October 30, 2007 / 5:53 PM / 12 years ago

Questions emerge about WellCare transactions

NEW YORK (Reuters) - Questions emerged on Tuesday about transactions between beleaguered WellCare Health Plans Inc (WCG.N) and an offshore entity, further hurting the health insurer’s battered stock price.

WellCare, which serves 2.3 million elderly, low-income and other members through government-sponsored programs, has been in a tailspin since more than 200 state and federal agents raided its Florida headquarters last Wednesday. Few details have been made public about the probe.

In a research note on Tuesday, Goldman Sachs analyst Matthew Borsch raised questions about whether WellCare used transactions with an offshore entity to cut profit margins in an effort to appear less profitable to officials with influence on reimbursement rates.

But even in a worst-case scenario, Borsch said the company should be able to address its issues with regulators and continue to serve its members.

Earlier this year, Borsch said in a research note that earnings reported to regulators under WellCare’s state insurance reports appeared to be considerably lower than earnings would have been without the use of its captive offshore reinsurance company.

In Borsch’s updated analysis issued on Tuesday, he said WellCare’s regulated insurance entity profits over the past 18 months are $90 million, or 47 percent, lower than they would have been excluding the reinsurance transactions.

“Earlier this year, we emphasized our concern over the impact of WellCare transactions with its offshore reinsurance entity,” Borsch said.

“At the time, we highlighted that state Medicaid reimbursement to WellCare might be at risk if and when regulators gained a clearer picture of WellCare’s underlying state insurance subsidiary profitability.”

WellCare was not immediately available for comment.

The company provides managed-care services exclusively to government sponsored healthcare programs. It serves 2.3 million members through Medicare plans for the elderly and Medicaid plans for low-income Americans.

Shares of WellCare have plunged about 80 percent since the raid. They were off $5.08, or 17.8 percent, at $23.54 in afternoon trading on Tuesday on the New York Stock Exchange.

Wednesday’s raid involved agents from the Federal Bureau of Investigation, the U.S. Department of Heath and Human Services Office of the Inspector General, and the Florida attorney general’s Medicaid Fraud Control unit.

The company revealed on Friday that the U.S. Securities and Exchange Commission had requested unspecified information a day after the raid.

Connecticut’s attorney general said on Friday he had been conducting a months-long probe, distinct from the Florida investigation, into a WellCare affiliate.

The attorney general’s office said its interest began in part after public reports by Wall Street analysts alleging WellCare was hiding and misreporting profits earned through its Medicaid program.

Borsch had rated WellCare shares as “sell” until last Thursday, when he raised his rating to “neutral” after a sharp drop.

On Tuesday, he said the lack of information about the probe makes it difficult to value WellCare.

“However, 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 said in his note.

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