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UnitedHealth Agrees To Pay $912 Million To Settle Suits

July 3, 2008
Vanessa Fuhrmans
© 2008 Wall Street Journal

In the largest settlement to emerge from an options-backdating case, UnitedHealth Group Inc. agreed to pay more than $900 million to resolve shareholder lawsuits. It also signaled more tough times ahead for the health insurance industry, as it slashed its 2008 profit outlook and said it would cut about 5% of its work force.

The payout comes nearly two years after revelations of stock-options backdating triggered the ouster of UnitedHealth's longtime chief executive, William McGuire. The settlement puts most of UnitedHealth's legal issues stemming from the scandal behind it, but the insurer now has to grapple with other problems, including operational missteps, growing competitive pressures and a harsh economic climate. UnitedHealth's stock-options problems had remained a distraction, partly because a class-action lawsuit led by the California Public Employees' Retirement System grew more contentious and public in recent months. Plaintiffs' attorneys in the suit had a string of preliminary court victories, including a ruling last month to unseal parts of potentially embarrassing company emails and memos discussing UnitedHealth's previous option-granting practices.

To put the class-action behind it, the nation's largest insurer by members said it would pay shareholders $895 million, more than double the combined recoveries in all previous backdating cases, according to RiskMetrics Group Inc.'s ISS Governance Services unit. It also agreed to resolve a smaller class action for $17 million.

Since 2006, dozens of companies have been found to have manipulated the dates on which stock options were awarded. In retrospectively picking dates when stock prices were at low points, they allowed executives the chance to reap outsize gains. The scandal has led to more than 80 financial restatements, dozens of executive dismissals, and civil and criminal government investigations. In the second-largest backdating settlement to date, Brocade Communications Systems Inc. agreed a month ago to pay $160 million to settle a shareholder class-action suit.

UnitedHealth's settlement of the Calpers-led lawsuit doesn't include Dr. McGuire or David Lubben, the company's former general counsel who was also ousted after a board-commissioned probe of the company's option-dating practices. Those claims will continue toward trial proceedings, which are expected to begin in September.

"Despite this settlement by the company, Dr. McGuire will continue to fight because he is not liable for any alleged shareholder losses," David Brodsky, Dr. McGuire's attorney, said in a statement. He added that, "after complete fact discovery, there is no evidence that would establish that Dr. McGuire knew that UnitedHealth's accounting for stock option grants or financial disclosures were false or misleading."

Meanwhile, UnitedHealth faces more pressing woes in its operations. On Wednesday, it cut its earnings-per-share forecast, excluding special items, to between $2.95 and $3.05, down from its earlier projection of $3.55 to $3.60 -- the second time this year that it has reduced its profit outlook. After surging nearly 7% higher earlier in the day on hopes the company was putting the worst of its troubles behind it, the stock closed down 2% at $25.12 Wednesday on a grimmer assessment. So far, this year, the stock has fallen more than 56%, the steepest decline of any of the industry's biggest players.

Amid tougher economic times, employers have been cutting jobs with health benefits and switching to lower-priced health plans that are less profitable for the carriers. With the market for health insurance shrinking, more insurers are trying to compete for business more intensely on prices, which is cutting into the record profit margins the industry enjoyed for several years.

Until recently, UnitedHealth preferred to lose some business and keep raising its premiums than risk its profit margins by holding the line on premiums. Now, UnitedHealth appears to be making more concessions on premium increases to prevent the loss of more profitable customers. Still, on a conference call with analysts Wednesday, Chief Executive Stephen Hemsley said the company anticipates enrollment in its commercial health plans will fall by a greater-than-expected 800,000 people this year.

The company also has lost business because of service problems related to kinks in the integration of some of the many large-scale acquisitions it made in recent years.

To stem some of the pressures on its profit margins, UnitedHealth said it would cut 4,000 jobs, many of them in its technology and clinical operations, rather than customer service.

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