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Brain Drain Bashes UnitedHealth

The rebuilding HMO loses two of its brightest stars.

OKLAHOMA CITY -- With the rules of the managed care game changing,

UnitedHealth

(UNH) - Get UnitedHealth Group Incorporated Report

is losing two key players just when it needs them most.

Richard Anderson, head of UnitedHealth's huge commercial division and a former contender for the company's top job, will return to the airline industry to run

Delta

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following its recent bankruptcy reorganization. Meanwhile, more surprising and troubling to some, Lois Quam will end her celebrated 18-year tenure at UnitedHealth -- where she built the company's booming Medicare business -- to launch an investment career at Piper Jaffray.

The high-profile departures come just eight months after a management overhaul, executed by new CEO Stephen Hensley, that left Anderson and Quam in charge of UnitedHealth's key operating divisions. While Anderson's exit seemed almost expected, particularly after his appointment to Delta's board in March, Quam's resignation clearly rattled UnitedHealth followers who have relied on her expert leadership for years.

"Less than a year after becoming president of a $30 billion-plus business -- and weeks before Congress is scheduled to debate important healthcare reforms related to key government-funded programs -- Quam is leaving the business she helped build into the largest government services operation in the country, and which is poised for continued strong growth in the future, to take a job in an unrelated industry," Credit Suisse analyst Gregory Nersessian marveled following news of the shakeup late Tuesday. "Frankly, we don't get it."

Regardless, Nersessian still has high hopes for UnitedHealth. He is maintaining his outperform rating and $62 price target on the company's stock despite the management shakeup. His firm seeks to do business with the companies it covers.

UnitedHealth shares slipped just $1.03 early Wednesday to $48.54, creeping toward the low end of their 52-week range.

Increasingly, Nersessian worries about rampant management turnover in the industry as a whole. In the past two years alone, he notes, more than 20 high-profile executives -- at such leading health insurance firms as

Aetna

(AET)

,

WellPoint

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(WLP)

and, of course, UnitedHealth -- have vacated their offices.

"The ongoing management carousel in the managed care industry seems to have no end," Nersessian lamented on Wednesday. "At this time, we have no definitive conclusion as to why management ranks continue to thin, as losses have stemmed from a broad set of circumstances.

"Nevertheless," he added, "the so-called managed care 'brain drain' is real and does create execution risks as the industry evolves."

Meanwhile, in recent quarters, UnitedHealth's commercial and Medicare divisions have already suffered uncharacteristic setbacks under their current leaders. The commercial business has seen medical costs rise so much that, in the first quarter, UnitedHealth found itself weathering a negative reserve development for the first time in recent memory. Since then, the Medicare unit has encountered new challenges -- leading to missed enrollment targets -- as well.

That said, most experts would prefer that UnitedHealth's key operational leaders stick around to cure those problems rather than leave the company's health in the hands of others. Indeed, CRT Capital analyst Sheryl Skolnick felt so concerned about Quam's unusual silence during UnitedHealth's latest quarterly update that she asked about the executive's own health.

"Typically, when we hear about Medicare and Ovations and Evercare, we hear from Lois," Skolnick noted during last month's conference calls. "Is Lois OK?"

Quam, in turn, piped up to make her presence known. In a moment of possible foreshadowing, however, Quam directed attention away from herself and toward the "strong team of people" she relied on instead.

She brought her fans some short-lived comfort in the process.

"Just wanted to make sure you were still there," Skolnick said at the time. "Thanks very much."

But Quam's comments during that conference call -- among her briefest ever -- look to be her last as a UnitedHealth leader. Although Quam has officially announced plans to enter the investment-banking field, some suspect that the well-connected executive could soon jump into the world of politics instead.

If so, leaving UnitedHealth -- a company tainted by compensation scandals and reaping extraordinary profits from Medicare -- could prove necessary.

"Her credentials included working on the health reform effort in the first term of the President Clinton administration, and she is considered to still have a good relationship with Senator (Hillary) Clinton," Bear Stearns analyst John Rex noted on Tuesday. "Should she ever want to return to public service in another Clinton administration, establishing some distance from UNH -- the largest Medicare contractor in the country -- would probably be helpful."

Rex is sticking with his outperform rating on UnitedHealth in the meantime. His firm has non-investment-banking ties to the company.

Going forward, Anthony Welters -- a UnitedHealth veteran far more familiar with Medicaid than Medicare -- is now poised to fill Quam's giant shoes. Meanwhile, Executive Vice President William Munsell will take over for Anderson.

For its part, UnitedHealth is boasting of the "depth and experience of the leadership team" while expressing full confidence in its new top managers. Nevertheless, even company bulls seem uneasy.

"Certainly, it is difficult to downplay the turnover of two of the top three operation positions reporting to the CEO," Rex acknowledged. "Though, with the company having just edged up its full-year (profit) outlook two weeks ago, we doubt the moves are related to any new operating/earnings problem.

"Still," he concluded, "with a near-continuous stream of 'issues' to deal with for some time now, the disruption doesn't exactly help create a more stable perception" of the company.