POLICY/HEALTH PLANS: Shalala and the janitors (not a 60s doo-wop band)

Over at Health Care Renewal, Tony Poses has done some excellent digging into the tale of how the University of Miami, best known for the close to criminal behavior of its football players over the years, is (by proxy of a middleman) stiffing the janitors at its hospital from getting health insurance. Meanwhile, university President and former Clinton HHS secretary — not that she did much while holding that hot seat other than make the camera pan way down when she walked in the room for the State of the Union — Donna Shalala was profiled in the New York Times for her luxury lifestyle. It’s all in the story: A Tale of Three Ironies: University of Miami’s Janitors Still Have No Health Insurance. And Roy digs up the fact that she gets a decent chunk of change for doing basically nothing by being on UnitedHealth Group’s board. ($750 for listening to a summary of a phone call? Nice work if you can get it).

Of course, compared to the average take home pay of UnitedHealth board members, that’s chicken feed. But the average is somewhat distorted by the CEO.

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  1. Dr. Shalala has problems in many areas of her public life, and probably too many items on her plate to do any of them well. She’s in it for the personal gain and recognition.
    Constrovery Concerning President Bush’s Appointment
    Dr. Shalala sits on the Board of Directors of Lennar Corporation, the nation’s third larges home builder. In this position, she has influence over the actions of Lennar Corporation. As noted on the website http://www.Lennar-Homes.info Lennar Corporation has issues with building and delivery of defective homes. Dr. Shalala refuses to address these issues, as Lennar Corporation turns the American Dream into the American Nightmare for thousands of American. Clear evidence of Lennar’s defective homes is documented at http://www.Lennar-Homes.info
    As a Board Member, Shalala is compensated by Lennar Corporation, and the University of Miami received a $100 million donation from the Miller family to rename the medical school to the Leonard Miller School of Medicine. It becomes clear that Shalala puts personal financial gain and recognition over the interests of American homeowners. She will do the same in her position on the President’s commission to investigate our nation’s military and veteran hospitals.
    It is interesting to note that Shalala is teamed up with Senator Bob Dole on this project. Senator Dole’s wife, when she was on the Federal Trade Commission, state: ” . . . for too many Americans, the dream home has turned into a nightmare. You know as well as I do that as families move into their own little Garden of Eden, more and more are finding the apple full of worms. As a result, some homebuyers believe they are being bilked for thousands of dollars, and they are expressing not only anguish but outrage. Shoddy building practices can be concealed from many purchasers who cannot be expected to have the technical expertise to evaluate the structural soundness of a home or the quality of electrical, plumbing, or air conditioning systems…The patience of the American consumer is rapidly running out. . . . Consumers are demanding more protection from the government, not LESS. The consumer movement is no longer made up of small bands of activists with no troops standing behind them; the consumer movement is now part of our culture – it embraces every one of us. And it will not be denied over an issue so fundamental as decent housing . . .”
    This statement was made in 1979, but nothing has changed, and Shalala’s position on the Board of Lennar has demonstrated her lack of empathy and respect for the American public. President Bush should clearly remove her from her current appointment on the commission to address problems in our military and veteran hospitals.

  2. > does anyone have anything to add about
    > Shalala and the janitors?
    I do not know whether this really contributes anything or not, but here goes. Ms. Shalala is not alone. What is going on evidently at Miami is pretty much what happened at my own Alma Mater back around 1987 (certainly before 1989). Essentially, they outsourced all the janitors, groundskeepers, and cafeteria workers because the rich benefits package required to attract and retain faculty is not necessary to attract and retain service workers. I was disappointed in this decision, what with the university’s claim to be socially conscious and all that. It seems that the social conscience of university presidents and a good many other lefties is primarily intended to regulate the behavior of other people.
    One consequence of the old scheme is we got a number of service workers at the university who were very good: smart beyond what one might expect in (say) a housekeeper, generally well-motivated and so-forth. Some (most?) of these people could’ve got a better WAGE in another line of work. But they were making a big sacrifice in a couple of dimensions for their kids’ sake in order to obtain the tuition benefit offered to children of university employees. This route to “family investment” has been cut off now.
    The whole trend this direction seems to me un-American. But so also is a blanket policy to prevent it happening. A conundrum…

  3. C’mon John, arguing about option valuation/acounting is much more fun….

  4. Ok, now that we have all revisited our Corporate Finance course, does anyone have anything to add about Shalala and the janitors?

  5. I see: “Without starting a huge debate on corporate finance, I’m going to throw out a bunch of half-truths, non sequiturs, contradictions, and falsehoods, and call them ‘sufficient’. So there.”
    Geez, Matthew…
    > The company’s option cost is the share price
    > at the time the option is granted – when the
    > option shares are set aside in the company
    > treasury.
    This is not true. The company’s option cost is unknown until the option is excercised. Most CFOs will use some variant of the Black-Scholes Model for estimating its value before that point. This is about the best that can be done. There are arguments both ways about whether this estimate ought to find its way into balance sheets.

  6. “Theora’s right, of course”
    Matt, I’m surprised at you. Theora does not understand how options work.
    The company’s option cost is the share price at the time the option is granted – when the option shares are set aside in the company treasury. To exercise the option, the employee must first buy the stock from the company at the option price. This repays the company for the option shares. The employee then owns the stock, and can sell (or hold) at will. Selling is a market transaction, and does not involve the company paying anything. Same for any random United stockholder (me for example) who sells shares; the proceeds come from the market, United does not “pay” me.
    Tom correctly points out there is some dilution in the stock to the extent that options are awarded in the first place. The stockholders bear the cost of such dilution. And the company incurs costs in managing the option account and takes a risk that stock it sets aside in the option account might decline in price ( although whenever that occurs the options expire unexercised and the company still owns the stock).
    As I said, I don’t like the absolute amount of McGuire’s compensation – I think it’s way out of line. But it’s simply false that United somehow “paid” him the market value of his gain from stock options.

  7. Hmm…
    Without starting a huge debate on corporate finance, suffice it to say that most “responsible” companies now count new stock option grants as an expense — particularly true in the case of new grants of “in-the-money” options which assume that unless the stock goes down, the excercise of the option will cost money that could be used elsewhere in the company.
    You can argue about the accounting all you like, but the money (the $136m in this case) has to come from somewhere, and as this is an option grant for which the company has to basically go into the market and buy shares at the back end to fulfill its obligations, it comes from reduced profits. You could say that that is money forgone by shareholders, but you could say that about any expense (e.g. the amount United spends on hospital care, say)
    The only difference is that these are off balance sheet transactions until the options are cashed in. Which is why they drive purists like Warren Buffet nuts. Otherwise they’re like a huge performance bonus, subject to certain milestones.
    But I like Tom’s touching disctinction between the notion of the company and the stockholder. While the difference is great in theory, the practice of the 1990s (and the ongoing one at United) show that management treats company stock as its personal piggy bank to be drawn into when it wants to reward itself. Of course if they contstruct the reward as one that only occurs when good things happen to other shareholders, they’re likley to receive few complaints.
    It’s when this happens and then things go wrong for shareholders that it tends to come under scrutiny. And luckily for United that hasn’t happened…yet.

  8. This is happening literally in my backyard. For years the MCO I have worked for has attempted to provide benefits to these employees. The janitors are actually employees of a company called UNICCO. UM outsources the work to UNICCO.
    Our conversations, through intermediaries, with UNICCO has not resulted in anything meaningful. The primary reason is that UM refuses to pay or require that benefits become part of the contract. Its ironic because we cover several other UNICCO-based employees under contract with other business entities, ie, Miami International Airport janitorial services. Because the County government passed a living wage ordinance whereby all contractors must pay a living wage PLUS provide health benefits to its employees. The amount to be allocated is indexed to inflation and is part of the contract (Broward County followed suit). Because of this ordinance, when a contractor wins the bid on a public contract before popping the champagne bottles they scramble to find health carrier for benefits.
    UM has refused to discuss the subject. In the interest of full disclosure, my company would have an incentive if the University were to offer coverage because then we would have a shot of the contract. Then again, so would any other licensed insurer in the state. Shalala has agreed to consider the request. Let’s see what happens.
    Footnote- UM was covered by United Health for several years. They switched to United shortly after Shalala arrived, but before she became part of the Board. United lost the contract this year to Humana. I would imagine there must have been some interesting sidebar conversations during board meetings after that decision was made.

  9. > Someone has to make up the difference between
    > the option price and whatever his purchaser paid,
    > and the answer is it’s the company which forgoes it —
    > so it is compensation.
    Matt, if you mean when you say “the company forgoes it” that “the current stockholders forgo it” then you are right. Any other meaning is wrong.
    United (in the meaning above) DID pay McGuire $136M — that was his share of the gains in value during the option period. The stockholders who held shares on the day the option was granted paid the $136M, and they got the rest of the gain. On that day they did not know how much they were paying, but they paid it; not subsequent purchasers of the stock.
    Notice I did not say that was his share of the gain in value for which he was responsible. That is a completely different idea.
    And a stock option is not a diamond, Theora. It is not guaranteed to have any particular non-negative value. And it isn’t very pretty to look at, although I have seen framed option certificates hanging on the wall before. United might have been able to sell those options on the open market, depending on how they were structured. But doing so would not buy “United” anything: the sale would simply dilute the expected value of the remaining shares, and the best “United” could do is break-even, less the expense of marketing the options: a net loss for d*mn sure. If I were an existing stockholder, I might sue the board if they tried a stunt like this.
    I recommend an introductory course in corporate finance.

  10. Theora’s right, of course, and Silicon Valley has been moaning about having to account for this, but talk to Warren Buffet. Someone has to make up the difference between the option price and whatever his purchaser paid, and the answer is it’s the company which forgoes it — so it is compensation.
    But who said I was complaining? If anyone wants to pay me that much you’ll hear no complaints. That’s just the way things are in America. Surely McGuire’s not embarrased about that, is he?

  11. Nice hairsplitting, bourne2y. Point of fact: United created those stock options, and could have stold them on the open market. Instead, they chose to give them to McGuire and let him sell them. If I give someone a diamond and let him sell it would you say that’s substantively different from selling it myself and giving him a big pile of money?
    That said, Shalala should be ashamed of herself. I hope those janitors unionize and kick her ass.

  12. I don’t care for McGuire’s income any more than you do – but for the sake of being correct about things, let’s note that United did not “pay” McGuire $136 million. That was his gain on the exercise of stock options, whose cost was paid by whoever bought the stock McGuire sold when he exercised his options – not by United (unless of course United also bought the stock, which I doubt). If United stock had declined in value, these same options could have been bupkis.
    Is anyone worth that level of comp? I dunno. Worth is a slippery concept. Is Oprah Winfrey worth $225 million a year? Is Mel Gibson worth $185 million a year? Is Tiger Woods worth $80 million? Is Elvis still worth $45 million a year? Is Larry Ellison worth $40 million a year? etc etc. I dunno.
    But I do know that United did not “pay” McGuire $136 million last year.