Critics attack massive merger-related payouts of health systems’ executives

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Sacramento Bee (California)

State Treasurer Phil Angelides is urging Gov. Arnold Schwarzenegger and California’s two giant pension funds to oppose UnitedHealth Group’s $8.1 billion acquisition of PacifiCare Health Systems Inc. until top executives give up millions in merger-related payouts.

The call comes as state regulators consider the second major merger of health insurers in California in two years. The governor’s Department of Managed Health Care will assess the impact of the PacifiCare deal during a 10 a.m. hearing today in the Secretary of State Building, 1500 11th St., Sacramento.

Critics, who raised the same issues in the merger of Anthem Inc. and WellPoint Health Networks, are assailing the bonuses, stock options and other perks in UnitedHealth‘s agreement to buy Orange County-based PacifiCare.

“There is no justification for these executives to pocket over $300 million in payouts for just engineering a merger,” Angelides said Thursday. These executives are, he said, “enriching themselves at the expense of shareholders.”

Angelides, a trustee with CalPERS and the California State Teachers’ Retirement System, is enlisting the two funds for his fight against the compensation arrangements. Together, the funds own about $480 million in stock in the two health insurers.

Angelides and consumer advocates also argue the deal could threaten to limit care and boost premiums.

“We want certain guarantees that they (UnitedHealth Group & PacifiCare) won’t pull out of the small group market and premiums won’t pay for the merger,” said David Fink of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

PacifiCare officials dispute the claims and say more than 80 percent of the payouts would be earned even without the merger. They also said the combination would spark competition in the state’s health insurance industry.

“It’s not your classic merger that bigger means less competition and fewer options. UnitedHealth has a history of acquiring companies and operating them as wholly owned subsidiaries. They grow them,” said Tyler Mason, a spokesman for PacifiCare. “It actually increases competition in California.”

Minnesota-based UnitedHealth, the nation’s second largest health plan, would join forces with PacifiCare, the No. 5 health insurer in the state with about 700,000 members, including about 100,000 in the Sacramento region. The combined company would have about 25 million members, second only to WellPoint.

Last year, California Insurance Commissioner John Garamendi held up state approval of WellPoint‘s $16.5 billion merger with Anthem partly due a executive payout totaling up to $600 million. The California Public Employees’ Retirement System voted against the merger because of the compensation package.

Garamendi later dropped opposition to the WellPoint merger after the companies pledged to spend $265 million on state health programs and to not raise premiums to finance the deal.

Mason said PacifiCare’s pay arrangements are aimed at compensating executives for turning around a financially struggling company.

According to company documents, top PacifiCare officers would earn $229.7 million in accelerated stock options and payments for the company changing ownership. Another $84.5 million in stock and bonuses would be paid for executives to stay after the merger.

“The merger should not be approved unless the executive compensation package is stripped out,” Angelides said.

Consumer Watchdog
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