New York AG in Fund Linked to Insurer He's Probing

OKLAHOMA CITY -- New York Attorney General Andrew Cuomo has ties to a hedge fund that could be hurt by his latest investigation.

This week, Cuomo subpoenaed 16 health insurers in a sweeping probe of the industry. He listed WellPoint (WLP Quote) among the companies targeted for possible underpayment of out-of-network bills.

EnTrust Capital -- which operates a hedge fund that handles Cuomo's investments -- owns 315,000 shares of WellPoint, Bloomberg records show.

All told, one analyst calculated, the stock represents around 2.4% of EnTrust's total market value. Still, with that stake worth more than $23 million, it ranks among the fund's more valuable investments.

EnTrust did not return a phone call from TheStreet.com seeking details for this story. Cuomo's office insists that no conflict of interest exists.

"He doesn't invest in specific stocks," Benjamin Lawsky, Cuomo's special assistant, told TheStreet.com on Thursday. "He invests in EnTrust ... He doesn't even know what stocks they're in."

Besides, he added, "All of these cases are sort of bad for the health care industry. [So] it certainly wouldn't create a conflict at all, from our perspective."

Indeed, WellPoint lost some ground along with the rest of the group when Cuomo announced his probe on Wednesday. Still, Cuomo has identified UnitedHealth (UNH Quote) -- a chief WellPoint rival -- as his primary target, and that company has suffered the biggest stock hit so far.

UnitedHealth is at the center of the probe for a reason. The company owns Ingenix, which controls a huge database that helps insurers establish payments for out-of-network services.

In a nutshell, the operation works like this: Health insurance companies gather rate information about various health care services, such as routine doctor visits, and send that data to Ingenix.

Ingenix, in turn, compiles the information and sells it to health insurers -- including its own parent -- that use it to establish "usual, customary and reasonable" (UCR) rates for the services. Based on those rates, the insurers then determine fees for out-of-network services and reimburse a portion of those sums -- often 80% -- to their customers.

Cuomo, however, claims that the entire system is flawed and subject to abuse.

This week, Cuomo suggested that health insurers lowball the health care fees that they send to Ingenix. From there, he claimed, Ingenix further manipulates the numbers to produce benchmark rates that fall well below the actual costs for services. As a result, he concluded, health insurers wind up paying a mere fraction of out-of-network bills and leave the vast majority for their customers to pick up instead.

All told, Cuomo estimated, health insurers owe their customers "hundreds of millions of dollars" for out-of-network bills that they should have covered themselves.

Goldman Sachs analyst Matthew Borsch suspects that potential fines could prove far greater. Based on a similar but smaller case, Borsch predicted that UnitedHealth by itself could face a $3 billion fine in the end. Coincidentally, he pointed out, news of the probe cut UnitedHealth's market value by almost exactly that amount.

"It is unclear to us if UnitedHealth will be able to mount an effective defense," Borsch wrote on Wednesday. Still, "the sell-off appears overdone, given that even under a reasonable worst-case scenario, any settlement would be one-time."

For its part, UnitedHealth stands behind its Ingenix system and insists that it advocates "fair and appropriate payment" for health care services. The company has promised to cooperate with the probe.