highmark and Independence Blue Cross are reasonable under the applicable legal standard,” said Pennsylvania Insurance Commissioner Joel Ario in a statement. “That standard required us to compare executive compensation at these two companies to comparable companies. Our compensation expert determined that the best comparables were other Blue Cross and Blue Shield companies and major non-profit hospital systems.”

Kenneth Melani

Kenneth Melani, CEO of Pittsburgh, Pa.-based Highmark, the state’s largest insurer and fourth largest nationally, earned $3.2 million in compensation in 2007. That ranked him fifth highest among Blue Cross and Blue Shield affiliates’ CEOs, according to the report.

At Philadelphia, Pa.-based IBC, chief executive Joseph Frick, who earned $2.6 million in compensation in 2007, ranked ninth in salary among Blues’ affiliates, while IBC was the eighth largest Blues affiliate in the country.

Highmark and IBC executive compensation was “generally substantially less” than the compensation given to for-profit health insurers. Ronald A. Williams, CEO of national insurer Aetna, earned $23 million and Philadelphia-based CIGNA’s chief executive, Ed Hanway, earned $25.8 million in 2007, according to the Pennsylvania Insurance Department report.

Ario said Highmark and IBC executive compensation was in the “same general range” as what is paid to executives at major non-profit hospital systems in Pennsylvania. Citing 2006 – the last year for which non-profit hospital’s executive pay is available–Ario said the CEO at Jefferson Health System earned $1.7 million, the CEO of University of Pennsylvania Health System earned $3.5 million and University of Pittsburgh Medical Center earned $4 million. That same year Melani earned $3.2 million and Frick earned $1.6 million.

The issue of executive compensation at health insurance companies has been under great scrutiny in Congress as part of the health care reform discussions. It also has made headlines in Maryland, where William Jews, former CEO of the Blue Cross affiliate, CareFirst, has been batting for several years with state officials over a severance package worth $17 million. Maryland Insurance Commissioner Ralph S. Tyler later cut it in half, to about $9 million, citing state law.

Ario said the focus of his analysis, performed by Jay Angoff, former Missouri insurance commissioner and an expert on executive compensation, was on the “legal standard and what drives competition for executive talent.”

He said other metrics for evaluating appropriate compensations are outside his purview. “Whether the compensation scale is fair in a broader public policy sense, or whether new regulations are needed, are questions that are appropriately left to the legislative branch,” he said.