PacifiCare deal draws fire;

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Consumer advocates decry $314 million for top execs

Modern Healthcare

In the latest insurance deal that has consumer advocates seething, PacifiCare Health Systems’ 39 top executives could receive up to $314 million in compensation if the health insurer completes its megamerger with industry giant UnitedHealth Group, according to documents filed with California regulators.

The bulk of the money-up to $215 million to be shared by all 39 executives-would come from the accelerated vesting of PacifiCare stock options granted between 2000 and 2002, when the Cypress, Calif.-based company was in financial disarray and needed to attract talented executives to lead a turnaround.

An additional $14.5 million in “change of control” payments has been earmarked for 18 PacifiCare executives if and when they leave the company. The 21 remaining executives are in line to receive $84.5 million in signing bonuses and UnitedHealth stock. Those executives would be eligible for the $84.5 million only if they fulfill the terms of their new contracts.

PacifiCare last month agreed to be acquired by Minnetonka, Minn.-based UnitedHealth, in a $9.2 billion deal that would create an insurance giant with roughly 26.2 million members nationwide (July 11, p. 8). The companies have said they expect the deal to close in late 2005 or early 2006.

The size of the intended payouts outraged some consumer advocacy groups, which blame industry consolidation and growing executive compensation at least partly for the nation’s rising healthcare costs.

The Foundation for Taxpayer and Consumer Rights last week called on state regulators to slash the payouts that PacifiCare executives are in line to receive and to ensure that UnitedHealth doesn’t siphon PacifiCare’s $374 million in financial reserves out of California.

“Patients are being put in an impossible situation as these corporate giants work to appease their Wall Street masters,” said Jerry Flanagan, an advocate with the foundation, which recently launched an Internet campaign to fight excessive corporate spending. “When HMO executives get hundreds of millions of dollars in cash and stock, consumers will invariably have to pay more for less care. All the money comes out of the same pot.”

News of the payouts comes less than a year after the regulatory skirmish surrounding the $16.4 million merger of Anthem and WellPoint Health Networks, sparked by the $147 million to $600 million in payments that WellPoint executives stood to gain from the deal. California Insurance Commissioner John Garamendi initially blocked the merger, but later OK’d it after the insurers pledged $265 million to the state and vowed not to pass along any merger-related costs to Californians (Nov. 15, 2004, p. 10).

Former WellPoint Health Networks Chairman and Chief Executive Officer Leonard Schaeffer received a severance package of $119 million after the merger closed in November 2004.

PacifiCare Chairman and CEO Howard Phanstiel, who took the helm in October 2000, holds $59 million in stock options that would vest if the merger closes by Feb. 1, 2006. He also has been promised a signing bonus and restricted stock totaling $16.4 million for agreeing to stay on as an executive vice president at UnitedHealth for two years.

PacifiCare spokespeople said Phanstiel holds about $131 million in retirement and other benefits that would vest when there is a change of control but those benefits were not included in the figures released last week. Most of this sum would have vested next year even if the company wasn’t acquired, said PacifiCare spokeswoman Cheryl Randolph. Other top PacifiCare executives would earn large payouts, with Chief Financial Officer Gregory Scott and General Counsel Joseph Konowiecki set to reap $25.7 million and $27.3 million, respectively.

Randolph described the payouts as well-deserved rewards for the executives who saved PacifiCare from the brink of bankruptcy. “That money was granted to an extremely talented team of executives years ago for the gamble they took in joining a very troubled company and managing to turn it around,” she said.

Last year, PacifiCare earned $303 million, or $3.20 per share, on $12.3 billion in revenue-a far cry from 2002, when it lost $757.8 million, or $21.50 per share, on $11.1 billion in revenue. Since January 2000, PacifiCare’s stock has climbed more than 190%.

California regulators said they would review PacifiCare’s filings carefully, especially the details on executive compensation, and hold two hearings on the planned merger this month. “We’re going to work to ensure that any executive compensation from the transaction won’t result in higher premiums for customers,” said Lynne Randolph, spokeswoman for the California Department of Managed Health Care, which regulates the state’s HMOs.

The merger must also be approved by Garamendi, who last week unveiled a plan to reform California’s “rapidly deteriorating” healthcare system. Garamendi said his office would hold a hearing to examine how much of each premium dollar is spent on patient care.

“Health insurance companies keep too much of the premium dollar, fattening their executives’ wallets and Wall Street purses at the expense of patients and doctors,” Garamendi said during a news conference announcing the reform effort. The structure of compensation … is a major factor in the dysfunction of this current system. We must find a way to determine how much compensation is appropriate and rationally required to provide essential services.”

Consumer Watchdog
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