WellCare's Restatement Relieves Investors - TheStreet



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pending restatement could have hurt a lot worse.

The beleaguered health insurer announced late Monday that it will modestly cut its past financial results to correct "accounting errors" that resulted from low-ball refund payments to certain Medicaid programs.

The company's stock rocketed 30% when investors -- who were braced for much broader damage -- learned of the limited hit. The stock was recently up 26.6% to $37.

After kicking off the industry's earnings season with better-than-expected results,


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gained some major ground as well. Indeed, several health insurers -- including





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-- posted sizable gains on Tuesday.

WellCare led the way, however, with its long-awaited news. Going forward, the company expects to trim its revenue by just $42 million -- or less than 1% -- for the three-year period ending December 2006. While the restatement will cut prior-year profits by an average of 11%, eating away at the company's once-impressive growth rate, it will hurt only the company's Medicaid results and cause no damage to its Medicare numbers at all.

Ever since government agents raided WellCare last fall, investors have feared possible hits to the company's longstanding Medicaid business and its fast-growing Medicare empire alike. Although WellCare has indicated in the past that the damage could be limited, the company has now offered a clearer explanation for that view.

Specifically, in both Illinois and its home state of Florida, WellCare was supposed to spend a minimum amount of its Medicaid premiums on health care or refund at least part of the difference back to the states. Since WellCare failed to do so, in part because of its inclusion of ineligible medical expenses, the company has promised to make the necessary adjustments and protect against such missteps in the future.

"We have determined that former senior management set an inappropriate tone in connection with the company's efforts to comply with the regulatory requirements" for certain Medicaid programs, WellCare stated in a special 8-K filing on Monday. "We have also determined that former senior management's failure to ensure effective communication regarding (those Medicaid programs) with certain regulators resulted in a material weakness in a portion of the information and communication system."

Moreover, WellCare added, "as the company works to complete the restatement ... it is possible that additional control deficiencies may be identified in addition to -- or that are unrelated to -- our review."

To its credit, WellCare has already taken major steps to repair the company's culture and prevent future abuses down the road. Most notably, the company has completely overhauled its senior management team and separated several key roles -- including chairman-CEO and general counsel-chief compliance officer -- that could prevent conflicts of interest.

WellCare could still pay a high price for its past behavior, however. The government could levy big fines against the company -- or even bar it from participating in government-funded health insurance programs -- down the road. Meanwhile, angry shareholders have filed a slew of class-action lawsuits against the company already.

Longtime investors, who owned WellCare ahead of the raid, have suffered devastating losses. Less than a year ago, WellCare's stock fetched more than $125.

Goldman Sachs analyst Matthew Borsch doubts that WellCare will regain that lost ground anytime soon. Indeed, although Borsch officially has a $50 price target on WellCare's shares, he finds it very difficult to value the company at all.

Therefore, even after news of the minor restatement, Borsch maintained his tepid neutral rating on Wellcare's stock and warned of lingering threats to the company.

"The magnitude and limited range of programs under the restatement implies the scope of the ongoing federal and state investigation could be less than a worst-case scenario," said Borsch, whose firm has investment-banking ties to WellCare. However, "at the same time, we do not yet have clarity here as the full scope of the ongoing investigation is not disclosed by the company, with a still-unknown conclusion in terms of potential sanctions."

Importantly, he concluded, "criminal sanctions against the company that could materially impact its public-sector contracts more broadly cannot be ruled out."