CalPERS Urges PacifiCare-UnitedHealth to ‘Unwind’ $345 Million Exec Bonus Package in Merger

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SACRAMENTO, CA – The board of the California Public Employees’ Retirement System, the largest U.S. pension fund, has called on PacifiCare Health Systems Inc. and UnitedHealth Group Inc. to unwind a $345 million executive bonus package that’s included as part of the companies’ proposed merger.

Giant UnitedHealth (NYSE:UNH) said in July it would acquire the smaller PacifiCare (NYSE:PHS) in an $8.1 billion transaction.

At a public meeting on the proposed merger last month, California State Treasurer Phil Angelides, a CalPERS trustee, urged the California Department of Managed Health Care to reject the UnitedHealth-PacifiCare combination unless PacifiCare executives give up what he contended in September were $315 million in “excessive payouts” (BestWire, Sept. 20, 2005).

Angelides is a trustee of CalPERS and of the California State Teachers’ Retirement System, which owns a combined $560 million in PacifiCare and UnitedHealth stock, according to Angelides’ office.

Earlier this week, the CalPERS board approved two separate proposals by Angelides. The first motion, passed on a 7-4 vote, directs CalPERS staff to work with PacifiCare and UnitedHealth with the goal that the companies “unwind” the pay package. The second motion, passed unanimously, directs CalPERS’ staff to work with the Department of Managed Health Care, also with the goal that the department urge the companies to forego the pay package.

“The CalPERS board… sent a clear and strong message on behalf of shareholders, pensioners and health-care consumers, calling on PacifiCare to relinquish $345 million unwarranted payouts to its top 309 HMO executives,” Angelides said in a statement. “There is simply no justification for these excessive payouts — which will go to the very same HMO executives who engineered this merger, and which ultimately will be paid either by shareholders of the merged company or by consumers in the form of higher insurance premiums.”

PacifiCare spokesman Tyler Mason said the company is “more than happy” to meet with CalPERS to clarify the compensation issues. “We publicly disclosed every aspect and detail of these compensation plans,” he said. “And they are performance based ‘ based on employment agreements that were put in place long before any discussion about a merger or acquisition.”

Most of the compensation would be realized with or without the merger, because the employment agreements were put together in early 2000 when PacifiCare was in serious financial trouble, Mason said, reiterating that equity-based compensation was the main tool PacifiCare used to attract and retain the key talent needed for a successful turnaround and to ensure its continuity of management.

Mason added that a report earlier this year by CalPERS investment officers stated that the merger would make CalPERS money and that the transaction comes at a fair price.

Angelides is running for governor of California, while Gov. Arnold Schwarzenegger announced that he is running for re-election, “so that’s what this is all about,” Mason said last month.

Shortly after the proposed merger was announced, PacifiCare disclosed in regulatory filings with the managed care department 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, breaks down as $215.1 million in “acceleration of outstanding equity incentives” and $14.5 million in “change of control compensation.” (BestWire, Aug. 5, 2005)

Nearly $85 million is payable to PacifiCare senior management as compensation other than salary and bonuses for future services in connection with the ongoing management of PacifiCare after the merger, according to PacifiCare’s filing. The breakdown is as follows: $42.1 million in UnitedHealth “equity incentive grants” and $42.5 million in UnitedHealth signing bonuses — $17.1 million in cash and $24.4 million in stock (BestWire, Aug. 5, 2005).

The Santa Monica, Calif.-based Foundation for Taxpayer and Consumer Rights, a watchdog group, said the $345 million in bonuses “is enough money to provide health care to 115,000 Californians for an entire year,” and it lauded CalPERS for its opposition to the arrangement.

“It is obscene to allow HMO executives to feed at the trough at a time when 6.5 million Californians cannot afford health care and millions more are underinsured,” Jerry Flanagan, a spokesman for the foundation, said in a statement.

Meanwhile, industry experts have said UnitedHealth‘s proposed acquisition of PacifiCare is a good move for UnitedHealth, noting UnitedHealth would gain with PacifiCare the largest U.S. publicly traded Medicare HMO and fill in geographic gaps on the West Coast.

PacifiCare has about 3.2 million members in its health plans, while UnitedHealth‘s commercial business membership, which includes risk-based and fee-based, stood at about 28.5 million as of Sept. 30. After completion of the merger, PacifiCare would operate as a unit of UnitedHealth. The acquisition is expected to close by early 2006.
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