The Last Of The Bubble Billionaires

The Wall Street Journal is all over the story of UnitedHealth Group CEO Dr. William McGuire, the richest guy you’ve never heard of. Today the CEO is calling for the end to stock-based compensation for his company’s executives. The Journal notes the irony:

The catch is this: the former pulmonologist has amassed one of the fattest stock-options fortunes of all time. In a Page One article today, The Wall Street Journal reported that Dr. McGuire’s unrealized gains on UnitedHealth options total $1.6 billion (he also pulls down $8 million a year in salary, plus bonus and perks). That’s more lavish than anything granted to celebrity CEOs like Jack Welch or Louis Gerstner. The timing of Dr. McGuire’s awards is also drawing scrutiny after the Journal reported last month that the grants were regularly dated just in time to catch substantial jumps in the company’s share price. Was he just lucky? The Journal calculated that the odds of the grants occurring with such winning timing were roughly one in 200 million. UnitedHealth has defended the grants, though the company’s board is conducting a review.

Dr. McGuire said in a conference call that “every member of management in this company believed at the time that we followed appropriate practices” in granting options. Remaining tight-lipped amid media reports about the grants is difficult, he said, but the company doesn’t plan to comment much on the issue. Dr. McGuire promised the company would be “transparent” about the results of the internal review and take action to address shareholder interests if the review shows the company didn’t follow appropriate practices. UnitedHealth is also under investigation by the Securities and Exchange Commission.

So how did McGuire get what turned out to be such a sweetheart deal? In 1998 he was just an ordinary millionaire.

Dr. McGuire at the end of 1998 had unrealized gains of $22 million on his existing options. That might have seemed like a huge sum a decade earlier. But Leonard Abramson, the founder of U.S. Healthcare Inc., netted about $900 million when he sold his company to Aetna Inc. in 1996. And dot-com mania was at its peak. CEOs of health-care start-ups such as WebMD Inc. held 5% or bigger stakes in their companies, which looked like passports to great wealth.

In contract negotiations, Dr. McGuire pushed for more options, and directors agreed. When his contract was renewed, effective Oct. 13, 1999, he got options equivalent to 2% of UnitedHealth’s shares outstanding. That was the biggest slice Dr. McGuire had ever received. “Clearly we were aware of people getting huge gains on Internet-stock situations. That was perhaps a factor in our mind,” says director William Spears.

The dot-coms’ onslaught proved laughably brief, but UnitedHealth kept rising. As the industry consolidated — spurred by several deals Dr. McGuire engineered — health-plan operators found it easier to raise prices. Employers rarely complained, or if they did they directed their anger at the health-care system generally.

The better UnitedHealth fared, the more valuable Dr. McGuire’s options became. Since 2000, he has cashed out $488 million of options, yet the value of his remaining options keeps rising. The 1999 grant has proved about seven times as valuable as the company projected when it was issued.

Drkoop.com, Pets.com, Idealab!, and their ilk, helped make McGuire billionaire.

As Patients, Doctors Feel Pinch, Insurer’s CEO Makes a Billion (subscribers only) – [WSJ]

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