United settles lawsuits, warns of falling profits

The company doesn't say how recent developments will affect physicians, but it does tell investors it will intensify its "care management discipline."

By Emily Berry — Posted July 28, 2008

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UnitedHealth Group let loose a long list of news in early July that proved unsettling to investors.

Executives didn't say whether United's problems will change the way it does business with doctors. But they did say the company is looking to improve savings and boost revenues on a local level.

United issued a series of press releases on July 2, with announcements concerning profits, layoffs, reorganizations and an agreement in two federal class-action lawsuits.

ProfitsThe company's profits for 2008 will be lower than previously projected. The company revised its year-end forecast from an estimated $3.55 to $3.60 per share, projected in April, to between $2.95 and $3.05 per share, a drop of between 15% and 17%.

The company is still projecting $6.5 billion in earnings from operations, down from $8 billion in 2007. These are earnings from operations, not net earnings after such items as income taxes and depreciation -- net earnings were $4.65 billion in 2007.

United CEO Stephen Hemsley blamed enrollment drops and higher-than-expected costs, particularly in its Medicare business, for lowered expectations for the year.

LawsuitsThe company reached an agreement to settle two federal class-action lawsuits over alleged stock-option backdating.

United, and current and former executives, have faced multiple investigations and lawsuits since 2006 over allegations the company improperly backdated stock-option grants to executives. Backdating -- adjusting the option grant price to a day when the company's stock peaked -- is not illegal, but must be reported to investors.

United's proposed settlement with plaintiff investors, led by the California Public Employees' Retirement System, or CalPERS, would cost the company $895 million.

According to CalPERS, it holds nearly 5 million shares of United's stock, valued at about $127 million at the time the agreement was announced.

The company also reached an agreement to pay $17 million in a second settlement over stock-option backdating, but most of that payment would come from United's insurers.

Neither individual executives nor United has admitted wrongdoing over its options. But the company agreed to a set of new corporate governance rules as part of the proposed deal. Hemsley, who has apologized for the company's problems, during the last two years has surrendered $190 million of his own stock options, and repriced others to reduce their value by $50 million.

Hemsley said the settlement would allow the company to move forward and avoid a lengthy legal battle.

If approved by the federal court, the UnitedHealth Group board and the CalPERS board, the class-action settlement would resolve claims against the company and its current executives. But former United Chair and CEO William McGuire, MD, would remain a defendant in the case, as would David Lubben, United's former general counsel.

CalPERS spokesman Clark McKinley said he couldn't comment on why those two were excluded from the agreement.

Dr. McGuire in January agreed to settle an inquiry by the Securities and Exchange Commission into whether he acted improperly in backdating stock-option grants and failing to disclose that to investors. The deal cost him $468 million in cash and stock options. He resigned effective Dec. 1, 2006, several months after the SEC first looked into United's stock-option practices.

Lubben agreed to give up $28 million in stock options as part of the same SEC settlement. Neither executive admitted wrongdoing.

State and federal criminal investigations of United's stock-backdating practices and disclosures still are under way.

LayoffsUnited will lay off 4,000 workers -- about 5% of its work force -- from all sections of its business, a cut Hemsley promised would not affect its service. The job loss was connected to the reduced profit outlook, both of which Hemsley blamed on "an intensely competitive commercial business environment."

United has reported that its full-risk business has fallen in favor of companies electing to hire United as an administrator only. Full-risk commercial business has a higher profit margin than managing coverage for companies that elect to shoulder their own financial risk.

ReorganizationIn a bid for efficiency, United has reorganized its business to eliminate its Uniprise brand and bring all national commercial health insurance accounts under the UnitedHealthcare umbrella.

United's stock price dropped in early July following the company's forecast revision. The stock traded at $22.58 July 10, down from $51.51 the same day in 2007 and a high of $58.94 over the previous 52 weeks. That high was set on Dec. 21, 2007.

It is unclear whether lower-than-expected profits over the past several months means that United will try to drive down what it spends on paying doctors.

United spokesman Tyler Mason said reimbursement rates are not related to the company's performance or to structural changes it announced.

"In both good and challenging times, we have a mandate from employers who are our customers to do everything possible to hold down cost increases -- but that is just one aspect of our business that we are always concerned with," Mason said in a statement.

In briefing investors and Wall Street analysts who watch United, executives did not address contracts with physicians. Hemsley said the company was "intensifying [its] focus on local-market dynamics and solutions, including underwriting and care management discipline."

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