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

As the New York attorney general investigates health care firms, he's indirectly invested in WellPoint.

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)

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) - Get UnitedHealth Group Incorporated Report

-- 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.

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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.

But Sheryl Skolnick, senior vice president of CRT Capital Group, says that UNH "has a big problem on its hands." Moreover, she sees risks for several other insurers -- including WellPoint -- whether they knowingly participated in the alleged scheme or not.

"To the extent that a plan uses unadjusted data out of the database and sets it equal to the UCR for their out-of-network claims, then that plan might well be understating its medical costs and might have exposure to the investigation," Skolnick wrote on Wednesday. "However, at the heart of the A.G.'s allegation is an almost unspoken allegation that the other health plans who provide the data to Ingenix and then buy the database are colluding with Ingenix/UNH" in the alleged scheme.

Besides UnitedHealth -- which faces an actual lawsuit from Cuomo for its role -- WellPoint could suffer the most backlash, Skolnick indicated. Because of its tight networks, she explained, some 20% of WellPoint's claims could be coming from outside health care providers.

"WLP also owns Empire, the largest plan in New York," she stressed. "We would expect that just because of its Empire exposure, WLP likely could receive more scrutiny from the New York A.G. than the other plans."

Still, cynics believe that Cuomo's investment might bring WellPoint some sort of protection. Others, however, scoff at the idea.

"It's a modest position for EnTrust," says one hedge fund manager. Besides, "I just can't imagine a politician risking much -- if any -- political capital or reputation to pull any weight around on this issue."

Taking aim at UnitedHealth may be enough. When scandals engulf UnitedHealth -- as they regularly have -- WellPoint seems to flourish.

Going forward, other health insurers could benefit as well. With UnitedHealth's reputation further sullied, some feel, unhappy customers could seek out new alternatives and reshuffle market share.

Certainly, UnitedHealth rivals would welcome such a break.

"The slowdown in commercial growth continues," Borsch reminded shortly before Cuomo announced his probe. But "one possible scenario that could significantly alter industry enrollment dynamics would be if the depth and duration of commercial enrollment decline at UnitedHealth were much more severe than currently assumed."

Thus, Borsch noted, "UnitedHealth

is a possible swing factor."

Borsch remains cautious on UnitedHealth itself. He has been steering investors toward other health insurers, including WellPoint, that he views as safer bets. His firm has investment banking ties to both companies.

EnTrust obviously likes WellPoint, too. Still, the fund's leaders just might like Cuomo even more.

After all,

The New York Times

reported in 2006, EnTrust's manager -- along with his wife and other EnTrust officials -- ranked as major contributors to Cuomo's political campaigns.

Moreover, the

Times

wrote, EnTrust bent its own rules to allow Cuomo into the fund. Thus, even those who doubt that Cuomo would protect WellPoint see at least a potential for conflict.

"He's obviously chummy with one of the managers of EnTrust Capital, or they made an exception because of who he was," a hedge fund manager says. "Either way, it raises a legitimate question about whether he would show some bias or favoritism in helping out his friends."