WellCare Stock Plunges In Wake Of Raid

TAMPA - Shares in WellCare Health Plans were hammered on Wall Street on Thursday, falling more than 60 percent in response to a massive raid Wednesday at its headquarters by federal and state agents.

Meanwhile in Tampa, the company hired two law firms - King & Spalding and Greenburg Traurig - to deal with the investigation and told employees that WellCare would provide an attorney for them if they are questioned by authorities.

Officials in Washington and seven state capitals, including Tallahassee, continued the flow of money to WellCare to cover health expenses for 2.3 million Medicare and Medicaid beneficiaries. The flow, which totaled $6.4 billion last year, continues to grow.

'They've been a good contractor up to this point,' said Tom Arnold, director of Florida's Medicaid program. 'We're not hearing complaints from our beneficiaries.'

Arnold said the raid took him by surprise, and others expressed similar shock.

'This is the first time that a Medicare health plan has been forcibly raided this way,' said health consultant John Gorman, a high-ranking Medicare official during the Clinton administration. When the government suspects overbilling or other improprieties, he said, it usually sends subpoenas, not agents with guns.

'Clearly, it's either an informant or a whistleblower,' said Gorman, who is based in Washington, D.C. 'There must have been some serious documentation to prompt this kind of action.'

None of the agencies involved in the execution of the search warrant was willing to comment on what spurred Wednesday's action. The U.S. Attorney's Office in Tampa declined to identify the federal judge who authorized the search or predict when the sealed warrant may be made public.

At the WellCare campus on Henderson Road, where nearly 2,200 people work in four buildings, executives churned out messages of reassurance by e-mail and a recording on the Internet by Todd Farha, president, chairman and CEO.

Investors Abandon Ship

'Our primary focus is to make sure that our operations are running smoothly and that we are continuing to pay provider claims timely, answer our customers' calls and provide access to covered health care services for our members,' he said.

Investors were not reassured. On the New York Stock Exchange, WellCare shares fell $72.50, or about 63 percent, to close Thursday at $42.67. More than 36 million shares traded hands, about 65 times the daily average volume.

The spectacular one-day collapse in the company's stock price had Wall Street analysts pondering doomsday questions about a company that had been a darling in the health care industry until 9:25 a.m. Wednesday.

That's when about 200 agents from the FBI, the Florida Medicaid Fraud Control Unit and the Inspector General of the U.S. Department of Health and Human Services simultaneously entered company buildings. Concentrating on Building One, which houses executives' offices and where the board of directors was meeting, the agents downloaded information from computers and carted off boxes of files.

Executives and members of the board of directors were taken off-campus for questioning, WellCare spokeswoman Amy Knapp confirmed, but WellCare officials returned to work Thursday and all the directors made their flights home late Wednesday.

Trading in WellCare's shares was shut down about 11 a.m. Wednesday as word leaked out about the raid. When it was allowed to resume Thursday, the value plunged.

'The market tends to frown on uncertainty,' said Joshua Raskin, an analyst who follows WellCare for Lehman Bros. 'This is not the end of it.'

WellCare had been a favorite on Wall Street as it won huge amounts of business from the federal government and states across the nation to handle health insurance matters.

Since 2004, the company's cash flow ballooned from $3.9 billion to $6.5 billion in 2006. Shares in the company also have been a good investment, until Wednesday. Shares in the company grew from as low as $18 a share in 2004 to $128.42 a share this summer.

That meteoric rise may have made WellCare especially vulnerable to a fall. Goldman Sachs analysts on Wednesday noted that WellCare's profit margins and stock valuation had been 'stretched unsustainably' above those of peer companies, and they wrote in a research report that 'we see no inherent reason that WellCare can sustain significantly better results than other industry leaders in what is ultimately a commodity-like business.'

'What Is This Thing Worth?'

Now, the question has changed from what happened at the raid in Tampa to 'what is this thing worth?' said Thomas Carroll, an analyst at financial services firm Stifel Nicolaus.

The company has no commercial customers, so it lives or dies by government contracts. There should be no immediate changes in the money flow, given WellCare's multitude of contracts with the Centers for Medicare and Medicaid Services. Last month, CMS announced that WellCare would be permitted to market drug plans nationwide in 2008 and to sell its Medicare Advantage plans, which replace traditional Medicare and carry high-dollar premiums, in 11 states, four more than last year.

Government contracts include clauses that allow them to be ended in weeks if there is imminent danger to beneficiaries, although that's rare. Analysts and officials say states and CMS are reluctant to curtail contracts that might force patients to switch doctors, hospitals or health plans, although political pressure could come to bear.

'If I'm the governor of a particular state, and I have the voters hopefully behind me, do I want to do something like bring in a company that is going to be questionable?' Carroll said. 'Do I want to be a politician authorizing business with the company when bad news comes out?'

More negative news happened Thursday. Standard & Poor's Ratings Services put WellCare on a watch list, a move that could force the company to pay higher interest rates. And Lehman Bros. noted that 'if these inquiries lead to the discovery of actions that are not allowed by Medicare or Medicaid, all of the company's revenues are potentially at risk.'

If there is some good news for WellCare, it may be that there are many examples of companies surviving civil and criminal investigations. Lehman analysts recently tracked nine health care companies that were the subjects of raids or probes. Cases lasted an average of three years, yet in almost all those all those cases, companies paid fines or settlements of about 10 percent of their annual revenue - and survived.