Case Study on Unitedhealth Group

With health care insurance being the most popular business in the United States UnitedHealth Group now faces federal investigation for compensating Chief Executive Officer (CEO) William McGuire with option profits profiting $1.6 billion. Many other chief executives are questioning if this types of practice in legal, while others are say that the boards of directors of UnitedHealth Group are too easy at the same time generous.

History

In 1974, Charter Med Inc. was founded by doctors and in 1977 United HealthCare Corp. was formed and bought Charter Med Inc. UnitedHealth Care became a publicly traded company in 1984 and William McGuire became the leader of the company in 1989. In between that time the company had acquired a pharmacy benefits management company.

Six years later this pharmacy was sold in 1994 to SmithKline Beecham Corp. UnitedHealth Care purchased MetraHealth Companies Inc. in 1995 which was a privately held company that was formed by combining the group health care operations of The Travelers Insurance Company and Metropolitan Life Insurance Company (Unitedhealthgroup, 2006). In 1998 the company changed its name to UnitedHealth Group and launched a strategic realignment into independent but strategically linked business segments; UnitedHealth Care, Ovations, Uniprise, Specialized Care Services and Ingenix.

CEO McGuire

Dr. William W. McGuire was appointed president and chief operating officer of UnitedHealth Group in 1989, and chief executive officer in February 1991. Dr. McGuire joined UnitedHealth Care Corporation in November 1988 from Peak Health Plan in Colorado, where he had served as president and chief operating officer. From 1980 through 1985, he was a practicing physician in Colorado Springs, Colo., specializing in cardiopulmonary medicine. Dr. McGuire holds board certification in internal medicine and pulmonary medicine, and is a member of the National Institutes of Health National Cancer Policy Board (Unitedhealthgroup, 2006).

Backdating Options

Backdating is the practice of marking a document with a date that precedes the actual date. The exercise price of the options is set to equal the market price of the underlying stock on the grant date. Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest. Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options. Backdating of options is not necessarily illegal if the following conditions hold: no documents have been forged, backdating is clearly communicated to the company’s shareholders, backdating is properly reflected in earnings and backdating is properly reflected in taxes (The University of Iowa, 2006).

Stock Options

Shares options were designed as incentives for executives for their performance within a company. It is said the better the company’s success the more shares will be rewarded to these executives. These shares will be given to them at a lower price where in return they can sell them at the higher market price. For example, the market share may be at $60 but optioned at $7 per share and the options are not taxable until they are transformed into shares.

These options would have a money value when they are given and should be a taxable event for the executive receiving the options. As senior executive, a taxable event for the company awarding the options would not be properly recognized. “The company’s financial statements would be wrong, and, in an interesting application of the Sarbanes-Oxley legislation, since chief executives must sign off on financial statements, and if financial statements might be inaccurate because of the compensation received by the chief executive himself, he might be guilty of filing a statement that was false, and that he knew to be false” (Buttonwood, para. 3).

UnitedHealth Group Scandal

William McGuire the CEO of the second largest health care insurance UnitedHealth Group has come under fire for his compensation. McGuire currently is making $100 million in cash and stock paydays and he still sitting in stock options valued at 1.6 billion (St. Anthony, 2006). In this he has been given options as rewards for his success in the company by the board of directors and was allowed to select the date for his options. This meant that McGuire may have backdated his options granting himself shares at the lowest price in a given year and in May 11, 2006 UnitedHealth Group issued a statement saying they were not handling stock options correctly (Lewis, 2006).

McGuire in February sold 2.3 million shares at $59 a share when they were optioned to him at $5 a share (Phelps, 2006). This exercised that he owned 6% of the company but back in November of 2004 he sold shares as well which amounted to 9% of his share holdings (Business, 2006). Many experts argue that this type of reward is ethically right because of his performance to the company. But the Securities and Exchange Commission (SEC) lawyers insist that this type of practice may violate security laws, because they allow executives to benefit