California fights insurer's plan to pay $120 million dividend

California Insurance Commissioner Steve Poizner has blocked UnitedHealth Group subsidiary PacifiCare from paying its investors a $120 million dividend, at least temporarily.

The company was set to pay the dividend Dec. 24, 2010, but United announced Dec. 16 that it would delay paying it, according to Poizner's order.

The issue is whether PacifiCare should use money from its reserves to pay a dividend when that money could be swallowed up in fines owed to the state.

The California plan that became part of UnitedHealth Group in 2007 holds $773 million in reserve and planned to pay the dividend from those funds. But United isn't selling new policies underwritten by PacifiCare -- it's selling its customers comparable policies underwritten by a UnitedHealthcare of California. Therefore, PacifiCare can't build up any more reserves.

In January 2008, the Dept. of Insurance and the California Dept. of Managed Health Care announced that PacifiCare had committed thousands of regulatory violations between 2007 and 2009. The company was ordered to pay $3.5 million to the Dept. of Managed Health Care. From the Dept. of Insurance, the maximum fine for the estimated 130,000 violations under state law would be $1.3 billion if the violations were determined to be "willful." An administrative law judge will determine the actual fine.

In early 2010, state officials said more violations had been uncovered, and PacifiCare actually had broken the law nearly 1 million times -- raising the potential fine to $9.9 billion. United has acknowledged problems as it absorbed PacifiCare after purchasing it in 2005. But the company has not admitted to any violations.

Because PacifiCare's potential fine exceeds the $773 million left in its reserve, Poizner ruled that the plan could not deplete its surplus by paying dividends.

The plan to pay a dividend is not dead. While it is holding off on paying the dividend, United is fighting Poizner's ruling.

"We disagree with the commissioner's refusal to allow PacifiCare to issue an ordinary dividend, and it's inappropriate to use this process to try to gain leverage in a separate case about administrative issues that have long since been addressed," United spokeswoman Cheryl Randolph said in an e-mailed statement.