UnitedHealth directors strive to please chief

Share with others:

Print Email Read Later

MINNETONKA, Minn. -- When William McGuire switched careers in 1986, he was so restless that a pay cut of more than 30 percent didn't faze him. Health maintenance organizations were booming, and Dr. McGuire wanted to help run one. So he jettisoned a six-figure income as a pulmonologist in favor of an HMO management job that paid about $70,000 a year.

Savvy move. Today, the 58-year-old Dr. McGuire is chief executive officer of UnitedHealth Group Inc., one of the nation's largest health-care companies. He draws $8 million a year in salary plus bonus, enjoying perks such as personal use of the company jet. He also has amassed one of the largest stock-options fortunes of all time.

Unrealized gains on Dr. McGuire's options totaled $1.6 billion, according to UnitedHealth's proxy statement released this month. Even celebrated CEOs such as General Electric Co.'s Jack Welch or International Business Machines Corp.'s Louis Gerstner never were granted so much during their time at the top.

Dr. McGuire's story shows how an elite group of companies is getting rich from the nation's fraying health-care system. Many of them aren't discovering drugs or treating patients. They're middlemen who process the paperwork, fill the pill bottles and otherwise connect the pieces of a $2 trillion industry.

The middlemen credit themselves with keeping the health system humming and restraining costs. They're bringing in robust profits -- and their executives are among the country's most richly paid -- as doctors, patients, hospitals and even drug makers are feeling a financial squeeze. Some 46 million Americans lack health insurance.

UnitedHealth's main business is offering health plans to employers and Medicare beneficiaries. Bigger employers usually pay employees' medical bills out of their own coffers and hire UnitedHealth to administer the health benefit. Smaller employers pay an annual insurance premium to UnitedHealth in exchange for having the insurer take on the risk of covering employees' health care.

The "risk" business has been a particular gold mine for UnitedHealth and its rivals in recent years. As health-care inflation eased, insurers still raised premiums at double-digit rates. UnitedHealth's stock price tripled between January 2003 and January 2006, helped by acquisitions, although it has fallen back somewhat since the beginning of this year. UnitedHealth's net income in 2005 totaled $3.3 billion, nearly four times the figure in 2001.

UnitedHealth directors in the late 1990s allowed Dr. McGuire the rare freedom to time his stock-option grants. In several cases the grants carried dates when the company's share price was particularly low, allowing him to profit when it recovered. The company's options-granting practices were among several scrutinized in a page-one article in The Wall Street Journal last month and are being examined by the Securities and Exchange Commission.

The Journal's analysis of 12 options grants to Dr. McGuire from 1994 to mid-2002 found that if the options had been randomly dated, the odds of their occurring at such propitious times were about 1 in 200 million. It raised the possibility that the options grants were backdated. Backdating an options grant isn't necessarily illegal, but civil or criminal actions could be brought if disclosure of the practice were inadequate, securities lawyers say. A UnitedHealth spokesman said the grants were appropriate, but the company's board is reviewing options-granting procedures.

The arrival of the $1 billion CEO would be a head-turner in any industry. But it's especially controversial in health care, where "people tend to view each dollar of executive pay as money that isn't spent on them," says Jonathan Weiner, a health-policy expert at Johns Hopkins University. Dr. McGuire and his supporters say the U.S. would be in even worse shape if it weren't for insurers such as UnitedHealth weeding out unnecessary treatments, bargaining with doctors and encouraging patients to seek out the highest-quality care.

Ever since missing a stock-market windfall in the late 1980s, Dr. McGuire has pursued stock-options wealth tirelessly, as an iron-willed leader surrounded by an admiring board. He declined to discuss his pay, but current and former directors talked at length about their desire to do whatever is necessary to keep Dr. McGuire happy.

"We're so lucky to have Bill," says Mary Mundinger, a UnitedHealth director who sits on the company's compensation committee. "He's brilliant." She says his income gives him extra credibility in health-policy debates because it shows his success. "He needs to be compensated appropriately so that his business model has believability in the market," says Ms. Mundinger, who is dean of the nursing school at Columbia University.

Robert Ryan, another UnitedHealth director, notes that the company's stock-market capitalization has climbed 112-fold since Dr. McGuire took over in 1991. "A lot of the board's job here is to keep him motivated," says Mr. Ryan, a retired chief financial officer of Medtronic Inc.

Bill McGuire was born in Troy, N.Y., but moved to Texas as a boy when his father got a job as an oil-company engineer. He grew up in League City, Texas, a blue-collar town near Galveston. Friends remember him as shy, pleasant and dead-certain of his expertise in areas ranging from sports to math.

He grew to be 6-foot-6, and as a high-school senior he was the starting center on a basketball team that nearly won the state championship. "Bill did all my scouting reports for me," recalls Bill Krueger, who was in his first year as coach. "I'd never played our opponents before. Bill had. He remembered all the other players' strengths and weaknesses."

After college, Bill McGuire attended medical school in Galveston, Texas, at the urging of family doctor Ned Dudney. Varsity athletes who go into medicine often end up as surgeons. But Dr. Dudney pegged his young friend as more of an intellectual problem-solver and pointed him toward internal medicine. "Bill liked the challenge of diagnosing the rare, complicated disease," Dr. Dudney recalls.

At medical school, Dr. McGuire became famous for his side income as a commercial fisherman, selling speckled trout to Galveston's best restaurants at 40 cents a pound. The night before one exam, he slipped away to the Gulf of Mexico and spent hours catching fish.

"It flabbergasted us," recalls classmate Robert Hendler. "The rest of us were struggling to learn the material. Bill had it down cold. He could go fishing and still get one of the best scores on the test."

In the early 1980s, Dr. McGuire settled into private practice as a lung-disease specialist in Colorado Springs, Colo. Much of his job involved hospital care of the desperately sick at all hours of the day and night. In one case, Dr. McGuire -- who wasn't certified as a cardiac surgeon -- reopened the chest incision of a critically ill patient in the emergency room and massaged his heart. That audacious step kept the patient alive until a surgeon arrived.

Looking for a new challenge, Dr. McGuire joined Peak Health Plan Inc. in 1984 as its assistant medical director. He helped found a smaller health plan, CostGuard Inc., in which he took a 10 percent ownership stake. "Bill gave us a lot of credibility," recalls Stephen Hyde, Peak's CEO at the time. "I was trying to expand our provider network, and I couldn't get doctors to come to our recruiting meetings. Bill could."

Within two years, both Peak and CostGuard were sold to UnitedHealth, a larger Minnesota company that had been founded in 1974, for a total of about $95 million. Dr. McGuire was irked that the company he had recently joined was suddenly sold, associates say. He earned about $1 million on his CostGuard stake but he didn't own any Peak stock, so he missed out on bigger windfalls that Peak's three founders collected. "Bill didn't let me forget about it for years," Mr. Hyde says.

The managed-care industry in the late 1980s was experiencing booming but chaotic growth. Big corporations, instead of simply paying whatever medical bills their employees submitted, tried steering them into more restrictive HMOs to hold down runaway costs. Members streamed in so fast that many health plans' computer systems buckled.

Dr. McGuire moved to UnitedHealth's headquarters in Minnesota, where he quickly became the company's No. 2 executive. In 1988 and 1989, he performed the business world's version of emergency surgery on a company that was stretched too thin. After he helped sell or close a half-dozen regional plans that weren't working out, UnitedHealth became a smaller but more profitable company.

"When we saw Bill's talent and potential, we started providing him with some big stock options to give him some incentives," recalls Robert Ditmore, a former UnitedHealth director in the late 1980s. By the end of 1990, Dr. McGuire had options on 229,277 shares, or 0.7 percent of the company.

This was the beginning of a period when U.S. corporations began making options a big part of pay packages, seeking to align the interests of executives and shareholders. Traditionally, hired CEOs enjoyed big salaries but their puny stockholdings left them no hope of approaching the epic wealth of the Rockefellers or DuPonts.

But as stock options took off, highflying bosses such as Dr. McGuire propelled themselves into the top ranks of their companies' shareholder registries. As stock prices rose, these bosses became tycoons, too.

In the early 1990s, the HMO boom continued and Dr. McGuire found more ways for his company to pull ahead of the pack. He spent heavily on information technology, ensuring that UnitedHealth could handle its fast-growing membership even as rivals got snarled in data blowups. And he showed a knack for acquisitions, picking up smaller plans that fit well into UnitedHealth's networks.

The stock jumped 10-fold during Dr. McGuire's first five years at the company. Directors purred. "We knew we had a really strong leader in Bill," recalls Walter Mondale, the former presidential candidate, who was a member of the UnitedHealth board's compensation committee in the early 1990s. "We wanted to keep him and help him with incentives."

During his first seven years as CEO, Dr. McGuire's base salary more than tripled, to $1.3 million in 1998. His bonus jumped nearly as briskly for a few years. Then in 1997 and 1998, Dr. McGuire told directors that he would forgo his bonus. The company's stock price and earnings growth had stalled amid a backlash against restrictive health plans.

His sacrifice impressed directors. As the expiration of his contract approached in mid-1999, the directors and the CEO met repeatedly to talk about a new contract.

Dr. McGuire at the end of 1998 had unrealized gains of $22 million on his existing options. That might have seemed like a huge sum a decade earlier. But Leonard Abramson, the founder of U.S. Healthcare Inc., netted about $900 million when he sold his company to Aetna Inc. in 1996. And dot-com mania was at its peak. CEOs of health-care start-ups such as WebMD Inc. held 5 percent or bigger stakes in their companies, which looked like passports to great wealth.

In contract negotiations, Dr. McGuire pushed for more options, and directors agreed. When his contract was renewed, effective Oct. 13, 1999, he got options equivalent to 2 percent of UnitedHealth's shares outstanding. That was the biggest slice Dr. McGuire had ever received. "Clearly we were aware of people getting huge gains on Internet-stock situations. That was perhaps a factor in our mind," says director William Spears.

The dot-coms' onslaught proved laughably brief, but UnitedHealth kept rising. As the industry consolidated -- spurred by several deals Dr. McGuire engineered -- health-plan operators found it easier to raise prices. Employers rarely complained, or if they did they directed their anger at the health-care system generally.

The better UnitedHealth fared, the more valuable Dr. McGuire's options became. Since 2000, he has cashed out $488 million of options, yet the value of his remaining options keeps rising. The 1999 grant has proved about seven times as valuable as the company projected when it was issued.

In Minnesota, such riches have infuriated some people. Joel Albers, a Minneapolis pharmacist, regularly impersonates Dr. McGuire at state fairs, donning a tuxedo, holding up an enlarged picture of Dr. McGuire on a stick and handing out leaflets denouncing corporate greed. Most people chuckle and walk on. But Mr. Albers says he has a serious point. He has been urging Dr. McGuire to spend his options proceeds on providing free health coverage for Minnesota's 77,000 uninsured children.

UnitedHealth executive John Penshorn says outsiders' efforts to tell Dr. McGuire how to spend his money are "very parochial" because "the issues are broader than just Minnesota." Dr. McGuire has been speaking out about national health system reform and UnitedHealth has opened advanced clinics that serve some of the nation's poorest neighborhoods. Dr. McGuire also has set up a family foundation that gives away millions on behalf of education, science and the arts.

Some of Dr. McGuire's most eye-catching gifts are unrelated to health care. In January, he announced he was giving $10 million to help thousands of disadvantaged Minnesota children attend college. Dr. McGuire also has given nearly $10 million to the University of Florida for a biodiversity center that includes one of the world's largest butterfly research institutes. An avid lepidopterist himself, Dr. McGuire discovered the brown Texas butterfly Euphyes mcguirei.

As long as UnitedHealth stock keeps climbing, big shareholders say they aren't likely to badger Dr. McGuire for a pay cut. "It's hard to say what someone like that is worth," says Tom Marsico, head of Marsico Capital in Denver, which owns about 5 percent of UnitedHealth's shares. "But compared with hedge-fund managers or athletes, he's probably doing more to improve the world."

Even so, UnitedHealth directors huddled several times last year to discuss whether they have showered Dr. McGuire with too many options. His 1999 employment contract obligated the company to award him further options on 2.6 million shares each year, adjusted for splits.

"The number (of options) became larger than we were comfortable with," says Mr. Spears, a member of the UnitedHealth compensation committee. Directors in August 2005 eliminated the options guarantee. Dr. McGuire received options last year on 1.7 million shares, down 35 percent from the previous year.

But several directors say they have no desire to peel away some of the CEO's longtime perks, such as a $139,000 travel allowance and $69,100 of financial planning last year -- even though Dr. McGuire is long past the point of needing help with everyday living costs.

"If we did reduce these things, Bill would take it as a signal that directors weren't enthusiastic about his leadership," says Mr. Spears. "That would be a distraction, at the very least. Bill takes these things as a benchmark of how directors feel about him."

During their August 2005 overhaul of Dr. McGuire's contract, directors did eliminate an unusual provision that let Dr. McGuire choose when his options would be awarded. As this newspaper reported on March 18, option grants to Dr. McGuire in 1997, 1999 and 2000 carried dates on which UnitedHealth's stock hit its low for the year. Mr. Spears said in March that he wasn't aware of anything inappropriate about the options grants.

In an SEC filing April 7, UnitedHealth said a committee of independent directors will work with outside lawyers to review the company's "current and historic stock option grant procedures." The company said the board review was Dr. McGuire's idea.


Create a free PG account.
Already have an account?