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Regulator rides to the aid of WellCare

Insurance Commissioner Kevin McCarty's intervention bolsters the legal case of the state's largest HMO.

JONI JAMES
Published May 7, 2004

TALLAHASSEE - Days before WellCare HMO was set to defend itself against a disgruntled insurance agent in a Tampa courtroom, the company found an unexpected ally in Florida's insurance regulator.

Dusting off a rarely used section of state law, Insurance Commissioner Kevin McCarty ordered the state's largest HMO to cancel its 9-year-old contract with the plaintiff, insurance agent E.S. Thomas and Associates of Tampa.

The decision April 29 was welcome news to WellCare of Tampa. Now part of the court file, the order is expected to bolster the company's argument that it had a right to prohibit Edward Thomas, whose independent agency sold WellCare policies, from selling WellCare's supplemental Medicare coverage.

McCarty's order came just as a new judge in the three-year-old lawsuit indefinitely postponed the trial, which was supposed to have begun last Monday. Now, the agent has asked the court to sanction WellCare for trying to circumvent the lawsuit by appealing to the insurance regulator.

"What he's done is protect the interest of the majority shareholders in this company," John Johnson, the Tampa attorney for Thomas, said this week.

McCarty, citing a law that allows him to review all HMO contracts for excessive fees, wrote that if WellCare's 1995 contract with Thomas was applied to Medicare policies it would be "excessive and detrimental to WellCare's subscribers, stockholders, investors and creditors."

McCarty estimated that Thomas' rate of commission, about 17 percent in the first year of a policy the agency sold, would have led WellCare to lose money on each supplemental Medicare policy Thomas sold. And that Thomas' contract would have drained the company's surplus, registered at $24-million.

Thomas is seeking $184-million in damages, saying WellCare founder Kiran Patel reneged on the contract when he prohibited Thomas from selling Medicare policies. Thomas' contract said his agency could sell all WellCare products, but it was written before WellCare began offering supplemental Medicare coverage.

The suit also alleges that WellCare violated state law and cost Thomas commissions when it refused to provide his agency with information to convert small group policies into individual ones.

"I'm reluctant to interfere with contracts. I believe companies should rise and fall by good deals and bad deals," McCarty said this week. "But I thought in this case the consequences of doing so would be significant. I could come to no other conclusion but the contract was excessive."

In reaching that conclusion, McCarty inserted his office into a contentious lawsuit at a time when WellCare's profile as the state's largest HMO is becoming decidely more distinct.

In Tallahassee, the company is coming off a successful 2004 legislative session that saw its influence with Republican leaders climb. And the company, which Patel sold in 2002 to a group of New York investors that included Democratic donor and multibillionaire George Soros, is poised to launch an initial public offering.

McCarty's ruling has frustrated Thomas and his attorney, who say the order failed to look at the company's entire financial picture before determining that a major settlement could lead to insolvency.

Thomas and Johnson contend that WellCare already has set aside money that could be used if they lose the lawsuit or agree to settle.

Johnson points to information in the company's filing in March with the U.S. Securities and Exchange Commission that says Patel and other original stockholders stand to gain $119.7-million from the initial public offering.

That money, tied to a settlement agreement from the sale with the original stockholders, would be used first if any liability comes from Thomas' claim, Johnson said. The settlement agreement has not yet been publicly disclosed.

But McCarty said this week that his job is to look at the company's current operating budget, which must be filed with the state. And he staunchly denied that he was influenced by the fast-growing HMO's rising profile in the state capital.

McCarty, who works at the pleasure of the state's Cabinet and Gov. Jeb Bush, said his decision came six weeks after WellCare executives alerted his office that the lawsuit appeared to be headed for trial.

McCarty said regulators had previously discounted Thomas' claim, expecting a judge to throw out the case because Thomas had never sold a Medicare policy.

"This isn't like regulating television sets where you can go in and close down someone who is making defective ones," McCarty said. "Our job is to protect the people who have been giving money to pay for future losses. It's different than almost any other regulation government does."

McCarty's order came just 10 days after WellCare garnered headlines for providing a private plane ride for Florida House Speaker Johnnie Byrd of Plant City, a Republican U.S. Senate candidate returning from a New York fundraising trip.

Just days after that, state lawmakers approved a 2004-05 state budget that could grant HMOs up to $140-million in business to provide care for hundreds of thousands of psychiatric patients on the state's Medicaid roles. WellCare had sought the budget language.

All told, Byrd's U.S. Senate campaign has received at least $33,000 in contributions from 24 donors identified in campaign records as WellCare employees, including president Todd Farha and several out-of-state WellCare executives. The money represents a tiny fraction of the more than $2.3-million Byrd has raised.

WellCare officials declined to comment, saying they don't address pending litigation. But they defended McCarty's order, "We think the statute is very clear and speaks for itself," said Donna Burtanger, WellCare's spokeswoman.

- Times staff writer Steve Bousquet and researcher Kitty Bennett contributed to this report.

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