Unbiased Analysis of Today's Healthcare Issues

United Health CEO earned $124.8 million in 2005

Written By: Jason Shafrin - Feb• 14•06

Forbes magazine reports that William W. McGuire, CEO of UnitedHealth Group) received compensation of $124.8 million in 2005.  Managed Care Magazine also says that the average executive compensation (excluding unexercised stock options) for an executive of a ‘top 10 for profit health plan’ was $11.7 million and that was back in 2000. 

 Are these high salaries a good for the welfare of American citizens?

Liberals would state that this is an outrage. The Dissident Voice website abhors these “robber barons” stating:

William McGuire of UnitedHealth Group, the nation’s leading insurer, was the third-highest paid CEO on the Forbes list. His pay of $124.8 million could cover the average health insurance premiums of nearly 34,000 people….

While workers are having a tougher time making ends meet, CEOs are getting perks worth more than worker paychecks. CEO freeloaders expect perks such as lifetime use of company jets, chauffeured cars, company apartments, club memberships, sports tickets, financial planning, personal assistants and more.

In CEO World, the more money you make, the less you should have to pay for.

BusinessWeek‘s profile of McGuire is much more complimentary.  It shows how McGuire has helped increase consumer choice in the marketplace.

When McGuire took over in 1991, UnitedHealth was little more than a regional health-maintenance organization. By trying to offer something for every-body and identifying lucrative niches, McGuire, now 55, has turned it into one of the most diversified health-services companies. If you don’t like the restrictions of an HMO plan, you can sign up for a preferred-provider organization. Belong to AARP? You can sign up for a special drug-discount card…

[McGuire has also] set up a program to track cardiology centers of excellence, so that patients can find the best places for treatment.

Economists generally would not have a problem with the large compensation in a competitive marketplace.  Firms who pay executives more than their marginal productivity will lose money and competitors with less expensive CEOs could earn more profits. 

McGuire does seem to be a productive CEO; according to Forbes UnitedHealth Group returns are 19% higher than the S&P 500 over his tenure.  Further, the majority of McGuire’s compensation was in the form of stock options.  With stock options, however, it is dificult to ascertain what amount was given as compensation (amounts below the current value of the stock) and which amount was due to increased productivity which raised the stock price. 

So what is the solution?  Regulating CEO salaries is not desirable.  Shareholders should be the ones who are outraged at the compensation which is cutting into their profits.  If the health care insurance market is not competitive, United Health can pass on the cost of McGuire’s salary to consumers.  I believe that the health insurance market is very competitive and this is not an option for united health.  Thus, the ones who truly suffer from the large CEO salary are United Health shareholders.  If citizens wish for a more equitable society, that can be accomplished with a more progressive tax structure.  While seeing exorbitant CEO salaries highlights the sad inequitities of society, putting a cap on salaries is not the solution. 

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22 Comments

  1. steven lonardo says:

    The question was asked – Are these salaries good for the welfare of American citizens?

    In a purely academic and theoretical sense, I am sure that economists could make an argument for such a compensation package in a free market system. It begins to fall apart when you understand that essentially, a few individuals ultimately weigh into these decisions and then use “free market forces” as the rationale. I venture that 99.9% of Americans could not comprehend the staggering size of Mr. McGuire’s compensation. Further insulting is the fact that there is a real health care financing crisis. We are told that there are only so many dollars available to fund health care. We are told that stock options are not really draining money from the healthcare system. It’s really the shareholders who should complain. Oh yes, in a company the size of United Health this compensation is not really significant. He was afterall, the only person who turned the company into the Goliath it is today (as if the employees were only bit players). Well, back to the question – Are these salaries good for the welfare of Americans? Let me answer this with another question – Do you think that more good could have been achieved if $1 Billion in United Health stock was placed in a trust fund to improve the welfare of uninsured and underinsured Americans?

  2. Jason Shafrin says:

    In theory an economist would claim that this compensation is justified in that McGuire was paid his marginal product. If United Health over-compensates their CEO, the cost of their product will increase; a competitor could take some of their business by reducing their price while still making the same margins if the compensated their CEO less.

    In reality, taking money from McGuire in the short run and giving to the uninsured would probably increase welfare. However incredible McGuire’s salary may be, do we want the government to regulate salaries in health insurance companies? Also, if health professionals salaries are capped, it will reduce the quality of service Americans receive.

    If want want to reduce inequality, society could do this through a more progressive tax system. If we want to expand health insurance, we could subsdize the purchase of health insurance or provide vouchers for individuals to use towards the purchase of private insurance.

    While the highsalaires of executives may be staggering for 99.9% of Americans (including myself), I think the tax system would be a better mechanism for redistribution than taking money from United Health.

  3. [...] In February, this year, I wrote of the seemingly outlandish compensation William W. McGuire, the CEO of UnitedHealth Group, received in 2005.  Of his $124.8 million of compensation, $114.6 million was in the form of stock options.  It seems that this compensation might not have been entirely kosher. [...]

  4. Edward M. says:

    UHC just doesn’t pay. My father-in-law has run up over $85,000 dollars in his end-state renal care. UNC is obligated by Federal Law to pay, but they just won’t pay. They don’t answer letters. They don’t do what they say on the phone. They don’t answer the phones in a timely manner. They will not recognize their obligation under the law. This experience has made completely in favor of NATIONAL SOCIALIZED MEDICINE as the only alternative to this b.s. Anyone who says that the private sector is good at providing health care is an idiot. Health care in the United States has degenerated into a profit-making racket in which innocent people get killed while executives who are little more than criminals put the money in the bank. I want it all shut down. All of it. One national data center with a single file of medical records for each person. One set of policies that everyone understands. One set of rules that everyone can live by.

  5. Dan Kanoza says:

    It continues to be difficult for me to believe that the majority of our citizens are willing to turn their backs on those who can’t afford health care. In fact, the word “affordable”, when talking about health care, is anything but the American way, as some of our citizens see it.

    Those people who cringe at the thought of a single payer program for our Nation, because they are opposed to a large bureaucracy seem to have conditioned themselves to forget that the HMOs represent a very large bureaucracy. A bureacracy, wheather Federal or private, has to be run be “people”. A single payer plan, run by a single agency has to be both cheaper and all inclusive.

    I’m convinced that the idea of privatization has permeated their pscyhes to the point that they either can’t think straight or are extremely selfish.

  6. Dan Kanoza says:

    It continues to be difficult for me to believe that the majority of our citizens are willing to turn their backs on those who can’t afford health care. In fact, the word “affordableâ€?, when talking about health care, is anything but the American way, as some of our citizens see it.

    Those people who cringe at the thought of a single payer program for our Nation, because they are opposed to a large bureaucracy seem to have conditioned themselves to forget that the HMOs represent a very large bureaucracy. A bureacracy, wheather Federal or private, has to be run be “peopleâ€?. A single payer plan, run by a single agency has to be both cheaper and all inclusive.

    I’m convinced that the idea of privatization has permeated their pscyhes to the point that they either can’t think straight or are extremely selfish.

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  16. [...] 2.Healthcare Economist · United Health CEO earned $124.8 million in If you don’t like the restrictions of an HMO plan, you can sign up for a preferred-provider organization. Belong to AARP? You can sign up for a special drug-discount card… … We are told that stock options are not really draining money from the healthcare system. … If United Health over-compensates their CEO, the cost of… http://healthcare-economist.com/2006/02/14/united-health-ceo-earned-1248-million-in-2005/ [...]

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