Wednesday, August 03, 2005

The UnitedHealthGroup-PacifiCare Merger: Do Executives Think They Own The Company?

The Los Angeles Times reported on more details of the UnitedHealth Group and PacifiCare merger. To wit,

Top executives of PacifiCare Health Systems Inc. would earn nearly $230 million if it were acqired by industry giant UnitedHealthGroup Inc. by February 1....
Eighteen PacifiCare executives - such as the company's senior vice president for finance and deputy general counsel - would share $14.5 million in 'change of control' payments.
All 39 of the top executives would share in $215 million in PacifiCare stock options previously granted by the company that would vest immediately. An additional $59 million in stock options for 691 other employees also would vest immediately.
[PacifiCare CEO Howard] Phanstiel holds stock options worth $59 million. Last month, he said he would also receive about $131 million in additional retirement payouts and other incentives not included in figures released Monday.
Other top executives also would learn large payouts, with Chief Financial Officer Gregory W. Scott reaping more than $18 million and general counsel Joseph Konowiecki earning more than $22 million....
We had previously posted about how lucrative this deal would be for PacifiCare CEO Phanstiel, and the discrepancy between the generosity of the deal and the UnitedHealthGroup's stated rationale for it of controlling health care costs, not to mention its stated mission to "make health care more affordable." Since the deal is even more lucrative than it appeared before, this discrepancy is only accented.
The deal did not go over well with everyone the Times interviewed, either.
'When you look at someone who is getting millions of dollars, it seems excessive to anyone whose framework isn't Wall Street, [Cindy] Ehnes [director of the California Department of Managed Care] said. 'For all of us who are agonizing about all the people who are going without healthcare, it's very difficult.'
Wall Street analysts and bankers, however, described the compensation as payoff for the gamble Phanstield and other executives took in joining a troubled company and helping it launch a turnaround in 2002.

Here is another discrepancy, and maybe one that is conceptually even more important. The rationale for the huge payments to top executives of PacifiCare was apparently payment for the risks they took. But what risks did they take? They were paid employees. They had none of their own money at risk when they were hired, and would be paid a salaries even if the company did not do well. The financial risks were actually taken by the owners of the company, that is, the stockholders.
Somehow, executives of this company (and I think of other health care organizations as well) seem to see themselves as the owners of the company, and hence entitled to reap whatever gains they can from, and do whatever they want to their company. The attitude may be L'managed care company c'est moi.
I submit that this erroneous sense of ownership of health care organizations by their salaried executives may be an important cause of some of the cases of mismanagement of health care organizations that we have previously documented.

1 comment:

Blue Cross of California said...

I hope the merger can be a good thing and bring affordable health coverage to many.