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

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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.”

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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.

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Diminished Returns

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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.

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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 per cent lower for returning CEOs, even when compared with counterparts who also faced crises.

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“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.

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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 per cent of UnitedHealth’s revenue. UnitedHealth’s insurance unit has 8.2 million customers in private Medicare Advantage plans.

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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.

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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.

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

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

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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.

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‘Difficult Period’

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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.

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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.

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