Oct. 25 (Bloomberg) -- The backdating of stock options by UnitedHealth Group Inc., the largest U.S. health-insurance provider, is an issue in the Minnesota governor's race.

A television advertisement focuses on the $1.8 billion in options amassed by William McGuire, who agreed last week to step down as chief executive officer of Minnetonka, Minnesota-based UnitedHealth. The state's Democratic-Farmer-Labor Party, a Democratic Party affiliate, is using the spots to target Republican Governor Tim Pawlenty in his run for a second term.

Pawlenty is one of four officials who oversee $39 billion in state pension funds, some of them invested in UnitedHealth shares. The governor abstained from a decision on voting the shares to re-elect McGuire and three other UnitedHealth directors, citing campaign donations from McGuire, according to his spokesman.

``When Tim Pawlenty had the chance to vote against the CEO, he abstained,'' the ad's narrator says, over images of headlines on stock-option profits and an aerial shot of UnitedHealth's headquarters. ``Why? Pawlenty admits it's because the CEO gave him campaign contributions. And under Tim Pawlenty, health- insurance premiums have skyrocketed.''

Pawlenty, 45, behaved properly in the UnitedHealth matter and has since returned contributions from UnitedHealth executives, said Brian McClung, the governor's spokesman, in an e-mail. He called the ad ``outrageous.''

`Ethical Standards'

``Governor Pawlenty acted with the highest ethical standards when he abstained from voting on an issue related to UnitedHealth Group,'' McClung said. ``In July, our campaign returned all contributions from UnitedHealth executives and board members received since the governor was elected in 2002 due to concerns over allegations of stock backdating.''

In 2004, the year cited in the ad, health-insurance premiums rose 11.2 percent in Minnesota, matching the national increase, according to the state health department and the Kaiser Family Foundation, based in Menlo Park, California.

A Newsweek poll of 1,000 Americans conducted Oct. 19-20 found that health care ranks second behind the Iraq war as the issue most important to their vote in the November elections. The subject plays into the Minnesota party's populist leanings, political analysts say.

``When you do surveys of Minnesota voters, health care is always one of the top issues,'' said Steve Schier, a political science professor at Carleton College in Northfield, Minnesota. ``The DFL has really tried to own this issue over the years.''

UnitedHealth shares fell $1.21, or 2.4 percent, to $48.63 at 4:01 p.m. in New York Stock Exchange composite trading. The stock has fallen 22 percent so far in 2006.

Hatch Campaign

The DFL ad doesn't mention Attorney General Mike Hatch, the 57-year-old Democratic gubernatorial candidate, and his campaign declined to comment. Hatch has been probing McGuire's options since June. In April, he said McGuire's compensation was the single-biggest source of consumer complaints in his eight years as attorney general.

The DFL ``is sensing an intolerance around the state and the country against fat-cat insider wheeling and dealing,'' said Arthur Caplan, head of bioethics at the University of Pennsylvania in Philadelphia. The issue ``lets the DFL get back to its roots as the party of the little guy,'' said Caplan, who formerly held a similar position at the University of Minnesota.

Close Race

The race is too close to call, Carleton College's Schier said yesterday in a telephone interview. In a poll of 818 likely voters conducted Oct. 6-11, Hatch held a lead of 46 percent to 37 percent, with a margin of error of plus or minus 3.4 percentage points, the Minneapolis Star Tribune reported Oct. 16.

UnitedHealth doesn't sell health insurance in Minnesota because for-profit medical coverage is illegal there, said Bill Walsh, a spokesman for the state Department of Commerce. UnitedHealth does administer health benefits for certain large national employers in the state that self-insure, spokesman Mark Lindsay said in an Oct. 20 telephone interview.

The DFL party's campaign may carry some risk of backfiring. UnitedHealth is one of Minnesota's biggest employers, with 7,300 workers who benefited from the company's growth under McGuire.

Many of the rank-and-file UnitedHealth employees also profited from the 59-year-old CEO's handling of stock options, a Washington-based law firm found in a report issued last week. McGuire agreed to step down as CEO by Dec. 1 after the probe found he was probably involved in backdating stock options.

Compensation

UnitedHealth used stock options to compensate for below- market cash compensation for employees, according to the report by Wilmer Cutler Pickering Hale & Dorr LLP, known as WilmerHale. Stock options grant the right to buy shares at a set price over a period of time, enabling holders to profit from increases in a company's share price. Backdating the options to lower the strike price increases their potential value.

WilmerHale found that UnitedHealth backdated options for lower-level employees, sometimes dating them before a worker was hired. The report didn't say how many options were granted this way or specify at what price the grants were made.

``The option grants made to newly hired employees and employees receiving promotions were backdated as a matter of policy,'' WilmerHale said in the report. About 14,000 UnitedHealth employees have received options as part of their compensation, Lindsay said.

Senior management and directors told investigators that they weren't aware of the practice, according to the report. In 2002, the policy involving rank-and-file workers was changed to set the grant dates at the lowest price between the time an employee was hired or promoted and the end of the quarter.

While McGuire agreed to reset the pricing dates of his options from the lowest share price of the year or quarter to the highest, rank-and-file employees won't have to give back any of their gains, UnitedHealth's Lindsay said.

To contact the reporters on this story: Michelle Fay Cortez in Minneapolis at mcortez@bloomberg.net; Duncan Moore in Chicago at dmoore35@bloomberg.net.

Last Updated: October 25, 2006 16:16 EDT