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After inquiry and stock plunge, can WellCare rebound?

For two years, the company was golden. Exponential growth attracted investors' attention, and the stock headed skyward. Then came the raid - and the free fall.

By Kris Hundley, Times Staff Writer
Published November 4, 2007

WellCare chief executive officer Todd Farha has built valuable relationships with elected officials, which might be an important factor in keeping the company alive and returning it to prominence.
	[Ken Helle | Times]

When the sun came up Oct. 24, WellCare Health Plans Inc. was a fast-growing, $5-billion managed-care company with the momentum to become Tampa Bay's top publicly traded company. By sundown, it was shattered.

That day more than 200 federal and state agents converged on WellCare's headquarters in Tampa, seizing computers, BlackBerries and boxes full of files as part of a wide-ranging investigation into the company's Medicaid and Medicare business. WellCare executives quickly hired lawyers and promised to cooperate with government officials. But the damage had been done.

Investors raced for the exits, driving WellCare stock down more than $100 a share in less than a week. The U.S. Securities and Exchange Commission requested information. Class-action shareholder lawsuits started piling up at the federal courthouse. Medicaid officials in Florida, Connecticut and New York began scrutinizing WellCare's contracts.

With the nature of the government's investigation unclear and the timing and scope of any charges unknown, WellCare's stockholders, government contractors and managed-care plan members were left wondering how - and if - the company could recover.

Analysts and attorneys familiar with similar health care investigations in the past predicted that WellCare would survive, but in radically different shape from what it was Oct. 23.

"I don't know that it's going to die," said Thomas A. Carroll, managing director of Stifel Nicolaus in Baltimore. "But its business could get piecemealed apart among various competitors. You could also see senior management replaced. And it certainly seems like there could be some kind of financial penalty, though at this point, we can't even speculate what might be reasonable."

Veterans of the health care industry say WellCare's situation is eerily similar to the FBI's high-profile raid in 1997 on Columbia/HCA, then the nation's fastest-growing hospital chain. Triggered by a whistle-blower's claim of Medicare fraud, an indictment was not filed for several months and the case dragged on for years. Top executives were replaced, expansion was halted and the company ultimately pleaded guilty to criminal charges and paid more than $2-billion in fines.

By the time a much smaller HCA was taken private in mid 2006, its share price was just slightly higher than it had been before the 1997 raid.

Here are factors weighing in WellCare's favor as it faces an uncertain future:

The company has responded quickly, setting up a special board committee of outside directors to handle inquiries. At Columbia/HCA, a hard-charging executive was initially confrontational - and was quickly removed.

Ken Vianale, an attorney in Boca Raton who was involved in a shareholder lawsuit against HCA, said it's good that WellCare has hired lawyers to perform its own investigation. "But now that they have the government breathing down their necks, do they have a choice?"

In the past when WellCare has taken heat for wrongdoing, it has been able to shift the blame away from top executives. Rejected pharmacy claims in Connecticut were blamed on a computer problem. The enrollment of dead people in Georgia was pinned on unsupervised sales agents. Depending on the government's allegations, top management could be spared.

WellCare is politically well-connected. Its board includes former Democratic Sen. Bob Graham as well as Ruben King-Shaw, who was once the No. 2 man at Medicare and head of Florida's Medicaid agency. The company has also been a generous contributor to Republican causes, with chief executive Todd Farha contributing $100,000 to President Bush's 2004 campaign.

WellCare has about $100-million in unrestricted cash and about $1-billion in state insurance coffers for members' medical bills. The company continues to process medical claims and prescriptions without interruption and, so far, member complaints have not been widespread.

WellCare also intends to pursue expansion of its Medicare plans into four new states in 2008. "Right now it's business as usual," said Amy Knapp, a WellCare spokeswoman.

What is yet to be known is whether WellCare's positives can outweigh these negatives:

Medicare beneficiaries, who make up about half of WellCare's 2.3-million members, will be signing up for 2008 coverage beginning in mid November, and in most markets, there is fierce competition for the business. Will WellCare be able to retain existing members and attract new ones with a pending government investigation?

Lawmakers in several states are taking another look at WellCare's Medicaid contracts and Florida has halted its expansion into 11 new counties. Though Medicaid members are less likely to switch plans than seniors, they could be swayed by doctors if they become unhappy with WellCare.

"The physician is the best salesman," analyst Carroll said. "To the extent doctors suggest a switch, that could drive WellCare's membership away."

Unlike the Columbia/HCA hospital chain, which provided medical care to patients, WellCare provides an insurance service that could be absorbed, with little disruption, by several competitors. Members could also return to government-run programs.

In the end, however, analysts are betting that the "nuclear option" - complete obliteration of WellCare - is not going to happen.

Matthew Borsch of Goldman Sachs was one of the first analysts to raise questions last spring about WellCare's reinsurance subsidiary in the Caymans. In a report last week, he said the arrangement allowed WellCare to hide $90-million in profits while being overpaid by state Medicaid programs.

But even critics like Borsch think it's doubtful WellCare will disappear.

"Even under a reasonable worst-case scenario, we believe that regulators would be likely to seek a remediation that addresses the underlying issues but also allows the company to continue to serve its Medicare and Medicaid members and continue to provide employment to its more than 3,000 employees," Borsch wrote.

Kris Hundley can be reached at hundley@sptimes.com or 727 892-2996.

Pros

.WellCare has plenty of cash to weather this storm.

.WellCare has strong political tiesincluding a former U.S. senator on its board and a CEO who's a major contributor to President Bush.

.Eliminating WellCare would disrupt service to 2.3-million members and wipe out 3,000 jobs, two effects regulators hope to avoid.

Cons

.Competition for WellCare's customerswill be fierce as 2008 enrollment begins.

.State lawmakers could cancel or restrict WellCare's Medicaid contracts.

.If dissatisfied, doctors could encourage WellCare members to switch plans.

[Last modified November 2, 2007, 21:40:08]