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Medicaid Suit Mangles Amerigroup

A discrimination case ends with a huge damage award.

Amerigroup

(AGP)

has every reason to tremble this Halloween.

The health insurer, which serves poor people on Medicaid, has just been slapped with a huge courtroom loss that could deplete the company's cash balance and still leave it scrambling for more. The company faces penalties of $144 million -- and counting -- for violating the False Claims Act.

Its stock plummeted 14% to $30.50 a share on the news.

Amerigroup stands accused of improperly excluding pregnant women, particularly those in their third trimester, from its Medicaid program in Illinois. The company counters that it "was acting with the knowledge of, and in accordance with, the direction of the Illinois Department of Public Aid."

Nevertheless, prosecutors convinced an Illinois jury this week that Amerigroup had overcharged the government by $48 million through its profit-boosting scheme. The government is entitled to collect triple damages, which total $144 million, as a result. Moreover, it can seek additional penalties for each false claim that -- under a worst-case scenario -- could push total damages into the $500 million territory.

The award ranks as the largest ever levied by a jury in a case brought under the False Claims Act.

"It's a terrific win," declared Patrick Burns, a spokesman for Taxpayers Against Fraud, a big promoter of the False Claims Act. "Amerigroup faced not only a horrific set of facts but also a tremendous liability. ... They were idiots not to settle this case; there is no other way to say it."

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Right now, Amerigroup barely has enough unrestricted cash to pay the $144 million penalty alone.

For its part, Amerigroup continues to defend its practices. The company claims that "a number of the court's rulings constitute reversible error and impacted the jury's findings." It also calls the court's instructions about individual claims -- which could more than double the ultimate damages -- "improper and unprecedented." It has announced plans to appeal.

Still, Amerigroup could take a huge financial hit in the end.

"The company had over $150 million in cash at the end of the quarter, so AGP would likely have to incur debt to pay the penalty if its appeal is unsuccessful," CIBC World Markets analyst Carl McDonald wrote on Tuesday. Meanwhile, "the verdict will require the establishment of a reserve for at least a portion" of the damages.

McDonald has an underperform rating on Amerigroup's stock. His firm hopes to secure investment banking business from the company over the next three months.

Amerigroup had previously established no reserves for the case at all.

Originally, a company whistleblower and his law firm pursued the case without any government assistance. Many whistleblower cases falter in such situations. But attorneys at Chicago-based Goldberg Kohn, which filed the case several years ago, say they methodically collected convincing evidence -- including damaging emails -- that persuaded the government to change its mind and join the case in the end. Those lawyers feel that same evidence will serve them well in fighting the company's appeal.

Amerigroup continues to stand by its actions in the meantime.

"For more than 11 years, we have always worked hard to ensure that we provide our state partners with the highest standards of service and ethics," insisted Amerigroup CEO Jeffrey McWaters. "We are a strong company and will continue to work tirelessly to provide access to quality care for the 1.2 million low-income families, elderly and the disabled who depend upon us to do our job well."