UnitedHealth to cut 4,000 jobs, settle options suits

Associated Press

July 3, 2008

MINNEAPOLIS - UnitedHealth Group Inc. will cut at least 4,000 jobs, or 5 percent of its work force, in a restructuring and warned yesterday 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 backdated stock options, 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 managed care company operates, its capital expenditures and its costs, seeing yesterday's announcements as perhaps the end of a long rough patch for UnitedHealth.

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 William 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 lawsuits over options backdating.

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, said McGuire will continue to fight "because he is not liable for any alleged shareholder losses."

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

"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," said Gail Boudreaux, executive vice president of UnitedHealth Group and president of UnitedHealthcare.

UnitedHealth pointed to 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. It 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 for seniors with chronic conditions.