UnitedHealth shareholders support $60M stock package for CEO Hemsley

Despite rumblings of widespread dissatisfaction, UnitedHealth Group shareholders voted to support a $60 million stock package for returning CEO Stephen Hemsley Monday morning.

The 24-minute shareholder meeting touched briefly on the recent upheaval that saw UHG part abruptly with CEO Andrew Witty and abandon its earnings outlook delivered less than four weeks earlier.

Hemsley sought to calm investor fears with confident comments on a return to profitability. He declined, however, to put a timetable on UHG’s turnaround, instead pointing to July 29 as the date for a new earnings outlook. UHG will report second-quarter results at that time.

UnitedHealth will cut costs and factor in the higher cost of care into its private insurance plans and Medicare Advantage plans, Hemsley said.

“I’m introducing new initiatives to include a comprehensive review of all our policies, practices, and the associated processes and performance measures for risk assessment, for managed care practices, and for pharmacy services,” he said. “We will use authoritative, independent experts to evaluate and assess these reviews, and will modify our approaches where appropriate.”

Hemsley, who returned to the CEO chair following Witty’s May 12 resignation, will receive a base annual salary of $1 million and $60 million in UHG stock options on a three-year contract.

A ‘windfall’ predicted

Institutional Shareholder Services issued a recent proxy alert “against” Hemsley’s compensation.

The ISS proxy alert states that recent fluctuations in stock price could create a “windfall” for Hemsley. UHG sent a letter to shareholders urging them to support the executive pay proposal.

“[I]n reality, all shareholders would gain from increases in the company’s stock price relative to current levels,” wrote Christopher R. Zaetta, executive vice president, chief legal officer and corporate secretary.

The shareholder vote, commonly referred to as a “Say-on-Pay” vote, is not binding on the board.

The UHG letter notes that Hemsley’s overall compensation level is designed to encourage fulfillment of the three-year contract and is in the “median” range for large-company CEOs. And if Hemsley, 72, resigns or is terminated by UHG “for cause,” he will “forfeit the [stock] options in their entirety.”

“Hemsley himself currently holds a significant portion of his net worth in our shares,” the letter states. On May 16, “he purchased more than $25 million of our shares on the open market with his own funds, further signaling his commitment to and stake in building long-term shareholder value.”

Glass Lewis, another prominent proxy advisory firm, has recommended shareholders vote “For” the compensation structure, the UHG letter says.

Unexpected cost drivers

During its April Q1 earnings call, UHG Chief Financial Officer John Rex outlined “three buckets” its higher costs fall into:

• A greater-than-expected impact on United Healthcare from the health status of new members.
• Further acceleration of utilization within Medicare Advantage.
• Finally, “indications of a broadening of this higher trend to other areas.” In response to a question, Rex said the higher utilization of services is being seen in patients “with complex medical conditions” and is mainly “in the outpatient and physician side.”

Hemsley, who led UHG from 2006 to 2017, emphasized the discipline he is bringing back, along with “a fresh perspective.”

“Clearly, we have gotten things wrong. We underestimated care activity and cost trends,” Hemsley said. “We are intensively examining our approaches and have already begun to make improvements, including, most notably, a significant retooling of our efforts to ensure more precise and more accurate forecasting of both care and financial activity.”

UHG received one shareholder proposal to limit “excessive golden parachutes” for departing executives. It was voted down by shareholders.

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