AP
UnitedHealth cuts 4,000 jobs and 2008 outlook
Wednesday July 2, 5:12 pm ET
Elizabeth Dunbar, Associated Press Writer
UnitedHealth restructures, cuts jobs and issues warning for 2008


MINNEAPOLIS (AP) -- UnitedHealth Group Inc. cleared its decks of bad news on Wednesday, announcing a lower profit outlook, a restructuring that will trim 4,000 jobs and a $900 million payout to settle a class-action lawsuit over options backdating.

UnitedHealth said its restructuring would change operations on every level to focus more on regional coverage. The new UnitedHealth will be "simpler, leaner and faster," Chief Executive Stephen J. Hemsley said.

Analysts saw the announcements as perhaps the end of a long rough patch for UnitedHealth, the nation's second-largest health insurer. Shares in UnitedHealth Group fell 51 cents, or 2 percent, to close at $25.12 Wednesday after sliding to $25.04 earlier in the session, a level not reached since 2003.

The company has been wrestling since 2006 with the backdating scandal, which led to the forced departure of CEO Bill McGuire, who helped build UnitedHealth into a managed-care powerhouse.

UnitedHealth took a big step toward making those problems go away by agreeing to pay $895 million to settle a class-action lawsuit led by the California Public Employees Retirement System (CalPERS) and Alaska Plumbing and Pipefitting Industry Pension Trust. The plaintiffs had argued that options backdating cost shareholders money.

UnitedHealth will pay $17 million to resolve another suit related to the Employee Retirement Income Security Act.

CalPERS and attorneys who follow such settlements said they believed the $895 million was the largest in an options backdating class action. Other recent settlements include $160 million last month between Brocade Communications Systems Inc. and shareholders and a $117.5 million settlement between Mercury Interactive Corp. and shareholders last October.

"This is a significant, epic settlement," said Ramzi Abadou, an attorney for CalPERS. He also noted a corporate governance change calling for a shareholder-nominated director, calling it "a major advance in corporate-shareowner relations."

Hemsley said the settlements will help UnitedHealth avoid more costly litigation.

Most analysts focused on the restructuring and the lowered profit forecast, which was widely expected.

"If there is a silver lining today, we believe it's that UnitedHealth has not introduced any new issues since" it lowered its guidance three months ago, Matt Perry, an analyst with Wachovia Securities, wrote in a research note.

UnitedHealth cited reduced commercial business and higher-than-expected Medicare-related costs for its lowered outlook.

The company now forecasts 2008 adjusted profit of $2.95 to $3.05 per share on revenue in the $81 billion range, down from prior estimates of $3.55 to $3.60 per share. Analysts surveyed by Thomson Financial expected profit of $3.52 per share on revenue of $81.02 billion.

The company said it is seeing greater-than-expected pressure on premium yields, due to an "intensely competitive" commercial business environment. UnitedHealth is reducing risk-based business, which is affecting earnings performance, and said it is paying out more than expected for Medicare Part D prescription drug offerings and special needs plans serving seniors with chronic conditions.

The 4,000 jobs represent about 5 percent of UnitedHealth's work force.

Under a new regionalized management structure, UnitedHealthcare will serve all commercial benefits markets, including national accounts previously under the Uniprise brand.

Hemsley, the CEO, said the regional business model would bring UnitedHealth more in tune with local markets. Simplifying the company by making more decisions locally may also reduce costs, he said.

Analysts said UnitedHealth's effort to improve margins by raising prices backfired, with enrollment dropping.

"You see companies sometimes move back and forth between what's the best model for customers and getting the pricing right," Ellis said. "Business is priced nationally but delivered locally. Knowing the local market sometimes helps you a little bit better."

The Minnetonka, Minn.-based managed care company said it would give more details when it reports second-quarter earnings on July 22. Elsewhere in the sector, fellow health insurer Coventry Health Care Inc. lowered its full-year outlook last month; Aetna Inc. and Humana Inc. have backed their prior estimates.