PacifiCare Execs’ Deal Is Detailed

Times Staff Writer

Top executives of PacifiCare Health Systems Inc. would earn nearly $230 million if it was acquired by industry giant UnitedHealth Group Inc. by Feb. 1, according to documents filed with the state Monday.

In their filings the companies, which announced the $8.1-billion deal last month, said most of that money would come through accelerated vesting of now-lucrative PacifiCare stock options that the company granted its top officers years ago, when it was on the verge of filing for bankruptcy and needed to attract and retain talent.

An additional $84.5 million in signing bonuses and UnitedHealth stock options would be promised to PacifiCare executives if they stayed with the new company, the documents show. UnitedHealth executives would receive no payments.


State regulators said Wednesday that they would review the documents carefully -- especially the details on executive compensation. Last year’s $21-billion acquisition of Thousand Oaks-based WellPoint Health Networks Inc. by Indianapolis-based Anthem Inc. attracted criticism over payouts to top officers of the California company.

“We will do everything within our power to make sure the compensation isn’t excessive” and doesn’t result in higher premiums, said Cindy Ehnes, director of the Department of Managed Health Care, which regulates HMOs.

“When you look at someone who is getting millions of dollars, it seems excessive to anyone whose framework isn’t Wall Street,” Ehnes said. “For all of us who are agonizing about all the people who are going without healthcare, it’s very difficult.”

Cypress-based PacifiCare said July 6 that it had agreed to be acquired by Minnetonka, Minn.-based UnitedHealth, the nation’s second-largest health insurer. The companies hope to finalize the deal as soon as Sept. 30.

Although PacifiCare is expected to remain in Orange County and minimal layoffs are planned, consumer activists are concerned that the deal would mean a decline in competition and in healthcare service quality, given the firm’s new out-of-state owners. Proponents believe that PacifiCare would be a better competitor with the backing of the larger national company, which could offer more healthcare choices for state residents.

In Monday’s filing, the companies said that all medical decision-making for PacifiCare enrollees would continue to be made by California physicians and that enrollees would have access to more doctor and hospital networks and more healthcare options.


Eighteen PacifiCare executives -- such as the company’s senior vice president for finance and deputy general counsel -- would share $14.5 million in “change in control” payments. Neither Chief Executive Howard Phanstiel nor 20 other senior executives are among them.

These “change in control” payments sparked controversy in the WellPoint deal last year. As a group, about 300 executives of WellPoint were expected to receive $147 million to $356 million in retention and cash bonuses once the deal closed. That range did not include the value of their stock options.

In the PacifiCare deal, all 39 of the top executives would share in $215 million in PacifiCare stock options previously granted by the company that would vest immediately. An additional $59 million in stock options for 691 other employees also would vest immediately.

Phanstiel holds stock options valued at $59 million. Last month, he said he also would receive about $131 million in additional retirement payouts and other incentives not included in figures released Monday.

Other top executives also would earn large payouts, with Chief Financial Officer Gregory W. Scott reaping more than $18 million and general counsel Joseph Konowiecki earning more than $22 million, the companies said in Monday’s filing.

One consumer group decried the payouts to executives.

“When HMO executives receive hundreds of millions of dollars of cash and stock, patients will invariably be asked to pay more for less care,” said Jerry Flanagan, spokesman for the Foundation for Taxpayer and Consumer Rights, a Santa Monica-based consumer group, which wants the state to allow regulators to review all future rate increases and deny those deemed to be excessive, unfair or discriminatory.


Flanagan noted that PacifiCare had at least $374 million in cash reserves that could be taken by UnitedHealth if regulators didn’t require the funds to remain in the state.

Wall Street analysts and bankers, however, described the compensation as a payoff for the gamble Phanstiel and other executives took in joining a troubled company and helping it launch a turnaround in 2002.

“It’s easy to look at the numbers in hindsight and say, “Wow, why are these guys making so much?” said Scott Adelson, a senior managing director and co-head of investment banking at Houlihan Lokey Howard & Zukin in Los Angeles.

“But here was a company that was in trouble and they got granted options and other bonuses to attract and retain good people,” he said.

Adelson said it was typical for a CEO or other top executives to get “deal bonuses” or “change of control payments” in order to make sure that management had an incentive to get the best deal for shareholders. Phanstiel is not getting such bonuses, probably because he had significant stock options, bankers said.

Still, “it’s not every CEO who gets to walk away with a couple hundred million -- unless you’re the company founder,” Adelson said.


State regulators are expected to hold hearings on the deal in the next few months.