UnitedHealth (UNH) - Get Report is starting to look like a company with too much on its plate.

For months, UnitedHealth leaders have been consumed by an escalating probe into the well-timed stock options they received in the past. That distraction has come at a crucial time for the company, as it seeks to overcome challenges tied to big recent acquisitions.

Take last year's buyout of PacifiCare, for example.

The acquisition greatly expanded UnitedHealth's presence in California, where competitors like nonprofit Blue Cross/Blue Shield have long dominated the market. But UnitedHealth made an important concession when pushing that acquisition through. UnitedHealth agreed to sever a close relationship with Blue Shield of California, which had been leasing its network of health care providers to the company for years, in response to antitrust concerns from regulators.

UnitedHealth, in turn, set out to establish its own health care network in California before its contract with Blue Shield expires. In the meantime, however, Blue Shield has decided that it would like to keep some of that business for itself.

In an aggressive move last week, Blue Shield offered attractive incentives for California employers that are willing to switch from away from UnitedHealth and sign up for its own plans instead.

"Our PPO network, medical management and administrative services are second to none in California," boasted Paul Markovich, senior vice president of Blue Shield's large-group business unit. "This offer guarantees that our administrative fees and performance guarantees are competitive with the largest national plans. We are so confident in our network coverage that we are willing to put financial guarantees around provider disruption."

Specifically, Blue Shield has promised to lock in current UnitedHealth rates for at least a year. It has offered multiyear agreements to those who prefer them as well.

For its part, UnitedHealth claims it now offers an even larger network than Blue Shield once provided the company. As a result, the company expects to hold on to its big California-based clients with "minimal, minimal disruptions."

Tom Epstein, vice president of public affairs for Blue Shield of California, says it is "still a little early" to measure customer response to his company's recent overture. But he expressed confidence in a Blue Shield network that, he estimates, boasts thousands more California physicians than UnitedHealth's own.

"We're certainly letting potential customers know about it," Epstein told

TheStreet.com

on Monday. "We're just capitalizing on an opportunity."

UnitedHealth stock inched up 43 cents to $43.93 on Tuesday, but remained near the bottom of its 52-week range.

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.

Early Warning

Skolnick has long expressed uneasiness about the stock options cashed in by UnitedHealth CEO William McGuire in particular. She regularly highlighted those sales as important risk factors even when she used to recommend the company's stock. But she also raised other concerns that have started to look more legitimate as time goes by.

For example, back in the fall of 2004 -- between two of UnitedHealth's biggest acquisitions -- Skolnick mentioned poor oversight of the company's New York operations. Specifically, she wondered why the company had repeatedly failed to file appropriate financial papers in the state. Her complaints seem rather perceptive now, given the problems that have since surfaced with the internal controls of a company once viewed by many -- and still viewed by some -- as perhaps the best-run corporation in America.

"We can understand one re-filing (in New York), or maybe even a second -- but five?" Skolnick wrote in a 2004 downgrade. "If the business was so sloppily run from a regulatory filing perspective, how can we be sure that no other problems will be uncovered under further review? We can't be ... hence, our downgrade."