Calif. Treasurer Urging State to Nix UnitedHealth-PacifiCare Deal Unless ‘Excessive Payouts’ Given Up

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SACRAMENTO, CA – California State Treasurer Phil Angelides is urging the California Department of Managed Health Care, a department of Gov. Arnold Schwarzenegger‘s administration, to reject UnitedHealth Group Inc.’s proposed $8.1 billion merger with PacifiCare Health Systems Inc., unless PacifiCare executives give up what he contends are $315 million in “excessive payouts.”

The California Department of Managed Health Care held a second public meeting in Sacramento, Calif., regarding the proposed merger, where Angelides, as well as the California Medical Association, and local consumer and health-care groups urged the DMHC to reject the deal.

UnitedHealth Group Inc. (NYSE: UNH) in July said it would acquire PacifiCare Health System’s Inc. (NYSE: PHS) in an $8.1 billion deal. Soon after the deal was announced, PacifiCare disclosed in regulatory filings with the California DMHC and the California Department of Insurance that its top-level senior executives could receive more than $230 million in compensation if the transaction is finalized by Feb. 1, 2006. The total amount of compensation payable to its senior management resulting from the merger, if it closes by Feb. 1, totals nearly $230 million, (BestWire, Aug. 5, 2005).

“I urge your Department of Managed Health Care to reject the merger unless these excessive payouts to HMO executives are relinquished,” Angelides wrote in a letter to Gov. Schwarzenegger a day before the DMHC public meeting. In the letter, he carbon-copied Cindy Ehnes, director of the DMHC.

“Top PacifiCare HMO executives stand to receive excessive payouts of as much as $315 million as a result of this merger, at a time when more than 6 million Californians are uninsured and millions of working Californians are struggling to meet the rising costs of health care for their families,” he wrote.

Angelides is a trustee of the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, which he wrote invested a combined $480 million in UnitedHealth and PacifiCare. “There is simply no justification for these excessive payouts–which will go to the very same HMO executives who engineered the merger.”

Tyler Mason, a PacifiCare spokesman, who said that Angelides does not have any regulatory oversight over the pending merger, noted Angelides doesn’t understand that 86% of the options are going to vest with or without this merger.

Angelides is running for governor of California, while Schwarzenegger recently announced that he is running for re-election, “so that’s what this is all about,” Mason added.

PacifiCare, in its regulatory filings, also pointed out that it was in “serious financial distress” from late 2000 through 2002. Equity-based compensation was the primary tool it used to attract and retain the key talent needed for a successful turnaround and to ensure its continuity of management (BestWire, Aug. 5, 20005).

In addition to Angelides, the Foundation for Taxpayer & Consumer Rights came out again criticizing the proposed merger. Joined by nurses and patient advocacy groups, the foundation urged the DMHC to oppose the deal, unless commitments are made, including guarantees that patients will not face rate increases to pay for the cost of the merger.

The California Medical Association also testified before the DMHC, saying in a statement that the proposed “mega-merger” of UnitedHealth and PacifiCare “runs the risk of putting patients in jeopardy of increased premiums and reduced access to health care in exchange for increasing profitability of the health plan.”

Meanwhile, Angelides also wrote that the 2004 merger of WellPoint Health Networks Inc. and Anthem Inc., which the DMHC approved, “was an egregious example of corporate excess that enriched HMO executives at the expense of shareholders and health-care consumers.”

Despite the critics of the UnitedHealth-PacifiCare deal, several health industry experts noted that UnitedHealth‘s acquisition of PacifiCare is a good move for the nation’s No. 2 health insurer, noting UnitedHealth will gain the largest U.S. publicly traded Medicare HMO, and fill in geographic gaps on the West Coast (BestWire, July 8, 2005). UnitedHealth‘s commercial business membership is about 27.1 million, while PacifiCare’s health plan membership is about 3.2 million.

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