UnitedHealth's Options Just Got Messier
The health insurer says costs for backdated stock options will balloon beyond its prior estimates. The new CEO has his work cut out for him
November 9, 2006, 12:15AM EST
by Sonja Ryst
UnitedHealth Group (UNH) faces a whopper of a bill from backdated stock options. It's also hoping to renew favor with investors by repricing options for several executives and bringing new leaders into its executive suite.
Less than a month after ousting its CEO over the options scandal, the suburban Minneapolis health insurer told investors Nov. 8 that it expects to take "significantly greater" charges than the $286 million it had previously predicted. The company also said its financial statements for the past dozen years are suspect and shouldn't be relied on, pending restatements. The reviews also will cause the company to delay filing its third-quarter report with the Securities & Exchange Commission.
The news came as UnitedHealth announced that its new chief executive, Stephen Hemsley, has agreed to have his options from 1997 and 2002 reset to the highest share price in the year in which they were granted. He also agreed to give up gains from options that were suspended in 1999 and reinstituted in August, 2000. The decision cuts the value of his options by $190 million. "My decision is in keeping with my personal goal of avoiding even the appearance of any unintended benefit from any past option grants to me," Hemsley said in a press release. Under Hemsley's new four-year employment agreement with UnitedHealth, he's guaranteed only a base salary.
Widespread Restatements
Hemsley replaces company founder and current CEO, Dr. William McGuire, who will have the exercise prices reset for all of his options with recorded grant dates between 1994 and 2002. McGuire resigned as board chairman on Oct. 15 after an external review found that many of his stock options were most likely backdated (see BusinessWeek.com, 10/16/06, "Hard Times for UnitedHealth").
McGuire is scheduled to leave the company on Dec. 1. The terms of his severance are still being negotiated. At the end of last year, McGuire's options were worth $1.78 billion. He has agreed to have them repriced to their highest point in the grant year. That will shave about $200 million from the value of McGuire's options, his attorney, David Brodsky, told The Associated Press on Wednesday.
The options backdating scandal has snared more than 120 companies to date, many of which will need to restate results to account for the compensation expense and pay taxes for options that were mishandled. The practice of backdating, which is allowed under accounting rules as long as it's disclosed, allows the recipient of a stock option to snag an immediate paper gain, since the strike price is set below the current share price.
First Priority
UnitedHealth also ousted its chief financial officer, Patrick Erlandson, who has been in that position since 2001. Erlandson will remain with the company, and be succeeded by G. Mike Mikan, a senior vice-president of finance. In addition, UnitedHealth designated Forrest Burke as acting general counsel, from his former role as general counsel for UnitedHealthcare, Uniprise, and specialized-care services.
The company says senior executives and its former general counsel, David Lubben, have agreed to reset the dates on all options from 1994 to 2002 to the day they were actually granted. They also have agreed to a formula to account for income on options they have already exercised. "The effect of these changes is to remove any potential whatsoever for these individuals to have financially benefited from any option misdating," the company said.
Cleaning up the options mess is Job No. 1 for Hemsley, who joined the company in 1997. In a conference call with analysts last month, he apologized for the fiasco and promised new managers with "stature, expertise, and integrity. We will be unrelenting in achieving the highest standards for governance and integrity" (see BusinessWeek.com, 10/18/06, "The Ties UnitedHealth Failed to Disclose").
Changing the Culture
Still, some analysts want to see results—and the debacle's costs—before saying the company has found its way. "Their corporate governance has been abysmal, and they've made a few changes over the last couple months," said Brandon Troegle, an analyst at research firm Morningstar in Chicago. "I think they're all very positive changes, but they're reactionary. There's always more they could do."
The latest options news, coupled with uncertainty over what newly empowered Democrats in Washington might plan for the privatized health industry, sent UnitedHealth shares down 3.2% on Nov. 8, to $48, on the New York Stock Exchange. The stock is down by more than a third from its 52-week high of $64.61 in December.
"They have to prove there's a cultural change in the organization," says Sheryl Skolnick, a senior vice-president at investment bank CRT Capital Group. She's watching to see what sort of retirement package McGuire will get. The whole mess, Skolnick predicts, will be largely closed by the spring. Investors will be hoping that estimate proves accurate.
Ryst is a reporter for BusinessWeek.com in New York.
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