The mounting stock-options backdating scandal at UnitedHealth Group, which resulted in last week's stunning ouster of longtime leader William McGuire, is playing differently on Wall Street than it is at hospitals and doctors' offices.
How these groups are reacting reflects how they've fared as Minnetonka, Minn.-based UnitedHealth has morphed over the years from a struggling regional health plan into an insurance empire with 28.3 million members and expected 2006 revenue of $72 billion.
Much of the financial community mourned the departure of McGuire, a former physician who has been widely revered as a healthcare visionary. But for many providers, the management shake-up -- and the public scrutiny that's accompanied it -- was long overdue at a company they say has unfairly enriched itself and its executives by squeezing reimbursements, delaying payments and pressuring doctors and hospitals to cut back on care.
"We've been complaining for years now about this type of corporate culture that's allowed them to operate with very flexible ethics," said David Rosen, president and chief executive officer of 588-bed Jamaica (N.Y.) Hospital Medical Center. "We've been really, really unhappy with their abuse of power, and it's refreshing in a way that someone else is finally taking a look at this, even if it's from a different (i.e., option-backdating) perspective."
Jamaica is suing UnitedHealth's Oxford Health Plans unit over a contract dispute that began in 2004. According to the lawsuit, Oxford agreed to pay higher rates that December, but delayed signing the contract and continued to pay Jamaica the old rate for several months. Then the insurer allegedly backdated the contract to prevent Jamaica from opting out of the agreement, an action Rosen says Oxford officials have admitted to in court papers.
UnitedHealth spokesman Tyler Mason said he could neither confirm nor deny that the contract was backdated. But he emphasized that "there is absolutely no link between the options issue and reimbursements, and it would be completely misleading to draw any comparisons between the two."
McGuire announced his resignation as UnitedHealth's chairman and CEO last week after an internal probe concluded many of the stock options bestowed upon him and other executives over the past 12 years were surreptitiously timed to maximize their value. President and Chief Operating Officer Stephen Hemsley will take over as CEO on Dec. 1. Richard Burke, a company director, was named nonexecutive chairman.
UnitedHealth also dismissed its general counsel and the head of its board's compensation committee, and said five other directors would be forced out over the next three years in what amounted to a sweeping overhaul of its governance practices and leadership ranks.
At the end of 2005, McGuire held $1.6 billion in exercisable stock options. The 58-year-old executive agreed to have all of the options issued to him between 1994 and 2002 re-priced to each year's highest share price, cutting what analysts estimate will be about $100 million from his holdings.
UnitedHealth still faces investigations by the Securities and Exchange Commission, the Internal Revenue Service and the Justice Department, as well as two shareholder lawsuits. Last week, Sens. Chuck Grassley (R-Iowa) and Max Baucus (D-Mont.) also sent letters to UnitedHealth officials questioning the appropriateness of McGuire's severance package, which, if left in place, could amount to $1.1 billion in stock options and other benefits, including an annual pension of $5.1 million. Mason said the company is still reviewing the terms of McGuire's compensation.
Sheryl Skolnick, an analyst with CRT Capital Group, said she was "outraged" by the com-pany's apparent lack of internal controls. But she added that McGuire's resignation would be a "big loss" for the healthcare industry, which she says has benefited greatly from McGuire's influence on advancing evidence-based medicine, information technology and accessibility.
But news of McGuire's resignation was received quite differently by providers and patient-rights groups, many of whom contend UnitedHealth's robust earnings growth and generous executive-pay packages have come at the expense of better care.
"His replacement was well-deserved," said Brent Mulgrew, executive director of the Ohio State Medical Association. "It offends me personally how much money McGuire alone has taken out the healthcare delivery system. ... And it reinforces my belief that, to a significant number of people in the payer community, healthcare is merely about moving money from one place to another, and often into their individual pockets."
The revelations of McGuire's controversial gains are particularly galling, some providers say, because they come at a time when insurers have been clamping down at the negotiating table (Oct. 2, p. 6). "When we're trying to get an extra dollar or an extra couple of dollars for a procedure, seeing these kinds of pay packages makes us twinge," said Peter Bastone, president and CEO of 272-bed Mission Hospital, Mission Viejo, Calif.
And UnitedHealth has been a particularly hardball player, says Robert Seligson, president of the Physicians Advocacy Institute, which represents the state medical associations involved in a long-running class-action lawsuit that accused the nation's largest health insurers of systematically shortchanging physicians. While seven other insurers reached multimillion-dollar settlements with physicians over the past three years, UnitedHealth remained one of just two holdouts. The lawsuit was ultimately dismissed June 19 by a federal judge in Miami, but the plaintiffs have appealed.
Seligson, however, says he's optimistic that the increased scrutiny UnitedHealth now faces will prompt the company's new leadership to take a more conciliatory stance toward providers. "We're hoping it'll be a new day," Seligson said, adding that the institute sent Hemsley a letter last week asking him to "begin to repair the years of damaged relationships."
Others, though, aren't so optimistic. Many industry observers said they viewed Hemsley's promotion to CEO as a sign that UnitedHealth plans to stay the course that boosted its stock price nearly 8,500% over McGuire's 15-year tenure as CEO. "They may not dole out the same options packages in the future, but their main goal as a for-profit company will always be to make more money than the year before," said Robert Hayes, president of the Medicare Rights Center, New York. "So if we're waiting for UnitedHealth -- or Aetna or Humana, for that matter -- to lead the charge toward a fairer healthcare system, we're in trouble."