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Within a day after UnitedHealth Group's CEO, William McGuire, was ousted, the health-insurance giant was already trying to assure its business customers that the scandal wouldn't affect operations.
"The executives who have been managing the day-to-day business operations remain in place ... ensuring continuity of business and growth plans," the company wrote to clients in a Monday letter that was obtained by the Star Tribune.
Yet the scandal engulfing UnitedHealth this past week comes at a particularly difficult time for the insurer, which is struggling with slowing growth in its core business of managing health benefits for companies and their workers.
In the past, the company could rely on acquisitions to overcome periods of slow growth. But those deals are drying up. And industry analysts say it could take a year, possibly longer, to mop up the myriad problems related to the stock-option mess, which so far, besides McGuire, has swallowed one other senior executive and a board member, and pushed the company to promise a major revamping of the board.
The company still faces shareholder lawsuits, state and federal investigations and possible earnings restatements.
It's unlikely that insurance carriers will agree to be acquired by UnitedHealth until these issues are behind them and the company's credibility is restored with shareholders and regulators, analysts said. What's more, the sheer size of McGuire's compensation package -- he had $1.6 billion in unexercised stock options at the end of 2005 -- could prompt some smaller employers to question whether they should renew their business with the company during the next enrollment period, some benefits consultants said.
"Someone looking at UnitedHealth for the first time might say, 'Aren't you the guys that went through that stock options scandal?' " said David Delahanty, a health care consultant at Watson Wyatt & Co. "They might look at UnitedHealth and see this senior management as too greedy."
Up until a year ago, analyst reports about UnitedHealth were almost universally positive. And for good reason. The company was posting record earnings, it was expanding into new markets, and it was starting to reap the benefits from a powerful alliance with AARP, the seniors' group, to manage Medicare drug benefits for seniors under the government's Part D prescription drug program.
But the company's strong profit growth masked the fact that employer-sponsored health care was in decline. Companies have been shedding insurance coverage for workers for the past five years. This year, 59 percent of all workers are covered by an employer-sponsored health plan, compared with a peak of 65 percent in 2001. That decline represents about 5 million fewer workers getting insurance through their employers.
Premium growth is also slowing, as employers try to rein in costs. This year, health care premiums paid by firms and their employees rose an average of 7.7 percent -- the lowest growth rate since 2000, according to the Henry J. Kaiser Family Foundation. The cost of insurance is now $11,480 a year for families and $4,242 a year for individuals.
Resisting premium cuts
Some insurers have tried to fight this trend by cutting premiums, but UnitedHealth insists it will not sacrifice profit margins for the sake of winning business. As a result, some employers have dropped UnitedHealth in favor of cheaper plans. The company said Thursday that enrollment in health plans it insures will be flat in the fourth quarter and will decline in the first quarter of next year.
"Employers have said, 'No more. We can't tolerate these kind of double-digit premium increases year after year, so we have to take a more active role in constraining costs,' " said Sheryl Skolnick, a senior analyst with brokerage firm CRT Capital Group in Stamford, Conn. "It's very, very hard to grow membership in that environment."
McGuire recognized this trend sooner than many of his competitors, and he pushed the company into higher-growth markets such as senior health care, private health savings accounts and technology data services. UnitedHealth also was at the forefront of electronic medicine, introducing swipe-card technology that would give doctors and hospitals instant access to benefits information.
Even so, those specialized areas remain a small part of UnitedHealth's overall business. About 90 percent of its sales last year came from health care premiums -- a business that McGuire has grown primarily by acquiring regional insurers across the country.
Indeed, the $16.5 billion the company has spent on acquisitions over the past three years has made it an earnings powerhouse, with profits nearly quadrupling to $3.3 billion from 2001 to 2005. In late 2005, UnitedHealth added about 9 million customers, primarily on the West Coast, by agreeing to pay $8.1 billion for PacifiCare Health Systems.
Largely as a result of its acquisitions, UnitedHealth now serves about 70 million Americans, or about one out of every four.
Investors who bought stock in the company before McGuire began his acquisition spree have been handsomely rewarded. Someone who invested $10,000 in the company at the end of 1990, when McGuire began his tenure, would own stock worth $703,472, based on Thursday's closing stock price.
Once a struggling HMO
The company's rocket-like growth still surprises some who remember UnitedHealth from two decades ago, when it was little different from hundreds of other struggling HMOs across the country.
"If you go back to the 1980s, this was a company that was running fast and loose and was still trying to get itself organized," said George Gmach, a Plymouth-based human resources consultant and a former employee of a UnitedHealth subsidiary. "When McGuire came on board, they really focused their efforts on buying other businesses, and the stock price just seemed to climb with every acquisition."
But the company's acquisition-based growth strategy may be winding down. As UnitedHealth gets larger, there are simply fewer companies left to acquire that would make a meaningful contribution to its earnings, analysts said. Antitrust concerns also could get in the way. UnitedHealth had to divest some of PacifiCare's business in Arizona and Colorado to satisfy regulators concerned about the company's size.
Now, with federal regulators scrutinizing the company's stock-option grants, deals will be even harder to come by, say analysts. "They really have to get these issues resolved before they can make any big acquisitions," said Manny Weintraub, managing director of Integre Advisors, an investment firm in New York that owns UnitedHealth shares.
Though the company is trying to maintain normalcy -- the board promoted its longtime president and chief operating officer, Stephen Hemsley, to McGuire's top spot -- there are signs the stock-option scandal might get worse before it gets better.
About a dozen lawsuits have been filed against the company. The Justice Department, Securities and Exchange Commission, Internal Revenue Service and Minnesota attorney general's office are all conducting independent investigations. The Senate Finance Committee also has requested records on McGuire's compensation.
'Jaw-dropping' excess
"It's remarkable how they just backed up the truck and loaded up the options," said Charles Mulford, an accounting professor at the Georgia Institute of Technology. "The magnitude of the thing, even at a time when we're somewhat jaded by large compensation packages [to executives], is jaw-dropping."
UnitedHealth's own investigation, besides citing the likely backdating of option grants, found evidence of a company skirting accounting and disclosure rules and a board beholden to its powerful chief executive.
The revelations that UnitedHealth's problems extended beyond stock options likely will encourage federal authorities and civil attorneys to dig deeper for evidence of further improprieties, warned Beth Young, senior research associate at the Corporate Library, a Portland, Maine, firm that researches corporate governance and compensation practices.
"Taken together, this [report by the outside legal counsel] suggests that there might be more issues lurking behind the surface that we're not aware of," she said.
The St. Paul Teachers Retirement Fund Association, which owns $2 million worth of UnitedHealth stock, is a plaintiff in a September lawsuit filed against the company accusing it of breaching its fiduciary duty to shareholders. Phillip Kapler, the association's executive director, said he "wasn't at all satisfied" by the company's Oct. 15 announcement that McGuire, board member William Spears and UnitedHealth's legal counsel, David Lubben, would depart. He is particularly concerned that the board promoted Hemsley to chief executive even though he may have received a substantial number of backdated options, according to the report.
"Everyone wants to focus on one person, a fall guy," Kapler said. "But these are very difficult activities for one, two or three people to carry off on their own."
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