Backdating Scandal

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Steven Pearlstein
Washington Post Columnist
Wednesday, October 18, 2006; 11:00 AM

Washington Post business columnist Steven Pearlstein was online Wednesday, Oct. 18 at 11 a.m. ET to discuss the backdating stock options scandal at UnitedHealth.

Read today's column: UnitedHealth's Options Scandal Shows Familiar Symptoms .

A transcript follows .

About Pearlstein : Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here .

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Arlington, Va.: As a local MD practicing in Arlington I have found United Healthcare to be completely disinterested in the needs of patients or physicians. United has repeatedly reduced payments for services and ultimately we dropped United as of October 1st since the company had no desire to even discuss reimbursement with us (in spite of the fact that Aetna had recently worked with us to reach a satisfactory agreement for a new contract). United Healthcare was interested in only one thing: an increased stock price and the massive options deals offered to the top executives. Such greed is sickening and I hope that the board and the top brass get what they deserve.

Steven Pearlstein: Thanks for sharing that, because it is important for everyone to understand the right and the wrong role for the insurance companies that are the middlemen in our private-sector driven health system. And I think there is a positive role, by the way, that should allow them to earn respectable returns (although not pay their executives $1.5 billion). But they need to EARN that money honestly, which means coming up with ways to better manage care by getting information to patients and doctors about best practices, and insisting that physicians practice evidence based medicine. You are probably suspicious of that because in the last round of truly managed care, you probably had some bad experiences with HMOs telling you whatyou could and could not do based on cost. But we all need to recognize, including doctors, that many many doctors are doing things they think are cost effective that really are not. And we need to develop respectful procedures so that when the computer says that your pattern of practice is outside the statistical norms, another board certified physician and you have a talk about it, and maybe he gives you some data and articles you were not aware of, and maybe you change the way you practice so you deliver BETTER results at a lower cost. The macro data on this is very clear: we are wasting a lot of money and generating substandard results. And what that means is that we all -- patients, doctors and insurers -- have to go back to the idea of managed care, only do it right this time.

I'd like to know what you think of that.

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Washington, D.C.: Mr. Pearlstein, Excellent article. However, it dealt with the unfairness of these practices to stockholders. My question is, is there any data to assess the effect of these practices on patients? In other words, is your difficulty getting reimbursed for a prescription directly related to these obscene options? Then, if UH insures 1/6 Americans, how is this practice contributing to the overall cost of health care in the U.S.? (by keeping premiums high, etc.)

Steven Pearlstein: I was not trying to suggest a causual relationship between excessive executive compensation and mediocre service quality, although there may be a weak one. I was just have some fun by pointing out a paradox.

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Cheverly, Md.: Read your article about UnitedHealth Group and the William McGuire scandal.....Is this organization affiliated with United HealthCare Insurance Company which AARP Health Care Options uses for its members' health insurance coverage? Thanks.

Steven Pearlstein: Yes, they have relationship with AARP, which is probably a very profitable business for them and has contributed to their success. I would think, by the way, that upon reviewing the situation, customers like AARP might want to renegotiate their relationship with UnitedHealth when it comes up for renewal. And I would think that Medicare and Medicaid, which also have extensive relationships with UnitedHealth, might want to do the same. Its fair to say that at least a third, if not more, of the UnitedHealth's excessive compensation came at the expense of taxpayers. The taxpayers representatives might want to inquire if there is that much profit to be spread around, maybe some of it should be captured, in the future, by the customer rather than the executives.

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Laurel, Md.: Is it plausible that McGuire was worth $1.5B?

The company maintains profit margins despite its growth. It's not a $100B non-performing asset like AOL.

Steven Pearlstein: No, its a hugely successful and profitable company. The question is why should anyone get paid that much by a public company that he doesn't own. Are you possible suggeting there isn't anyone in the world the board of directors could get who could do as good a job for $1 billion. Or $500 million? That sounds pretty preposterous to me. Or to turn the "he delivered for the shareholders" argument on its head, why not $3 billion. $5 billion. $10 billion.

The problem here is one of false comparisons. We are creating huge, huge global corporations these days. Yet individuals still eat three meals a day, live 100 years and put their pants on one leg at a time. And so any attempt to fashion compensation for executives on the basis of some percentage of the shareholder value created it simply nonsense. We don't set pay of anyone else like that. The two numbers have to be considered in totally different contexts. Its simply a false logic glommed onto by the executive compensation consultants on behalf of their real clients, the chief executives. Its bull. These aren't waiters and taxi drivers who should earn tips.

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Los Altos, Calif. (Silicon Valley): What is the position of lead accounting firms on what date must be used to set the grant price? For example, can a company's board board grant options prior to an employee's date of hire (as part of an offer), and make it effective the employee's first day of work, setting the price at that first day of work?

Steven Pearlstein: You can do anything you want, if you think it is the interest of the company. But you have to account for it correctly, and there are tax consequences to handing someone an option that is immediately "in the money" which these backdaters are trying to avoid. You also have an obligation to tell the shareholders, since every dollar the strike price is reduced is a dollar taken out of the company treasury.

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Hilton Head Island, S.C.: Was the issuance of options a taxable event for purposes of federal income taxes? Is the answer to the above question impacted by the backdating of the options?

Steven Pearlstein: Yes, tax avoidance is part of the story here, which is why the IRS is involved in the investigation.

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Washington, D.C.: I realize this isn't the topic of your chat today, but as a business columnist, I was wondering if you wanted to weigh in on the dow crossing 12,000 this morning- is this just a psychological milestone? Is it worth all the hype?

Steven Pearlstein: Its worthy of significant comment, yes. Its psychological, obviously, since it an artificial construct. But when I last checked, psychology has a lot to do with the stock market, particularly in the short and medium run.

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Arlington, Va.: I'm a UnitedHealth customer -- earlier this year, I got a letter from my doctor saying her practice would no longer be participating in UnitedHealthcare plans because the company didn't reimburse them enough to cover their costs. She later told me the company refused to even discuss the issue with them. Two days later, I saw a story about what you so appropriately called McGuire's piggy behavior and the backdating issue. I'm absolutely appalled by the way UnitedHealth treats its doctors and patients while letting McGuire run off with obscene amounts of money. I'm switching to another health insurance company as soon as I can -- I just wish "disgusted by the company's unethical behavior" was an accepted reason to switch plans outside of open season -- and I'm telling everyone I know to avoid UnitedHealth plans. What a disgrace.

Steven Pearlstein: Another great contribution to the discussion. Maybe we should start a Boycott UnitedHealth movement right here and now. That would not only get their attention out in Minnesota, it would get the attention of other CEO's who might not want their companies boycotted because of their piggy behavior. Something to consider. We could even adopt a slogan: Spread the Wealth. Dump UnitedHealth.

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Minneapolis, Minn.: Comment

Bravo! to you, to report on this. Yours is one of the first to go into more detail. This story seems to require non-local journalists to investigate; even with such a damning statement from the company, for the life of me I cannot figure out why more attention has not been given to this. Your column and this Q & A help move this along. Thank you. I think this tragedy might provide a national case study for problems inherent in our country's absurd treatment of oversight of CEO's and senior management, the obvious impunity with which they act vis a vis board of directors, investors, etc., and the need for change.

Question: Any evidence or thoughts along the cockroach theory, that where you find one nasty problem, others surely lurk? When a CEO exhibits such avarice, hubris and imperiousness, he might be obsessed solely with power and greed, but the raw, sustained, implied impunity of these actions implies a behavior that makes me wonder if there doesn't have to be more reprehensible actions to reveal.

Steven Pearlstein: Thanks for your kind comment. I'm disappointed to learn that the St. Paul and Minneapolis press haven't been more vigilant about this, but that may be because McGuire and the company are big benefactors in town. As for the cockroach theory, some of the comments we've received this morning from their unhappy customers may suggest an answer.

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Tampa, Fla.: GREAT column today! Your point about this garbage stopping when SOX became effective was spot on (as the Brits would say).

Correct me if I'm wrong, but SOX does not require independent compensation committees of the Board of Directors, only independent audit committees. If so, the next step in refining SOX must be independent compensation committees, and then full disclosure of the actual employment contracts of CEOs.

I guess I'm some sort of Bolshevek radical, but I believe us pesky shareholder--you know, the OWNERS of the company--have a right to know what's going on in OUR company. As Ronald Reagan once said, trust, but verify.

Steven Pearlstein: I love when you use that Reagan quote and apply it to the corporate types.

Independent directors for compensation committees is already required by the stock exchanges for listed companies. It may also be in SOX. In this case, the rule was broken because of Spear's tie to McGuire that was undisclosed to shareholders and, to hear it from the directors, undisclosed to the board. There is some paper that suggests Spear did inform the general counsel, but it never went any further. But of course Doctor McGuire knew and said nothing. Perhaps that's why McGuire, Spear and the general counsel are all leaving UnitedHealth.

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Baltimore, Md.: Does this scandal indicate 1) that corporate managers in general are still too insulated from accountability 2) that there's a lack of competition in the health insurance marketplace allowing health insurers to conceal these vastly inflated payments all the while demanding transparency from health care providers or both? Is there a cure short of further government regulation?

Steven Pearlstein: It indicates both. And the second question is the more interesting one to me, because on the surface, there appears to be plenty of price competition in the group health insurance market, although not the individual market. Big companies looking for insurers to insure their employees do play one insurer off the other. But I suspect there has been such consolidation in the industry now that the companies compete in a more oligopolistic way -- they don't get too aggressive in pricing because they know it will simply lower the rates for all insurers and nobody will win in the end. This is something the Federal Trade Commission should be looking at, certainly. We know that consolidation of hospitals, on the other side, is also reducing competition.

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Baltimore, Md.: Just want to second the initial poster's criticism of United as a health insurer. We had them at the large firm I work for. While I had no problems, the folks in our Chicago office had MAJOR headaches a couple years back when all their area hospitals started refusing United coverage. You can imagine what headaches that created for our HR people. We have been with Aetna since with no problems that I know of.

Steven Pearlstein: And I might add that Aetna is still able to show a pretty good profit, and pay its outgoing chairman very, very well -- but nowhere near as well as our good Dr. McGuire.

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Watertown, Mass.: Clearly United's executives were in the wrong here. Is it fair to compare this with Worldcom and ENRON?

Steven Pearlstein: Its only half fair. The company is sound and profitable, which was not the case with WorldCom and Enron, which were financial houses of cards.

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Bowie, Md.: Stock options aren't just something given free to execs and other employees. You can also buy and sell them on the open market.

Are the kinds of options execs get like the ones traded on the CBOE, so that a company could use them for compensation by buying them at the prevailing price and expensing them like any other wage?

Steven Pearlstein: No, they are generally not tradeable.

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Washington, D.C.: Given that the market has crossed 12,000 and the price of gasoline has dipped below $2, shouldn't we, as a nation, be even harder on Bush? This seems to be the solution to obtaining cheap gas and a market that trends.

Steven Pearlstein: Why do we have to see these business issues through a partisan prism. It isn't useful.

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Boston, Mass.: This really goes to show the priorities of corp. America in today's market. I work for a software company that bills thousands of claims a day to United and they are just pitiful. They are miles behind the ball on electronic remittance, even though it was part of a federal mandate in 2001. One of our contacts there slipped and admitted they hold off on paying claims they know are valid so they can keep the interest on the money they are holding. Both practices cost doctors and patients plenty, and make the company far less money than these stock options cost them. Go Healthcare!

Steven Pearlstein: Another charter member of the Boycott UnitedHealth coalition. Thanks for that.

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Richmond, Ind.: When an organization invests $43 billion, their investors expect a return of something greater than five or ten percent, probably more like 15 to 20 percent, and that return comes from the people (doctors) or organizations (hospitals)that provide the care. Their boardrooms now discuss profits and not patient care, and leads to the gradual commercialization and deteriorization of health care. And who will care for those that are not insured?

Steven Pearlstein: Customers and employers should care, and make sure that insurers compete on the basis of value, which takes in both price and quality. They are learning to do that, but the information they need to do it is still pretty crude. Its getting better, however, thanks to some pushing by Medicare and Medicare. The Democrats will definitely step up that effort, even as the health insurance lobby fights it tooth and nail (while denying they are).

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Baltimore, Md.: I would comment on your espousal of pay for performance initiatives just to note that the theoretical justifications for P4P (which I think are good) too often have been used as excuses by managed care execs to siphon a few more dollars away from providers. The theory behind health care P4P programs as laid out by groups such as the Institute of Medicine certainly envisioned that, at least in some areas, more money needs to be put into the system to get quality improvements of the kind you discussed. Unfortunately, P4P has gotten in the hands of for-profit insurers and has just become another rhetorical cover for increasing the bottom line at everyone else's expense.

Steven Pearlstein: That's very sad to hear.

Just for everyone else, pay for performance in health insurance is paying providers (doctors and hospitals) for keeping people healthy and treating them in a cost effective way, rather than simply paying them for procedures they perform. The latter encourages providers to perform more procedures, and the most expensive procedures. The former rewards them sometimes for doing simple things, or talking and asking question, or referring them to someone else -- or doing nothing at all.

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Princeton, N.J.: Hello from your friendly Single Payor Nut. I don't think I have to make any comment. I'll just let you do it for me.

Steven Pearlstein: I will say that unless we can get better value from the 10 percent of our health dollar that are going to middlemen, then it surely does raise a fundamental question about whether we need to go to a nationalized, government-run system. Let me repeat: it raises the question. It doesn't answer it. The government needs to get involved more as customer and regulator to reduce the take of the insurers while increasing their value added. But in my opinion, they are a crucial component of a health system founded on evidence-based medicine.

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Washington, D.C.: Are there any Post employees with stocks in the company? Isn't that a conflict of interest?

Steven Pearlstein: Obviously I have no way of knowing that. But I can tell you I don't. And nobody told me what to write other than me.

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Roswell, Ga.: Great column on the executive greed and corruption at UNH. Did you by any chance read the pathetic effort by yesterday's Wall Street Journal to defend McGuire and the other UNH crooks?

Steven Pearlstein: Yes, I read the editorial. There's also been a column suggesting that there's nothing wrong with backdating options. Its along the line of the Journal's editorial page's other whacky notion that insider trading makes markets more efficient. But please remember that the news side of the Journal has been doing outstanding work on this issue. I say that admiringly and jealously.

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Washington, D.C.: I'm surprised by the lack of outrage in the the emails shown so far; and in general. A Billion Dollars !!???? For a sinlgle man ?! A sinlge family !? It's grotesque !!! For someome who has been forced to step down ?!!

What is going on in this Country that no one seems to blink an eye at this, let alone bring serious, serious charges against these white collar criminals. Is there an investigation in the works ?

J. Pache

Steven Pearlstein: There are lots of investigations in the works, along with plenty of shareholder lawsuits. But your basic point is a good one: why does anyone, including UnitedHealth's distinguished directors, think a billion dollars for any person who is hired help is a reasonable pay package.

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Silver Spring, Md.: As a long-standing participating physician in the MAMSI(now United) health products, I can prove that the allowances for ordinary daily services, not high-tech expensive services, have been cut dramatically since the onset of the near monopoly of United in both HMO and PPO products, some as much as 50%!Patient care that requires personal interaction is the most vulnerable place to minimize access. I have withdrawn from MAMSI HMO to minimize the impact upon other HMO patients' accessibility.

Steven Pearlstein: Another member of the UnitedHealth boycott. Welcome aboard.

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Arlington, Va.: No shock to me about their behavior. I've dumped United as a third party payer, and I'm about to dump the practice of medicine as all of the plans require way too much in the way of paperwork

Steven Pearlstein: A lot of docs where I live are on the Visa health plan: You come in, get service at prices dictated by the doctor, and pay with your credit card. And the rest is up to you. Obviously Medicare and Medicaid are different than that, but I'm sure it cuts down on the paperwork. The catch is that these docs probably serve a wealthier population that has the initial cash flow and can wait to be reimbursed.

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Princeton, N.J.: What's this 10% nonsense? What about the 200 Billion wasted by having doctors filling out incredible paperwork required by the 1,500 different forms private insurers want filled out? What about the 15%+ overhead of these companies (compared to 1.3% in the Canadian system)? Our present system is just chocked fill of waste.

Steven Pearlstein: It may be as high as 15 percent, but in a fully nationalized system with a management function added in, the cost is not going to be 1.3 percent -- nor should it be.

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Steven Pearlstein: That looks like it for today, folks. See you next week.

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