Top PacifiCare Executives Could Receive $230 Million in Sale to UnitedHealth

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CYPRESS, Calif. (BestWire) – PacifiCare Health System Inc.’s proposed acquisition by UnitedHealth Group Inc. could mean more than $230 million to PacifiCare’s top-level senior executives, if the $8.1 billion deal is finalized by Feb. 1, according to regulatory filings with state regulators.

According to the filings with the California Department of Managed Health Care and the California Department of Insurance made earlier this week, the total amount of compensation payable to PacifiCare senior management as a result of the merger, if it closes by Feb. 1, 2006, totals nearly $230 million. The breakdown is $215.1 million in “acceleration of outstanding equity incentives” and $14.5 million in “change of control compensation.”

Regarding “change in control payments,” the only executives entitled to receive these payments related to the merger would be current PacifiCare executives who have employment agreements with PacifiCare (NYSE:PHS) and who don’t enter new employment agreements with UnitedHealth, PacifiCare said. Twenty-one PacifiCare executives and senior managers have entered new employment agreements with UnitedHealth (NYSE:UNH), according to PacifiCare’s filing.

PacifiCare said 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.

A spokesman for PacifiCare declined to comment but deferred to the regulatory filings, which are posted on PacifiCare’s company Web site.

The Minnesota-based UnitedHealth‘s proposed acquisition of Cypress, Calif.-based PacifiCare, announced last month, is a good move for the nation’s No. 2 health insurer, industry observers said, noting UnitedHealth would gain with PacifiCare the largest U.S. publicly traded Medicare HMO and fill in geographic gaps on the West Coast. Upon completion of the merger, PacifiCare would operate as a unit of UnitedHealth. The acquisition is expected to close in late 2005 or early 2006.

Compensation other than salary and bonuses payable to PacifiCare senior management for future services in connection with the ongoing management of PacifiCare after the merger totals nearly $85 million, 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.

In its filing, PacifiCare said its turnaround has been successful. Since Jan. 1, 2000, PacifiCare’s operations have stabilized and growth in its stock has outperformed the Standard & Poor’s 500 stock index.

PacifiCare points out that it was in “serious financial distress” from late 2000 through 2002. In 2000, PacifiCare owed about $840 million to a consortium of domestic and international banks. In June 2000, an attempt to refinance the outstanding debt with high-yield debt failed, forcing PacifiCare to negotiate a one-year extension of the majority of the existing bank facility, which was done in September 2001.

Since reaching a low point in October 2000, PacifiCare’s common stock “has been consistently listed as one of the best performing publicly traded equity issuances,” the company says.

Nevertheless, in the wake of the announced merger, California Insurance Commissioner John Garamendi – who held an extensive review before finally approving last year’s $16.5 billion merger of Indiana-based Anthem Inc. and California-based WellPoint Health Networks Inc. to form giant WellPoint Inc. (NYSE:WLP), the nation’s largest U.S. health insurer based on membership ‘ said in a statement that he expects to apply “the same close scrutiny and principles used in our examinations of previous applications.”

And in recent weeks, groups have sharply criticized the proposed merger, saying it would mean higher health-care costs.

The Santa Monica, Calif.-based Foundation for Taxpayer and Consumer Rights, the consumer group that led the battle over the WellPoint-Anthem merger, on Aug. 2 urged state officials to oppose the planned buy-out of PacifiCare unless key conditions are met, including limiting executive payouts and “protecting PacifiCare’s $374 million reserve.”

“When piggish HMO executives cash out with nine-figure paychecks, patients and small business foot the bill,” said Jerry Flanagan, a spokesman with the FTCR, in a statement. “Patients need new protections to ensure that premiums reflect the cost of medical care, not the greed of health-care profiteers and Wall Street financiers.”

Both the California Department of Insurance and the California DMHC are authorized to deny the merger request, the FTCR said.

On its Web site, the DMHC said it would hold two public meetings on the proposed UnitedHealth-PacifiCare merger within 30 days of receiving the formal merger filing. The DMHC didn’t return phone calls seeking comment. But in a statement, the agency said that it will ensure that administrative costs, including executive compensation, don’t exceed 15% of the plan’s revenue.

“However, the DMHC does not have authority under state law to set the level of executive compensation paid by a health plan to employees, nor the amount of premium charged to enrollees,” the DMHC said.

Shortly after the merger announcement, the American Medical Association also urged state regulators, and federal regulators, to examine closely UnitedHealth‘s recently proposed acquisitions, not only of PacifiCare in the West but also Neighborhood Health Plan in southern Florida.

“The American Medical Association is outraged that at a time when health-care costs are escalating and the number of uninsured continues to rise that an enormously profitable private health insurance conglomerate, UnitedHealth Group, is spending $8.1 billion to acquire yet another national health insurer, PacifiCare,” Dr. William G. Plested III, president-elect of the AMA, said in a statement.

The AMA‘s executive vice president and chief executive officer, Dr. Michael D. Maves, on behalf of the AMA, has called on the U.S. Department of Justice to throughout investigate the merger through a letter sent to Attorney General Alberto R. Gonzalez.

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