The man who built UnitedHealth into an industry giant now has to turn it around

Stephen Hemsley never fully dropped the reins when he stepped down as UnitedHealth Group Inc.’s chief executive officer eight years ago. With the health giant in crisis, he’s taking back his old job – and confronting one of the toughest turnaround tasks any executive has ever faced.

Widely credited with building UnitedHealth into the conglomerate it is today, Hemsley, 72, was reluctant to end his tenure as CEO in 2017, according to people familiar with the matter who asked for anonymity to describe internal company discussions. The board had asked him to step aside at age 65, but he wanted to remain involved in operations as executive chairman, the people said.

The company disputed the characterization that Hemsley didn’t want to step down, saying UnitedHealth doesn’t have a mandatory retirement age and he worked with the board for more than a year on transition planning.

UnitedHealth is betting that Hemsley can fix operational stumbles while sticking with its strategy to broaden and deepen its reach into more areas of health care. As CEO, he had presided over a period in which its business rapidly expanded and evolved. He made the crucial decision to build the company’s pharmacy-benefits operation, which now accounts for a large share of its profits.

During his time as CEO and after, UnitedHealth delivered reliable profit growth as it reached unrivaled scale. From the start of Hemsley’s tenure through last year, shares of UnitedHealth gained more than 900%.

That track record has now unraveled. After the company broke a streak of stronger-than-expected quarterly results stretching back to 2008, years of gains evaporated in a matter of days. UnitedHealth also faces multiple U.S. investigations of its business practices — and is still reeling from the murder last year of its top insurance executive.

People who worked under Hemsley when he was CEO described him as a savvy corporate strategist with an accountant’s command of the numbers (before joining the company in 1997, he was chief financial officer at the defunct accounting giant Arthur Andersen). Hemsley would sometimes map out his plans by hand on an 11” x 17” tablet of paper, drawing precise organizational charts with a ruler, according to people familiar with him.

Even after Hemsley moved into the chairman role, his influence over how the company was run never waned, the people said. He is UnitedHealth’s largest individual shareholder, owning more than 1.1 million shares worth about $350 million as of the close of U.S. trading on Monday, according to data compiled by Bloomberg.

In his return to his old job, Hemsley is set to receive a $1 million salary and a $60 million equity bonus that will vest in three years. The investor advisory group Institutional Shareholder Services opposed that pay package, UnitedHealth said in a filing Tuesday that urged shareholders to support it. The board asked Hemsley to stay on as CEO for at least three years, according to the filing.

He’ll also keep his seat as chairman despite company governance principles that call for splitting its top executive and boardroom roles. According to a document published on UnitedHealth’s website, the chief executive and chairman roles should be separate to “aid in the Board’s oversight of management” and allow the CEO to “focus primarily on management responsibilities.”

UnitedHealth representatives didn’t address questions about whether candidates other than Hemsley were considered for the CEO job or whether he would give up the chairman role. The company declined to make Hemsley available for an interview.

Diminished returns

Hemsley is joining a fraternity of well-known chief executives, including Howard Schultz of Starbucks Corp., Robert Iger of Walt Disney Co. and A.G. Lafley of Procter & Gamble, who returned to running companies they had shaped.

Yet companies that bring back former chiefs tend to underperform those that bring in new leaders, according to a 2019 analysis of thousands of CEO tenures. The paper found that annual stock returns were 10% lower for returning CEOs, even when compared with counterparts who also faced crises.

“The world that the former CEO knew is just different,” said Chris Bingham, a strategy professor at the UNC Kenan-Flagler Business School who led the research. Turning to an old hand tends to push a company “backward, not forward,” he said.

One of the biggest pressure points for UnitedHealth in the near term will be Medicare, the federal health program for seniors. Premiums from the federal agency that runs Medicare account for about 40% of UnitedHealth’s revenue. UnitedHealth’s insurance unit has 8.2 million customers in private Medicare Advantage plans.

Expenses in Medicare are rising faster than management anticipated, leading the company to cut its outlook when it reported its quarterly earnings in April. Andrew Witty, who had been CEO since 2021, also blamed changes to how plans were paid by the government.

UnitedHealth is disproportionately affected by changes to how Medicare pays insurers, analysts from TD Cowen wrote in a May 19 note lowering their rating on the stock from buy to hold. A new version of the elaborate system of diagnostic codes that determine payment could mean a “fundamental impairment” of the company’s historical edge over its insurance-industry rivals, they wrote.

Not long after the earnings report, Witty was out. In announcing the CEO change, UnitedHealth pulled its earnings guidance, further shaking investors’ confidence.

“Do not underestimate the gravity of the situation,” analysts from Nephron Research wrote in a note to clients.

On top of those challenges, the Department of Justice has opened a criminal probe of UnitedHealth’s Medicare practices, according to The Wall Street Journal. UnitedHealth said it hadn’t been notified of the probe and stood by its practices.

‘Difficult period’

The Justice Department is also examining potential antitrust violations by UnitedHealth, which has reach across the U.S. health-care system that few companies can match.

Hemsley was among a group of executives who sold stock after the company learned of that probe but before it became public, trades the company said last year were approved. The sales are at issue in a lawsuit led by the California Public Employees’ Retirement System alleging that the company misled investors. UnitedHealth has sought to dismiss the suit.

Last week, with the stock price at five-year lows, Hemsley bought 86,700 shares, according to a filing.

Hemsley will be the first executive to serve as both CEO and chairman at UnitedHealth since 2006, when William McGuire was forced out over allegations he received backdated stock options. Without admitting or denying wrongdoing, McGuire forfeited $468 million in a settlement with U.S. securities regulators in 2007.

As chairman, Hemsley outlasted two CEOs. His protégé Dave Wichmann retired abruptly after less than four years, citing personal reasons. Witty, who had previously run the UK drugmaker now known as GSK Plc, will remain as an adviser.

Since the December shooting death of Brian Thompson, who had been chief executive of the company’s insurance unit, many of UnitedHealth’s executive changes have been made with Hemsley’s blessing, the people familiar with the situation said.

That includes elevating Medicare chief Tim Noel to succeed Thompson. Patrick Conway, who ran the company’s pharmacy business, was promoted to CEO of Optum, while former Optum chief Heather Cianfrocco took a role overseeing compliance, governance and information security. Chief Financial Officer John Rex, a one-time Wall Street analyst who rose to his current role under Hemsley in 2016, remains.

Thompson’s murder and the harsh public response that followed are fresh in the minds of the company’s almost 400,000 employees. Last week, Hemsley thanked Witty for leading “with real integrity and compassion during one of the most difficult periods any company could endure.”