Stock option problems magnifying financial troubles for United

Top executives return options that the company acknowledged were bloated by manipulating the date of their receipt. Meanwhile, United will restate past earnings.

By Jonathan G. Bethely — Posted Nov. 27, 2006

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Fallout from UnitedHealth Group's issuance of stock options in a process known as backdating is hitting the health plan's two top executives, as well as the company's bottom line, after an internal review of the company's options-granting policies.

Outgoing Chair and CEO William McGuire, MD, agreed to forfeit nearly $200 million in stock options already exercised linked to the backdating. He said he would step down Dec. 1. President and Chief Operating Officer Stephen Hemsley, who is also linked to the stock-options probe, is slated to succeed Dr. McGuire as CEO.

Hemsley said he would reduce his past stock compensation by $190 million in both unrealized gains and money he would return. "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," he said in a prepared statement.

In each case, the dollar figure represents the amount of money lost by United repricing the executives' options, awarded between 1994 to 2002. In the process of backdating, the options price -- called a strike price -- is set at the company's lowest stock price of the year, instead of the stock price the date the options were awarded -- thus allowing executives to buy company stock at a deep discount.

Now, United is repricing those options so that their strike price equals the company's highest stock price of the year the options were awarded. That still leaves Dr. McGuire with about $1.6 billion worth of options, which United says were not backdated.

Meanwhile, United also announced that it would need to restate earnings, perhaps all the way back to 1994, because of the backdating issue. The company missed its August deadline for filing its second-quarter 2006 financial statement with the Securities and Exchange Commission and then said it would delay its filing.

United had estimated that the backdating issue would end up costing it $286 million but said in a Nov. 8 SEC filing that it would be "significantly greater."

United is one of nearly 130 companies nationwide under SEC investigation for backdating stock options. The Minnetonka, Minn.-based company said nearly 40 United executives had lost their jobs because of the stock options investigation.

Also, the company's bondholders on Nov. 2 issued United a notice that they would seek immediate repayment of an $850 million issue of notes that were to come due in March 2036. In August, they notified United of alleged violations of the company's agreement with bondholders, including the second-quarter filing delay. The company filed a lawsuit in U.S. District Court in Minneapolis on Oct. 25 to avoid the default, United said in a Nov. 3 SEC filing.

United representatives are not issuing public comments about issues relating to backdating and its fallout.

Hospital battle over

Meanwhile, United and HCA ended a contracting standoff.

The two companies reached a new nationwide contract agreement that runs into 2011, ending a two-month period in Colorado and South Florida where thousands of patients and their physicians were forced to look elsewhere for facilities in which they could receive or give in-network care.

HCA spokesman Jeff Prescott said the new nationwide agreement would replace existing contracts around the country that expire this year.

Specific terms of the deal were not released, but Prescott said, "We think it's a contract that provides us fair reimbursement for the quality of care provided."

United spokesman Tyler Mason said part of the contract ties reimbursement rates to performance and quality measures, something the health plan insisted upon in a new deal.

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