UnitedHealth Group's profits give investors something to cheer

Investors cheered the company's report and sent UnitedHealth's share price soaring 5.5 percent -- the biggest percentage increase in more than two years.

Health care stock analyst Sheryl Skolnick of CRT Capital Group says the report shows the company is performing extremely well.

"I think what the numbers told us, despite the distractions in the upper echelons of the corporate suite, the day to day operations and the people in the segments and down in the regions and down on Mainstreet were very clearly focused and determined on making or exceeding expectations in the third quarter," she says.

The distractions Skolnick mentions have to do with the departure of CEO Bill McGuire in the midst of a scandal over backdating of stock options. Earlier this week, UnitedHealth released a report it commissioned on the matter.

We are deeply disappointed by, and apologize to you, for the shortcomings in the stock option programs.

The investigation by an outside law firm found that stock options were "likely backdated" on a number of occasions, in such a way that would greatly benefit Chief Executive Officer Bill McGuire and the company's president Stephen Hemsley.

The report says McGuire was central to the options grant process for senior executives, but Hemsley probably was not.

McGuire is leaving the company by December 1 and Hemsley will replace him as CEO. Both men have agreed to a repricing of their stock options to minimize their profit. Hemsley's options were worth $660 million at the end of last year.

In a conference call with investors on Thursday, Hemsley struck a contrite tone over the report's findings.

"We have demonstrated great strength in our operating controls in other areas of our enterprise and are deeply disappointed by, and apologize to you, for the shortcomings in the stock option programs," he said.

Hemsley acknowledged that the report on the company was strongly critical of UnitedHealth's stock option practice and internal governance.

Wall Street analysts asked whether Hemsley's promotion to CEO was meant as a short term fix to the options scandal. Hemsley and board Chairman Richard Burke said Hemsley is meant to fill the position for the long term.

Some analysts say this is still just the start what the stock options scandal will mean for the company. Yesterday the U.S. Senate Finance Committee requested documents concerning McGuire's compensation and the terms of his departure. McGuire stands to leave with as much as $1.1 billion in stock options, retirement payouts and other benefits, according to the Wall Street Journal's assessment.

However, the company says it is negotiating the terms of his departure. Senate Finance Committee Chair Charles Grassley, R-Iowa, could not be reached for comment. But in a statement, Grassley questioned "how a top executive can lose his job for allegedly defrauding his own company's investors, but still get rewarded with a billion dollars for doing it."

Norman Bowie, who teaches at the Carlson School of Management at the University of Minnesota, says it used to be the case that the American public and politicians believed corporate leaders deserved high incomes if they raised shareholder wealth. But he thinks the Senate's current interest in UnitedHealth points to a change.

"I think now, with people in a grumpy mood about lots of things, and with the suspicion that a lot of these gains have not been gotten by increasing shareholder value, or not just by increasing shareholder value but by other stuff, I think people are annoyed," he says.

But University of Minnesota political science professor Larry Jacobs says he doubts the Senate Finance Committee will target UnitedHealth in particular. With more than 100 companies under scrutiny for backdating options, Jacobs expects the committee will simply research UnitedHealth as one case in their overall investigation into corporate governance issues.

UnitedHealth also faces investigations by the the Securities and Exchange Commission, the Justice Department and the Minnesota attorney general.