Backdating Settlement Doesn't End UnitedHealth's Problems

An old health-insurance scandal just keeps on giving at UnitedHealth, which today settled a shareholder lawsuit over the way it backdated stock options for its former CEO Bill McGuire and other execs. The insurer will pay $895 million to resolve claims by Calpers, the giant California public-pension fund, that the move defrauded investors by illegally inflating the value of McGuire's options -- which at one point were reported worth over $1 billion.

UnitedHealth was undoubtedly eager to put a steady drip-drip-drip of revelations about the backdating scandal behind it. In one filing, lawyers for the company insisted that McGuire, a doctor, had "no formal training or degrees in finance, accounting or law," and therefore didn't know that backdating was wrong. Documents unearthed as part of the case included a memo from McGuire defending the practice as far back as 1999 and emails from corporate officials who expressed alarm when they realized they hadn't yet stopped backdating options. (The WSJ Health Blog has the entire set, in case you're interested.)

So, big sighs of relief this morning around UnitedHealth's Minneapolis headquarters, right? Not exactly. The company also announced a big drop in its expected earnings this year -- its second such revision this year. The culprits, as has been the case all year long, are higher-than-expected medical costs (read: claims payments to the sick) and its inability to raise premiums fast enough.

UnitedHealth is hardly alone in watching its business melt down this year, since the same is true for almost every major insurer save Aetna. While the individual causes vary -- some insurers miscalculated demand for drugs under their Medicare plans, while others are getting hammered by defecting businesses unable to meet the burden of insuring their employees -- the root problem is the same one that extends across healthcare: Medical costs continue to soar, and no one seems to know how to get a handle on them.

UnitedHealth and its brethren will certainly try and stem the bleeding with a major premium hike for 2009. It may work in the short term, but the cure is likely to be worse than the disease, since higher insurance costs will force more businesses and individuals out of the market. Insurers will undoubtedly keep trying to squeeze more money out of fewer customers, but since that's pretty much the exact opposite of a growth market, it's hard to see how it will end well.

In short, insurers may soon find themselves playing the doctor in that old joke -- you know, the one famous for saying, "The operation was successful, but the patient died."