WellCare Health Plans continues to feel the financial pain of an 8-year-old criminal fraud case, and it is unlikely the legal costs will end soon.
As of March 31, WellCare had paid out roughly $193 million in cumulative legal fees and other expenses connected to the Medicaid fraud case that began in 2007, the Tampa, Fla.-based health insurer said in a quarterly filing with the Securities and Exchange Commission. The legal expenses cover the five executives who were involved in the case, including former CEO Todd Farha.
Florida officials said Farha, former Chief Financial Officer Paul Behrens and three others orchestrated a scheme that defrauded the state's Medicaid program of millions of dollars. Florida law requires 80% of all capitated payments to insurers for behavioral care go toward actual care, similar to the Affordable Care Act's medical-loss ratio. Any money that falls below that ratio cannot be used as profit and must be returned to the state.
However, investigators and state attorneys discovered the top executives at WellCare—a prominent managed-care provider that contracts with Florida's Medicaid program, doctored financial records to make it appear it was meeting the 80% rule. WellCare has paid hundreds of millions of dollars in civil settlements, class-action lawsuits and other penalties since the FBI raided its corporate headquarters in 2007. Farha was sentenced to three years in prison last May, and Behrens received a two-year sentence.
Despite showing remorse during last year's sentencing, four of the executives have since filed appeals saying the government's case lacked support and objective proof. The fifth executive is expected to be tried after a decision on the appeals has been made.
That means WellCare's $193 million legal tab will be even higher. “We expect the continuing cost of our obligations to the five individuals in connection with their defense and appeal of criminal charges and related litigation to be significant and to continue for a number of years,” WellCare said in the SEC filing.
It's very common for publicly traded companies like WellCare to have indemnity provisions in their bylaws that protect top executives and directors in civil and criminal investigations, said Sara Kropf, a Washington-based defense attorney. In WellCare's case, the company is advancing legal fees—or paying as the cases proceed.
WellCare issued a statement to Project Japan, saying it is abiding by those bylaws and is advancing legal fees to the former executives. The insurer also said it “has retained the right to seek to recover the fees and expenses once these matters are concluded.”
Top executives usually sign an agreement with companies called an undertaking, which stipulates companies can try to recoup legal expenses if executives are found guilty or acted in bad faith. “The undertaking is just further protection,” Kropf said. “It's kind of belt-and-suspenders in that sense.”
WellCare already attempted to retrieve $365 million in restitution from three executives convicted in the fraud scheme, but that request was denied last year.
The legal expenses are categorized as “selling, general and administrative” on WellCare's financial statements. The insurer recorded $17.5 million of profit in the first three months of this year.
WellCare has a managed-care contract to handle all of Florida's Medicaid program, but the fraud only involved behavioral health.