UnitedHealth working to get back on course

Last year, in the first surreal days after former UnitedHealth chief William McGuire was ousted in a stock-options scandal, the company held its usual earnings conference call.

Without introduction, an unfamiliar voice began speaking.

"People were wondering: Who is this guy? We'd never heard his voice before," recalled Sheryl Skolnick, an analyst with CRT Capital Group in Stamford, Conn.

The mystery voice belonged to Stephen Hemsley, the chief operating officer later thrust into the role of chief executive of America's biggest health insurer, and the gaffe was symptomatic of the early, uncertain days of his tenure. Since then, the intensely private Hemsley has quietly worked to sustain the Minnetonka-based company's business and restore its reputation.

This week was a big one for Hemsley.

On Thursday, McGuire agreed to repay UnitedHealth $618 million in options and other benefits, a milestone settlement for the company as it continues to extricate itself from the tangle over backdated stock options.

Two days earlier, Hemsley marked a year on the job by acknowledging missteps that hurt the business in 2007 and laying out his most expansive vision yet of how to regain lost ground. So far, the market reaction is one of wait-and-see.

"At least they are stabilizing," said David Heupel, a portfolio manager with Thrivent Asset Management in Minneapolis. "But they are nowhere near where they had been."

Hemsley wasn't available to comment for this article.

Admitting problems

For years, UnitedHealth regularly served several sure bets to Wall Street.

Business was always booming, the company was always trying something new and exciting and McGuire was always firmly in charge. A physician who took over in 1991, McGuire built the small and struggling health insurer into a Fortune 100 empire based on a broad slate of health plans and ancillary businesses such as health information technology and financial services.

Then came the stock-options shock. After a lengthy internal investigation that showed the stock options for top executives were "likely" backdated to periods where their share prices were lower, inflating potential gains, McGuire stepped down in December 2006. Hemsley, the chief operating officer since 1999 and the man often credited with managing the company's rapid growth, stepped up.

While Thursday's settlement is significant, there are still continuing inquiries by the U.S. Department of Justice and the Minnesota Attorney General.

Since McGuire's departure, UnitedHealth has overhauled its corporate governance rules to prevent a repeat of the stock-options debacle. Changes include requiring a majority vote for electing new directors, as well as annual elections for directors, instead of staggered multi-year terms.

In July, Institutional Shareholder Services Inc., which advises institutional clients on how to vote in key company issues, said UnitedHealth outperformed 91 percent of companies in the Standard & Poor's 500 for corporate governance, compared to 30.7 percent a year ago.

Assessments of the company's business performance have been less glowing. Missteps this year, including botched marketing of its 2007 Medicare Advantage plans, higher than expected medical costs early on, and the loss of commercial members, have unsettled the market. It didn't help when two top executives, Lois Quam and Richard Anderson, left at midyear.

After years of commanding a hefty premium, UnitedHealth's stock is now trading in line with other big health insurers such as Aetna, Cigna and WellPoint.

There have been bright spots. UnitedHealth has deepened an important partnership with AARP in marketing Medicare health plans, a growing market. And helped by continuing acquisitions, it has continued to expand. The insurer forecasts revenues of $75.5 billion this year and between $82.5 and $83 billion next year.

Quam, who is credited with building UnitedHealth's lucrative Medicare business and who now oversees health care and environmental investments for Piper Jaffray, defended Hemsley's performance.

"During a transitional period that probably would have been a major distraction for a less-disciplined team, Steve and my former colleagues did an outstanding job of remaining focused on United's businesses," Quam said. She described Hemsley as "a person of obviously great analytical intelligence and unquestionable integrity."

He's also a person who's done a lot of apologizing.

This week, at the company's annual investor conference in New York, Hemsley acknowledged fumbles that have alienated doctors and driven away customers, particularly at a new subsidiary, California-based PacifiCare. Since then, he said, the company has reached out to doctors and insurance brokers and it expects better relations in 2008.

Executives also admitted taking too long to resolve billing issues and said they'd made fixes to shorten the average time to resolve disputes from five days to two.

"A good first step," wrote Justin Lake, an analyst with UBS Investment Research, while warning of a "long, uphill climb" in 2008. The management "seemed refocused and energized," declared Charles Boorady at Citi Investment Research, adding that the worst seemed to be behind the company.

Public image campaign

UnitedHealth's efforts to make amends have extended to polishing its public image in Minnesota. It has a relatively small number of members in the state in its commercial plans -- just over 20,000 residents, mostly working for out-of-state companies -- but it also serves almost 53,000 Medicare beneficiaries.

Last month, at a community clinic along a gritty stretch of the Phillips neighborhood of Minneapolis, a phalanx of suited executives from UnitedHealth Group crowded into a back room usually used for educating diabetes and mental health patients.

Hemsley had chosen this occasion for his first media conference. Unlike McGuire, who has been a featured speaker at national health policy conferences and has a stage at the Guthrie Theater named after him, Hemsley is so publicity-averse that he once turned around and walked the other way at a shareholders meeting to avoid a TV crew.

As some of the city's poorest and sickest waited down the hallway to see a doctor, an earnest-looking Hemsley announced that the company would give away $100 million in the next decade to improve the health and well-being of Minnesotans.

"It's a new era," he said. "This is part of being a modern corporation today."

Chen May Yee • 612-673-7434