UnitedHealth Cleans House

It sweeps away options-tainted execs and cuts past pay.
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With the political landscape changing, possibly putting its big Medicare opportunity in danger,

UnitedHealth

(UNH) - Get Report

has announced some major housecleaning of its own.

Stephen Hemsley, tapped to replace disgraced William McGuire as CEO, is expected to lead the company for another four years. But several other leaders -- including the CFO, the general counsel and the head of human resources -- have all been thrown out.

The shift in power, unimaginable less than a year ago, comes in response to a stock-option backdating scandal that likely will result in "material" charges for the company.

"These are the right changes, the necessary changes, the obvious changes," says Sheryl Skolnick, senior vice president of CRT Capital Group. "These are things that the company should do. But I don't want to congratulate them for what they should be doing -- because it's the minimum."

In the past, UnitedHealth has rewarded its executives with backdated stock options that made them even wealthier than they otherwise would be. The company is now repricing those questionable options to make them worth far less. Hemsley alone will see the value of his past option grants slashed by nearly $200 million.

He won't make nearly as much money as McGuire did, either. He gets no more stock options and no automatic bonuses under his new contract with the company.

Hemsley -- who replaces a paper billionaire -- seems happy with his new job, anyway.

"I am especially pleased to have reached a new agreement that allows me to continue working with the finest group of employees anywhere," he announced. "The senior leaders of UnitedHealth Group are clearly aligned with our board in striving for the highest standards of governance and business practices, even as they continue to deliver operational excellence throughout the company."

Changes at the national level haven't helped the company, however. Notably, with Democrats gaining power in Congress, Medicare Part D could be reshaped.

The new drug benefit -- accused of helping health care companies more than senior citizens -- has been an important growth vehicle for UnitedHealth this year.

The company's stock tumbled 3.6% to $47.79 on Wednesday's developments.

Humana

(HUM) - Get Report

, another big Medicare player, fell even harder.

Clean Sweep

Meanwhile, UnitedHealth continues to overhaul its executive branch.

Mike Mikan replaces Patrick Erlandson as CFO. Mikan is a veteran UnitedHealth executive who most recently served as senior vice president of finance for the company.

Forrest Burke, already a top lawyer for many UnitedHealth divisions, will serve as acting general counsel of the entire company until a permanent replacement can be found. The company is hunting for a new person to head its HR department -- blamed for weak oversight of past option grants -- as well.

Skolnick welcomes the upcoming changes.

"The CFO had to fall on a sword," says Skolnick, who has a fair value rating on the company's stock. "Ditto for the HR director. ... There really isn't anything here that isn't obvious."

Two big matters remain undecided, however. UnitedHealth has yet to determine just how much its past option grants will cost the company. It has said only that the charge will be "material" -- exceeding the hundreds of millions of dollars it has already warned about -- and has deemed its past financial statements unreliable in the meantime.

In addition, UnitedHealth has yet to reveal a finalized retirement package for McGuire. Critics have sought to block the rich benefits that McGuire's contract could deliver to him. Skolnick, for one, hopes that new company Chairman Richard Burke will listen.

"They need to keep that a very skinny retirement package; if they don't, it will mean another leg down for the stock -- at least temporarily," she says. "But I suspect that Richard Burke understands."