UnitedHealth settles suit, cuts jobs and earnings outlook

UnitedHealth says it reached a major settlement totaling nearly $900 million to resolve a major shareholder lawsuit. By several accounts, it's the biggest settlement of any stock options backdating cases so far.

But what's a billion or so dollars when you really think about it?

"The number is not as big a concern for someone looking to invest in this company right now," says Thrivent Financial analyst David Heupel.

Heupel says the company has a robust balance sheet and adequate cash on hand to deal with this settlement, so the amount of the settlement isn't debilitating.

The lawsuit came from the California Public Employees Retirement System (CalPERS), a major investor in UnitedHealth. CalPERS filed the suit in the wake of a 2006 stock options backdating scandal, which led to the ouster of former chief executive officer William McGuire. A company probe found that McGuire and others had received stock options that were likely backdated without following proper accounting procedures.

Heupel says the investor community anticipated that UnitedHealth would have to dole out some cash to settle the CalPERS suit, but he says now it's time to move on.

"Trust me, it's not fun to lose 895 million dollars in this way," he says. "But investors look forward. This is the past."

On an investor conference call, UnitedHealth CEO Stephen Hemsley struck a similar note about the settlement.

"It provides UnitedHealth Group with certainty and closure on the lawsuit, avoids potentially costly and protracted litigation, and allows us to continue to focus on our enterprise and the people we serve," Hemsley said.

As part of the settlement, neither the company nor any of the individuals involved admit any wrongdoing.

Most settlements use similar language, says Paul Lapides, director of the Corporate Governance Center at Kennesaw State University.

"But the settlement itself is its own admission," Lapides adds. "When you get to these type of numbers. When you look at numbers that are under ten million, a corporation might settle and not have done something wrong, because the ten million or less might be less than their legal fees.

"But a number like this, I don't think there's any debate that the company and individuals at the company had done some bad things there."

Lapides says it makes some sense that UnitedHealth threw the announcement about the settlement into a pile of other bad news. On the one hand, that makes the huge settlement seem like less of a big deal. But it's also just efficient for the company to give all the bad news at once.

UnitedHealth revising is earnings estimates downward for the second time this year. It cited increased competition, flagging membership, and heavier use of health care by its members as reasons for the revision.

Thrivent Financial analyst David Heupel says this news was expected.. And he says the reasons for it are not as grave as they could be.: "If you were in the midst of a runaway cost environment, that's a tougher environment for these guys to deal with than, 'we've just not modeled correctly some of the assumptions we had for seniors' use of drugs and the amount of utilization we think these plans are going to see. You can make adjustments to that."

UnitedHealth says its efforts to reign in costs include shedding 4,000 jobs out of its total workforce of 80,000.

Spokesman Don Nathan would not specify how many layoffs will be in Minnesota, where the company employs about 10,000 people. Nathan says the company is trying to get staffing levels in line with demand for its services.

"The company staffed up and increased operating costs in anticipation of a level of growth that didn't materialize, and that we don't think we're going to see for the rest of the year," Nathan said.

Nathan would not comment on when the layoffs will be completed.

It's also unclear when UnitedHealth will wrap up its newly crafted settlement, which requires approval by the CalPERS and UnitedHealth boards, and from a judge. Meantime, CalPERS is still pursuing litigation against former UnitedHealth chief Bill McGuire and former general counsel David Lubben, who were not included in the settlement.

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