UnitedHealth's California Clash

Matter of Debate

For the most part, analysts seem rather unconcerned by the Blue Shield threat.

Either they feel that UnitedHealth will retain most of the estimated 1 million California customers who are being targeted by the competition. Or they see the damage as minimal at worst.

"We doubt many customers will actually switch to Blue Shield," CIBC World Markets analyst Carl McDonald wrote last week. "But even in the extremely unlikely event that United lost all of its customers (who are currently at risk), the impact on earnings would only be a couple of pennies a share."

McDonald has an outperform rating on UnitedHealth's stock. His firm hopes to secure investment banking business from the company over the next three months.

But one veteran health care expert has expressed more concern about the current situation. Sheryl Skolnick, senior vice president of CRT Capital Group, fears broader problems for the company.

For starters, Skolnick worries about the California physicians who are reportedly leaving UnitedHealth's network as a result of big reimbursement cuts. But she senses physician tensions on the East Coast -- where UnitedHealth bought another major insurer -- as well.

"That's a little bit troubling to me," says Skolnick, who has a fair value rating on the company's stock. "What I would say about California is that UnitedHealth has still got the business right now. But we won't know if they keep that business until September. So that's something I want to watch."

Potential Threats

It's something rating agencies might want to watch, too.

Late last month -- even before Blue Shield of California made its move -- Moody's revised UnitedHealth's outlook from stable to negative. Like others, Moody's seemed most concerned about a stock-option scandal that could result in legal damages, and even senior management changes for the company. But the agency cited risks associated with the company's fundamental operations as well.

"UnitedHealth could also sustain damage to its reputation, which may result in nonrenewal of business by employer groups or in providers leaving UnitedHealth's network, although Moody's considers a significant loss of membership or providers unlikely," the agency wrote on May 22. "In addition, the company may face difficult negotiations with respect to pricing contracts and provider reimbursements as these contracts come up for renewal during the year, even if the company is cleared of any wrongdoing."

UnitedHealth has been accused of backdating stock options for executives in a manner that significantly enhanced their value. The company has expressed confidence in its past compensation practices, although it has since gone on to change them dramatically.

By then, however, UnitedHealth had come under steady fire for its generosity to executives. The California Public Employees' Retirement System cried foul when UnitedHealth agreed to shower PacifiCare executives with giant rewards as part of the buyout deal last year. CalPERS attempted to block those payouts -- withholding its votes for the merger -- but lost out in the end. The organization has gone on to criticize the huge paychecks for UnitedHealth executives as well.