Worries about possible management turmoil continue to hamper UnitedHealth (UNH) - Get Report.

Fans of the Minnetonka, Minn., health insurer have been fretting over a stock-option backdating scandal at the big company. CEO William McGuire and UnitedHealth's board have come under fire for possible improprieties tied to McGuire's huge pay package and their handling of executive stock options. Shares have lost more than 20% of their value since the revelations.

But some observers fret that even beyond the widely respected McGuire, the stock-option scandal could compromise the visionary chief's second-in-command and possible successor, operating chief Stephen Hemsley.

Hemsley has stood alongside McGuire as the CEO built UnitedHealth into a corporate powerhouse that generated phenomenal returns for shareholders. But one analyst says Hemsley could be held responsible for problems associated with the stock-option program in general. Notably, the company has disclosed a "significant deficiency" relating to the administration, accounting and disclosure of its stock-option grants.

"The significant deficiency came out of the

human resources department -- which reports to Stephen," says Sheryl Skolnick, senior vice president of CRT Capital Group. "If the buck stops with the guy on top, then he's the first place where the buck stops. And that is of concern."

To be clear, Skolnick notes, UnitedHealth has never indicated that either McGuire or Hemsley could lose their jobs over the stock-options scandal. Even Skolnick herself portrays such a scenario as mere speculation. But she says investors must consider the risk.

In a nutshell, Skolnick sees McGuire and Hemsley as a winning team and wonders how the company would fare without them both.

"There seems to be an understanding between Bill and Stephen that's unspoken -- or even if it's spoken, it doesn't require many words," says Skolnick, who downgraded UnitedHealth from buy to fair value last month over concerns about the stock-options saga. "Bill has the vision. And Stephen makes sure that things get done."

UnitedHealth failed to return a phone call from

TheStreet.com

seeking comment for this story. The company's stock, which peaked at $64.61 late last year, inched up 39 cents to $46.57 on Wednesday.

UnitedHealth highlighted the company's outstanding performance under McGuire's leadership -- including a 7,000% increase in the price of the stock -- when asked about management's staying power. It also referred to any talk about top-level turnover as "inappropriate speculation."

Meanwhile, however, the company's once-highflying stock continues to struggle. The shares inched up 3 cents to $46.21 on Wednesday, but remain well below the $64.61 peak they set at the end of last year.

Right-Hand Man

McGuire always wins most of the credit for UnitedHealth's amazing success. But the company really shot to prominence -- leaving typical managed-care players behind -- after McGuire tapped Hemsley as his right-hand man.

Hemsley came to UnitedHealth in 1997 with decades of leadership experience at Arthur Andersen, the firm that audited UnitedHealth's books until shortly before its conviction in 2002. By the time his old firm flamed out, Hemsley had ascended higher up the UnitedHealth ladder than everyone but McGuire himself. Hemsley serves as president, operating chief and a member of the board.

He has been rewarded accordingly.

In 1999, under a new formal employment agreement, Hemsley received a special option grant for 500,000 shares of stock that would vest completely if the stock hit some undisclosed minimum trading price. He went on to collect other big stock awards -- at the same low strike price as McGuire's own -- as the years went by.

The duo often sold their stock together as well. As a result, the

Star-Tribune

of Minneapolis has reported, Hemsley regularly made more money than any other non-CEO in the company's home state of Minnesota -- and more than most CEOs there, besides his own, to boot.

A government pension plan, citing the huge stock gains enjoyed by McGuire and Hemsley alike, finally tried to rein the company in a few years ago. The plan urged investors to adopt a proposal that would require the company to start expensing stock options going forward.

"We believe that not expensing stock options may lead to overuse by companies that see them as 'free money,'" the group explained. "As Standard & Poor's put it in its recent report, 'When something is significantly underpriced, it is often also substantially overconsumed.' We believe this concern is relevant to UnitedHealth."

But company leaders, who opposed the measure, narrowly won out in the end. And the company went on to shower its executives with even more stock options down the road.

Rich Reward

Last year, in fact, the company granted Hemsley 850,000 new options -- leaving him with 13.5 million options even after all his giant sales -- and promised to keep showing him that same kind of favor.

"Under the terms of

his new employment agreement," the company's latest proxy states, "Mr. Hemsley is eligible to receive annual equity and/or equity-based incentive compensation awards in such form and amount as determined by the committee -- but in such aggregate amount that is not less favorable than that granted to any other senior executive of the company other than the chief executive officer."

By then, the proxy shows, Hemsley already had $663 million worth of in-the-money options that he could exercise and another $81.7 million worth of options still vesting.

Hemsley could have to make do with that. Under heavy attack, UnitedHealth last month agreed to forgo future stock-option grants for high-ranking executives -- including McGuire and Hemsley -- who already have big equity stakes in the company.

Meanwhile, Skolnick speculates that if both executives end up losing their jobs, a relative newcomer -- former Northwest Airlines CEO Richard Anderson -- could wind up at the helm. Anderson voluntarily vacated the top spot at Northwest two years ago to run a small, but rapidly growing, information technology division at UnitedHealth.

"Could he step into a COO/president role?" Skolnick ponders. "Yes, he could. ... But I don't know that Richard has the depth of experience in health care globally to actually be CEO of this corporation."

In contrast, Skolnick seems fully confident in the company's current COO. She simply worries that he let a serious problem develop under his watch.

"The company did find mistakes and sloppiness with options handling," she notes. "This is one of those things that he should have made sure didn't happen. ... It ends up that the things that were probably on the bottom of Stephen's to-do list have become even more important to the health and future of the company -- and the lifespan of its executives -- than the things that were at the top of that list before."