Cleveland Clinic Drops WellCare

The loss jeopardizes growth prospects in a key state for the troubled managed-care company.
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Updated from 3:28 p.m. EST

OKLAHOMA CITY --

WellCare

(WCG) - Get Report

will soon lose its contract with the Cleveland Clinic.

Just a year after WellCare entered the Cleveland market -- and turned Ohio into a key growth state -- the Cleveland Clinic has decided to stop doing business with the managed-care company.

The clinic said that it reached its verdict two months ago, even before government agents raided WellCare's headquarters and damaged the company's reputation.

"Initially, we were very optimistic that we could work well with them," Eileen Sheil, a spokeswoman for the Cleveland Clinic, told

TheStreet.com

on Friday. "But we faced some administrative issues that, over time, became a key factor" in ending the contract.

WellCare must notify affected policyholders of the change next week, Sheil added.

Nevertheless, WellCare still seems to be hoping for the best. While the company said that it cannot comment on negotiations with providers, it stressed that it values its relationship with the Cleveland Clinic and hopes to keep partnering with the hospital going forward. It also promised to make sure that its members receive necessary services if changes do occur.

Still, the development looks like a real blow for the troubled company. Notably, the Cleveland Clinic ranks among the best hospitals in the country and specifically caters to patients like those signed up for WellCare's Medicaid policies.

Under its contract with the state of Ohio, WellCare covers especially sick patients -- including the aged, blind and disabled -- who qualify for Medicaid benefits. Moreover, the company focuses on the populous Cleveland area in particular.

Now, without the Cleveland Clinic contract in place, it's unclear whether WellCare can effectively operate in the Ohio market at all.

The Ohio Department of Job and Family Services, which manages the state's Medicaid program, said it would "have to look into" the matter when questioned about the Cleveland Clinic contract on Friday. However, the agency did tell

TheStreet.com

that health insurers must offer "a sufficient network of providers" in order to participate in the Medicaid program.

In the past, WellCare has expressed high hopes for Ohio. Indeed, the company was counting on Ohio to offset customer losses in Indiana -- where its Medicaid contract was not renewed last year -- and, more recently, announced plans to start selling Medicare Advantage policies in the state as well.

But now, some say, WellCare could struggle to meet those goals. Certainly the company could ill afford to lose its contract with Ohio's most prominent hospital system.

Moody's has already warned of serious fallout if WellCare's business starts to erode.

"In particular, Moody's notes that the Medicaid business is very reliant on reputation and an operating problem or investigation in one state could jeopardize the Medicaid contracts in other states or prohibit expansion," the ratings agency wrote last month, when placing WellCare under review for a possible downgrade. "The loss of any one of these contracts could have a considerable impact on the revenues and earnings" of the company.

WellCare's stock has suffered dearly already. The shares, up 45 cents to $34.20 on Friday, have lost roughly 70% of their value since the government raid less than one month ago.