San Jose Mercury News (California)
State Treasurer Phil Angelides Thursday denounced the proposed merger of PacifiCare Health Systems and UnitedHealth Group because it would result in a payout of up to $315 million to 39 PacifiCare executives — or about $8 million per executive.
“This is the kind of self-serving manipulation that undermines the faith and confidence of ordinary working Californians,” Angelides said in a letter to Gov. Arnold Schwarzenegger, and two public employee retirement funds that hold stock in the insurance companies. “There is simply no justification for these excessive payouts.”
But PacifiCare spokesman Tyler Mason disputed that claim. He said most of the compensation package — $215 million — was for stock options granted years ago and reflects the rise in PacifiCare’s stock in recent years. Another $85 million was designed to keep key PacifiCare executives in the merged company.
“It is absolutely not excessive,” said Mason, adding that the objections by Angelides, who is running for governor, amount to political “grandstanding.”
Cypress-based PacifiCare announced July 6 that it has agreed to be acquired by the nation’s second-largest health care provider, UnitedHealth of Minnesota, for $8.1 billion. The deal — scheduled to be completed by Feb. 1 — requires approval by the firms’ shareholders and three state agencies — the Attorney General, Department of Managed Health Care and Department of Insurance.
Angelides has no regulatory authority over the proposed merger. However, he is a trustee of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, which own a combined $480 million in PacifiCare and UnitedHealth stock.
In an interview, Angelides called the proposed executive payments “really outrageous” and he planned to testify against the compensation deal today when the Department of Managed Health Care holds a hearing on the plan.
Lynne Randolph, a spokeswoman with the managed care agency, said the department could bar the executive compensation deal if it pushed the merged company’s administrative costs too high. Under state rules, she said, administrative costs cannot account for more than 15 percent of a managed care company’s overall expenses.
State Insurance Commissioner John Garamendi said he had not seen Angelides’ letter, but planned to look into the issue of whether the payout amount was unusual.
“We are in the early stages of our analysis,” he said. But he added that if the amount proves excessive, “I won’t approve it.”
Garamendi also vowed to make sure consumer premiums would not rise as a result of the PacifiCare-UnitedHealth deal.
Mason of PacifiCare said insurance premiums in California are being driven higher because of higher hospital, drug and other health costs. If anything, he said, merging PacifiCare and UnitedHealth will make the two companies more efficient, which should help limit a rise in premiums.
Several experts who specialize in corporate compensation deals said they couldn’t comment on whether the $315 million payout was excessive without knowing more details about the deal. But on its face, “it definitely sounds high,” said Broc Romanek, a former U.S. Securities and Exchange Commission lawyer who edits several online publications aimed at corporate executives.
Jamie Court, president of the Santa Monica-based Foundation for Taxpayer and Consumer Rights, agreed.
“It’s ridiculous that executives who are supposed to be managing costs would walk away with a third of a billion dollars,” he said. “The quickest way to cut health care costs would be to cut out the executive payouts like this.”
