Final Settlement of UnitedHealth Backdating Case

Last year, we discussed a preliminary settlement of allegations against the leadership of one of the US (and the world's) biggest health care insurance companies/ managed care organization. Now the settlement appears final, as reported by the AP (and published in the NY Times),

UnitedHealth Group Inc. moved closer to finally putting its stock options backdating problems behind it Tuesday, when a federal judge approved a class-action settlement of more than $925 million.

Minnetonka, Minn.-based UnitedHealth will pay $895 million toward a settlement for shareholders. Former Chairman and CEO William McGuire contributes $30 million and cancels 3.6 million stock options.

The insurer's former general counsel, David J. Lubben, will pay $500,000.

The parties first agreed to this settlement more than a year ago, and U.S. District Court Judge James M. Rosenbaum granted preliminary approval in December. He then approved it in an order filed Tuesday.

The settlement is one of the largest involving options backdating cases if not the largest, said Peter Henning, a law professor at Wayne State University in Detroit.

The lawsuit centered on a scandal over stock options backdating that forced McGuire to step down from both roles in 2006.

The litigation claimed investors were hurt because UnitedHealth and McGuire didn't really grant stock options when they said they did in the late 1990s and early 2000s.

Backdating involves manipulating the timing of options grants so they look as though they were made on days when the stock's value was lower. Doing this can boost a recipients' windfall when they sell the stock.

The practice is not illegal if it is properly disclosed. But concealing it can hide the true costs a company incurred, inflating its profits and possibly its stock price.

UnitedHealth wiped out more than $1.5 billion in past profits when it acknowledged that it backdated stock options.

This was the second approval granted this summer for a large settlement involving UnitedHealth stock options. Last month, Rosenbaum also approved the resolution of a derivatives case that pitted UnitedHealth shareholders against McGuire and several other company executives.

The shareholders had accused the executives of failing to fulfill their fiduciary duties by allowing the backdating. They recovered mostly options and cash for the company.

Court papers put the value of that settlement, which also was approved by a Minnesota state judge, at around $718 million in January.

Note that this year we discussed a settlement made by UnitedHealth's Ingenix subsidiary.

Here on Health Care Renewal, we discuss problems afflicting the leadership and governance of health care organizations. So, we have discussed a seemingly endless parade of legal settlements of allegations of unethical behavior by health care leaders, and even outright criminal behavior. These cases suggest that the leadership culture of many health care organizations accepts unethical, and sometimes even criminal behavior, at least as long as their leaders bring in money in the short-term. Yet shouldn't health care organizations, which are supposedly about helping patients, improving health, preventing disease, etc, be held to a higher standard of ethics than, for example, garbage hauling firms? The parade of stories about misbehavior among health care leaders suggest that some of their organizations do not even rise to the ethical standards of trash haulers.

Further, it is reasonable to hypothesize that unethical and at times criminal leadership is bad for health care, bad for patients, and bad for the public health. It likely is an important cause of rising health care costs, declining health care access, and poor health care quality.

However, despite the ongoing storm of discussion and opinion about health care reform here in the US, few would-be health care reformers are addressing these issues. What discussion there is of "fraud and abuse" seems to be about low-level offenses, not about leadership. In fact, influential voices in the discussion come from leaders of some of the same organizations that have made huge settlements of allegations of bad behavior, accepted deferred prosecution agreements, or have seen previous leaders resign in disgrace or go to jail.

I respectfully suggest that meaningful health care reform is unlikely unless we deal with the problem of conflicted, unethical, and sometimes corrupt leadership of health care organizations.