UnitedHealth to pay $895 million over options

/ Source: The Associated Press

UnitedHealth Group Inc. will cut at least 4,000 jobs, or 5 percent of its workforce, in a restructuring and warned Wednesday that a weaker environment and higher costs will cut into profits this year.

Chief Executive Stephen J. Hemsley said in a conference call that the company is shifting management positions to better focus on regional coverage.

The company also said it will pay $895 million to settle lawsuits over stock options backdating, and will pay $17 million into a fund in an agreement to resolve a suit related to the Employee Retirement Income Security Act.

Investors welcomed a broad review of how the company operates, its capital expenditures and its costs, seeing Wednesday’s announcements as perhaps the end of a long rough patch for UnitedHealth.

After rising as much as 7 percent, shares traded up 3 cents at $25.66. Shares had traded as high as $59.46 in the past year.

The options settlement stems from a 2006 complaint filed in U.S. District Court in Minnesota. The California Public Employees Retirement System (CalPERS) and Alaska Plumbing and Pipefitting Industry Pension Trust, the lead plaintiffs, argued that the backdating cost shareholders money.

The scandal ultimately forced out Bill McGuire, UnitedHealth’s chief executive.

Hemsley said the settlement helps the company avoid more costly litigation.

Ramzi Abadou, an attorney representing CalPERS, called it “a significant, epic settlement” that far exceeded previous payouts in options backdating lawsuits.

He said the corporate governance change calls for a shareholder-nominated director, which he called “a major advance in corporate-shareowner relations.”

McGuire is not part of the settlement. His attorney, David Brodsky, issued a statement saying McGuire will continue to fight “because he is not liable for any alleged shareholder losses.”

Under a new regionalized management structure, UnitedHealthcare will serve all commercial benefits markets, including national accounts previously under the Uniprise brand.

Mike Matteo, currently the chief executive officer of Uniprise, will continue to handle national accounts for UnitedHealthcare.

Matteo and the regional chief executive officers of UnitedHealthcare will report directly to Gail Boudreaux, executive vice president of UnitedHealth Group and president of UnitedHealthcare.

“The changes we are making today underscore our commitment to establishing an even more customer-focused organization that is more responsive at the market level and easier to do business with,” Boudreaux said. “This is another step toward making UnitedHealthcare the full-service brand for all of our commercial businesses and toward streamlining the services we provide to our customers and the market.”

UnitedHealth cited reduced commercial business and higher-than-expected Medicare-related costs for its lowered outlook.

The company now forecasts 2008 adjusted profit of $2.95 to $3.05 per share on revenue in the $81 billion range, down from prior estimates of $3.55 to $3.60 per share. Analysts surveyed by Thomson Financial expected profit of $3.52 per share on revenue of $81.02 billion.

“During the second quarter, our risk-based businesses produced a lower level of gross margin than expected, and we also experienced a continuation of the pressures we saw in the first quarter,” Hemsley said in a statement.

The company said it is seeing greater-than-expected pressure on premium yields, due to an “intensely competitive” commercial business environment. UnitedHealth is reducing risk-based business, which is affecting earnings performance, and said it is paying out more than expected for Medicare Part D prescription drug offerings and special needs plans serving seniors with chronic conditions.

Medical cost trends for corporate customers remain within its previously projected range of 7.5 percent, plus or minus 50 basis points for 2008. For the full year, UnitedHealth Group is projecting a higher total medical care ratio in the range of 82.5 percent, with a commercial medical care ratio in the range of 83.3 percent.

This is above previous medical loss ratio estimates of 81.3 percent and 82.3 percent, plus or minus 50 basis points. A medical loss ratio indicates how many premium dollars are being paid out on benefit claims.

The Minnetonka, Minn.-based managed care company said it would give more details when it reports second-quarter earnings on July

22. Elsewhere in the sector, fellow health insurer Coventry Health Care Inc. lowered its full-year outlook last month; Aetna Inc. and Humana Inc. have backed their prior estimates.