Wednesday, October 18, 2006

Another (Really Big) One Bites the Dust: CEO McGuire to Retire from UnitedHealth

We have posted repeatedly (see these posts here, here, and here with links backward) about the hugely lavish compensation afforded to the Dr William McGuire, CEO of UnitedHealth Group, one of the largest US insurers/ managed care organizations, and how this remuneration stood in stark contrast to the stated mission of UnitedHealth Group:
UnitedHealth Group is a diversified health and well-being company dedicated to making the health care system work better. The company directs its resources into designing products, providing services and applying technologies that:
- Improve access to health and well-being services;
- Simplify the health care experience;
- Promote quality; and,
- Make health care more affordable.
Most recently, controversy has swirled over the timing of huge stock option grants given to CEO McGuire (see post here). The findings are now in from an internal investigation of the problem, and they are not pretty. Quoting from the Wall Street Journal article by James Bandler and Charles Forelle published October 16,
The scandal over backdated stock options claimed one of corporate America's most successful chief executives, William McGuire of UnitedHealth Group Inc., who agreed to leave the giant health insurer after an internal probe concluded that the stock-option grants that have brought him a huge fortune were likely manipulated.
The probe's findings, released yesterday, provided a detailed picture of how stock-option backdating worked at the company, offering glimpses of cronyism and a culture in which vast sums of compensation were handed out with few controls or written records. Among the troublesome option grants detailed in the report was a massive 1999 award to Dr. McGuire that ranks among the most lucrative ever.

UnitedHealth said Dr. McGuire would immediately relinquish the chairman's post and step down as CEO by Dec. 1. Also leaving is William G. Spears, a member of the board's compensation committee who had deep financial entanglements with Dr. McGuire, which were undisclosed to investors, and David Lubben, the company's general counsel.

At the end of last year, Dr. McGuire's cache of unexercised options was valued at $1.78 billion, a sum far greater than any other U.S. corporate chieftain. Yesterday, UnitedHealth said he agreed to have all of the options issued to him from 1994 through 2002 repriced, likely cutting tens of millions in dollars from their value. But the company left open other financial arrangements with Dr. McGuire, and the exact terms of his departure are likely to be the subject of intense negotiations.

UnitedHealth, which is based in Minnetonka, Minn., and has a market capitalization of $66 billion, also is being investigated by the Securities and Exchange Commission, by federal prosecutors in New York, and by the Minnesota attorney general.

The probe by WilmerHale was headed by William McLucas, a former director of the enforcement division of the SEC. It examined 29 of the largest options grants at UnitedHealth over a 12-year period, and concluded that most likely were backdated to benefit insiders.

Although couched in careful language, the 14-page WilmerHale report suggests that Dr. McGuire misled lawyers conducting the probe of the options grants at issue. To the end, Dr. McGuire insisted that year after year he actually did call or otherwise contact a compensation-committee member to set an options grant in motion on what, in hindsight, turned out to be a wildly favorable day.

'Certain facts run contrary to this assertion,' the WilmerHale report says, citing memoranda Dr. McGuire wrote on or after the purported grant dates referring to possible grants in the future tense.
Additional articles in the media underlined management problems at UnitedHealth. In the New York Times, "a law firm hired by UnitedHealth to investigate the timing of stock options concluded that the company was riddled with poor controls and conflicts of interest." From the Associated Press (in the San Jose Mercury News), "William McGuire ran UnitedHealth Group Inc. like his personal fiefdom, allowing the former CEO and his cronies to gain tremendous wealth with few internal controls to stop them." Furthermore, "the review headed by former SEC top cop Bill McLucas ends up telling a much more important story: That of a controlling leader who put his personal interests ahead of the welfare of the company's shareholders." In addition, "'This shows how a board stopped managing a CEO and just cheered him on,' said Patrick McGurn, executive vice president and special counsel to Institutional Shareholder Services, a proxy advisory firm. 'They just wrote McGuire a blank check.'" In a scathing commentary in the Washington Post, Steven Pearlstein wrote, "Maybe what we have here is the most outrageous corporate scandal since Enron and WorldCom."

Perhaps this is a demonstration of how those ignorant of history are bound to repeat it. Some aspects of the UnitedHealth story now seem strangely reminiscent of the story of the collapse of the Allegheny Health Education and Research Foundation (AHERF), at its time one of the biggest hospital systems in the US, and which became the second largest bankruptcy in the US at the time. Its leader was widely called a "visionary." Later, he was accused of running the system as a personal fiefdom. Yet the story of the fall of AHERF got little national recognition, and almost no recognition in the medical and health care literature, an early example of the anechoic effect. (See my summary of the AHERF story starting on page 5 here.)

So I wonder whether the current UnitedHealth scandal will finally be big enough to open up some eyes about the concentration and abuse of power now pervading US (and global) health care. (For many more examples, just see the archives of Health Care Renewal.)

What has been missing from most of the discussion of the UnitedHealth Group debacle so far is appreciation for its health care context. This is not merely a scandal about lavish executive pay and sloppy management at a big corporation. This is a scandal about mismangement of one of the largest US health care insurers and managed care organizations.

Shouldn't we be wondering if "controlling leader who put his interests ahead of the company's shareholders" also put his interests ahead of the doctors and other health care professionals who had to deal with the company, and most importantly ahead of the patients "served," it that is the word, by the company?

And shouldn't we be wondering if the commercial managed care model, which has failed to control US health care costs, and in this example seemed more devoted to the enrichment of its own executives than saving money for its patients, hasn't been managing care so well, and maybe isn't the model we should be using?

1 comment:

Anonymous said...

Dr. McGuire will still end up with about $1B after the repricing plus other perks, including use of the company plane.

Steve Lucas