For the last six years or so, every practicing physician in the United States has been sent a thick paperback book called Clinical Evidence every six months. The volume, regularly updated, summarizes the latest best practices for everything from the proper uses of drugs to the most effective techniques in cardiovascular care.
The man behind this effort, Dr. William McGuire, the ousted chief executive officer of UnitedHealth Group (UNH), undertook it to end what he regarded as a crazy-quilt of practices that shortchange patients in some places and overtreat them in others.
McGuire, a pulmonologist who practiced medicine for years before building UnitedHealth into the nation's second-largest medical insurer, knew the strengths and weaknesses of the health-care system firsthand. Now that he has been driven out of UnitedHealth for being involved in backdating options that made him a billionaire, the company will have to limp along without a man widely regarded as a towering visionary who turned a modest-sized HMO into a diversified health-care titan.
Along the way, he vastly enriched shareholders, hiking the stock price nearly 8,500% over 15 years as he developed UnitedHealth from a narrowly focused regional health outfit with $600 million a year in revenues into a $70 billion national player.
"It would be hard to find somebody with as much vision and perspective as Bill McGuire has," says Dr. Irwin Redlener, a longtime colleague and president of the Children's Health Fund as well as associate dean at the Mailman School of Public Health at Columbia University. "He has really grown UnitedHealth with an extreme degree of innovation and vision."
LOW CRED. McGuire stepped down as chairman of UnitedHealth on Oct. 15, after a special committee of the board heard a report by the law firm of Wilmer Cutler Pickering Hale & Dorr that faulted the management and board for its handling of stock options given to executives. Further, he agreed to leave as CEO by Dec. 1, turning the job over to his President, Stephen Hemsley.
The law firm reported that the options were "likely backdated" to low points in stock prices, thus enriching McGuire more than he would have been otherwise. The CEO's options were worth more than $1 billion at one point. McGuire denied that he selected the dates for option grants, but the law firm's report cites documents and e-mails "inconsistent" with his stance.
McGuire's departure was almost certainly unavoidable. His credibility has been slammed and longstanding attacks on him for greed have now been vindicated. His outsize paychecks—even if there were no improprieties about them—may have forever tarnished his standing as a voice for health-care reform. Long before his pay reached the latest lofty levels, former medical colleagues branded his compensation as "obscene" (see BusinessWeek.com, 11/4/02, "He Collects Butterflies—and Companies").
ANTITRUST BLUES. But his departure comes at an especially tough time for UnitedHealth, and the health-care insurance industry generally. Rivals such as Aetna (AET) and WellPoint (WLP) are fighting harder to steal corporate clients in lower-margin health benefits administration contracts, even as UnitedHealth's bigger-margin HMO and PPO (preferred provider organization) client base is shrinking.
What's more, premium income for employer-sponsored coverage is rising at a lower rate, 7.7% this year, vs. a high of 13.9% in 2003, according to the Henry J. Kaiser Family Foundation. That's why UnitedHealth and others are getting into increasingly nasty fights over reimbursement rates with hospitals (see BusinessWeek.com, 10/9/06, "UnitedHealth vs. HCA: It's Ugly").
More problematic, antitrust worries are making it tougher for companies to buy up regional rivals, McGuire's favored tack for growth. He developed UnitedHealth largely through acquisition, snapping up several regional health-care outfits across the country as he expanded it from its Minnesota-based regional roots.
GREENER PASTURES. In late 2005, for instance, he added 7 million customers by shelling out $9.2 billion for California giant PacificCare Health Systems, and added still more by buying John Deere Health Care, a four-state plan, and a small south Florida plan. UnitedHealth now serves a staggering 65 million Americans, more than one in every five. With the go-go days likely behind the company, it's no wonder UnitedHealth's stock has skidded from a high near $65 last December to about $41 in May before clawing back to around $48 as of Oct. 16.
"The insurers are at a tipping point," says industry consultant Nathan Kaufman of ACS Healthcare Solutions. "They really don't have that many tricks up their sleeve."
Reckoning that insurance was just a one-trick pony, McGuire was savvy enough to put UnitedHealth into areas that are more promising. He moved the company into sectors such as Medicare drug benefits administration for seniors under the government's Medicare Part D prescription drug program. He teamed it up with AARP, the seniors' group, to manage health-care insurance and pharmacy benefits. And he pushed the outfit into such ventures as helping the Food & Drug Administration monitor the safety of drugs. He even masterminded the selling of discount health-care cards by the likes of Sam's Club. Sadly for UnitedHealth, such areas are still peripheral to the core health-care benefits corporate and insurance businesses.
PASSION AND GRAVITAS. President and soon CEO Hemsley faces an uphill slog. As McGuire's right-hand man since 1997, the former chief financial officer at defunct accounting firm Arthur Andersen gets a lot of credit from Wall Street analysts for knowing the business intimately. But he doesn't bring the hands-on medical experience that gave McGuire the kind of insight that led him a few years ago to scrap the annoying practice of requiring patients to see their primary-care doctors for referrals before going to specialists. Nor will he be able to speak with quite as much authority as McGuire at scientific gatherings and in Congress.
McGuire "is passionate about improving preventative medicine, passionate about controlling costs and speeding access to information, and providing affordable, accessible, high-quality, and safe medicine," says Dr. John Stobo, president of the University of Texas' medical branch in Galveston (McGuire's alma mater). "He has had an impact on the national debate and on some of the challenges facing the health-care system," Stobo adds.
Given McGuire's gravitas, it's no wonder that some of his directors have been quoted as saying they were thankful to have him as the company's CEO. He was able to assemble and stand as a peer among a panel of directors that included the diverse likes of former New Jersey Governor Thomas Kean, a Republican, and, for a time, former Vice-President Walter Mondale, a Democrat. Others included Project HOPE fellow and President Bush adviser Gail Wilensky and Donna Shalala, former Health & Human Services Secretary under President Clinton.
CHAIR-WARMER? Now, Hemsley will also have to make do without some of those directors. William Spears, a director who was faulted by Wilmer Cutler Pickering Hale & Dorr for being too financially entangled with McGuire, also quit. And five board seats will be filled by new independent directors over the next three years, though it's not clear yet who will be among those leaving.
Hemsley will also be busy working with a new chief legal officer, since General Counsel David Lubben has quit, and will have to integrate a new chief ethics officer into the management ranks. He will also be overseeing senior executives who no longer will have the powerful incentive of stock options to drive their efforts. Hemsley himself, a big beneficiary of the options, will have to reprice options he holds even as he has to deal with shareholder suits faulting the company for its options practices.
With all that, Hemsley could easily wind up warming the CEO's spot until someone untainted by the management problems can be found. Indeed one published report suggested he'll be in the post just a year before turning it over to former Northwest Airlines CEO Richard Anderson, who now heads a UnitedHealth subsidiary. A company spokesman denied that report.
Given all the challenges and distractions, Hemsley may well find that making UnitedHealth the rocket it long was under McGuire will be a tall—and probably impossible—order.
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