WellCare's Alleged Medicaid Fraud: The Plaintiffs' Theory

WellCare Health Plans is in a real bind. Not only did federal and state agents raid its headquarters just over a year ago, the administrator of Medicare and Medicaid programs across the country has since fired its CEO and two other top execs, laid off a bunch of employees, and announced it will restate three-and-a-half years of earnings thanks to more than $40 million in what it calls "accounting errors" related to Florida and Illinois Medicaid accounts.

Worst of all, at least from a public-relations standpoint, WellCare has to the best of my knowledge never even bothered to explain what went wrong, even as it kinda sorta acknowledged a vague form of wrongdoing -- best encapsulated by its weasely admission that "former senior management set an inappropriate tone" in the matter. That, of course, leaves the narrative momentum with the company's critics, especially investors who have banded together in a major class-action lawsuit against the company. (WellCare also faces state and federal investigations, several other lawsuits and at least one qui tam whistleblower action.)

Disclosure: A reader emailed to point out the class-action complaint, and it's entirely possible this person has either a professional or personal axe to grind against the company. That said, the complaint is the complaint, and it certainly appears from its SEC filings that WellCare takes the suit seriously. Update: The reader, who asked to remain anonymous, emailed again to say he has no conflict.
Although it's a few months old, I haven't seen much reporting on the class-action suit, which does an impressive job of laying out one possible -- and, of course, highly charged -- explanation of what went wrong at WellCare. None of which to say the plaintiffs' claims are necessarily correct, but in the absence of rebuttal or explanation by the company, this is about the best shot at understanding WellCare's shenanigans as we have at the moment.

Following are a few of the complaint's narrative highlights. The entire complaint is embedded below that, along with a link for folks who don't want to mess with the Scribd widget.

• Briefly put, the complaint alleges that WellCare misappropriated Medicaid funds to inflate its earnings and share price.
• Under WellCare's Medicaid contracts, the company was required to spend a certain fraction of its Medicaid revenue on direct medical services or to refund any unspent part of that amount.
• Instead, WellCare allegedly schemed to hold onto the extra Medicaid money, which it then reported as profit.
• The complaint alleges that WellCare accomplished this by transferring the excess Medicaid revenue to a wholly owned subsidiary in the Cayman Islands for the purpose of buying reinsurance. Instead, the reinsurance purchases were "a sham," the complaint alleges.
• Next, WellCare allegedly "disguised" the supposed reinsurance payments as direct medical costs in filings to the states, relieving it of the duty to refund the money.
• The unspent Medicare money allegedly ended up as profit on WellCare's federal income statements because the company consolidated its Cayman subsidiary into its results, thus allowing it to book the funds as revenue. (The complaint actually charges that WellCare booked the funds as "profit," but revenue seems more likely -- and the net effect would be the same, because additional revenue without offsetting expenses would fall directly to the bottom line.)
• As a result, WellCare allegedly inflated profits by at least $46.5 million over the years this scheme was in practice, thus exceeding analyst expectations and bolstering its stock.
• WellCare allegedly also benefited from "generous" annual Medicaid premium increases, which are based on the amount spent on medical care the previous year. Because WellCare allegedly inflated its medical costs, its premium increases were higher than they otherwise would have been.

Here's the embedded complaint:
Wellcare Class Action Complaint 10-31-2008

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