Wellcare - How bad Might it Be?

Implications: Wellcare' stock has dropped like a rock since the FBI, Health and Human Services (HHS) and the Florida Attorney General's office raided the facility earlier this week. Initial speculation was on marketing activities, or billing issues.  It now appears that it may be based upon their use of an offshore reinsurer and the reporting of their financial's at the state level. The potential consequences are serious.

Analysis: It appears now that this raid may be based upon insider information. The announcement that Connecticut is also investigating Wellcare and it is apparently based upon insider information concerning the reporting of financial results, leads me to believe that they both may be based upon Wellcare's use of an offshore reinsurer.

reinsurance is a tricky market as one is making actuarial analysis of the potential costs associated with outliers or very high cost cases. Over time, one gets a better sense of this risk and is able to hone in on the expected next year expenditures. If Wellcare had a good handle on its true reinsurance costs and the reinsurer were charging more than required to cover this risk, the State plans would be reporting lower profits, while the corporation would be able to bring the profits from the reinsurer back in at a corporate level. excessive rates for its product, the State operated Health Plans would If occurring, this would allow Wellcare to report "reasonable" profits at the state level and not attract attention from the States they are operating in.

Should this in fact be the case, Wellcare would be in serious trouble with all of their contracts.  Medicaid is a jointly funded federal and state program.  These State and Federal contracts typically require that a corporation not be found to have defrauded or found guilty of or in breach of any State or Federal  contract. 

While I am not a lawyer, based upon previous health care fraud issues, the penalties for this could include:

1) Forfeiture of ill gotten gains and fines
2) Replacement of Senior management
3) Prison terms
4) Loss of contracts

I think that given the nature of the raid, the fact that Connecticut was also looking into Wellcare, the distinct possibility of an insider(s) providing the Federal and State Governments with information.  Remember M.T. Sauter, their Florida Health plan CEO left a few months ago very suddenly and with no explanation, the Wellcare situation will continue for a long time and result in serious consequences for the company.