Wellcare Group (WCG)

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Greg Hollander

sunny deol

WellCare Health Plans, Inc. (WCG) manages Medicaid and Medicare health insurance on behalf of state governments and the federal government. These plans target low-income families and children (medicaid) and the elderly and disabled (medicare). Under contracts with local, state, and federal governments that typically last for up to three years, the company receives premiums from these governments in exchange for paying medical costs, primarily on a fee-for-service basis. That is, each policy holder makes their health care decisions independently and subsequently files a claim with WellCare. If approved, WellCare reimburses their customers.

WellCare's profitability is influenced by both its geographical and political constraints. WellCare only has contracts to provide health insurance in 7 states, and is heavily invested in Florida and Georgia, which together generate almost 60%^[1] of the company’s premium revenue. Any failure to renew these contracts would have a significant impact on WCG. In 2006, Indiana, a former WCG client state, made the decision not to renew its contract with the company. ^[2] Furthermore, following a raid of its corporate headquarters in October 2007, the company is now under investigation by the U.S. Department of Justice, the FBI, and the Florida Attorney General's Medicaid Fraud Control Unit. While the scope of these investigations is still undisclosed, the WellCare has already spent $32 million on legal and consulting fees related to the investigation in the first quarter of 2008.^[3]

All of WCG's premium revenues and over 99%^[4] of its total revenues come from government payments of Medicare and Medicaid premiums. The 2006 Deficit Reduction Act, aims to cut Medicaid and Medicare funding by over $4.8 billion and $6.4 billion, respectively, before 2011.^[5]

Company Overview

WellCare operates in two major business segments: Medicaid (52% of revenue) and Medicare (47% of revenue). WellCare’s revenue stream has increased by approximately 170% from $1.395 billion in 2004 to $3.763 billion in 2006. This is due primarily to the change in enrollment of Medicare customers, which increased by over 944,000 people (1,368%) from 2005 to 2006, and drew an additional $1.281 billion in revenue over this same period. WellCare’s filings attribute this enormous membership growth to their new Prescription Drug Plan offering.^[6]

Operating income has increased from 2004 to 2006 as well, by over 181% from $80.5 million in 2004 to $226.7 million in 2006. This significant increase is also attributed primarily to Medicare membership growth that accompanied the release of the company's Medicare part D, perscription drug plan offering.^[7]

Note: In March 2008, WellCare received an extension from the SEC for the filing of their 2007 10-K forms, and has not yet done so.

Note: Gross Profit does not take SG&A and depreciation into account, as company filings do not allow for the allocation of these costs.

Medicaid (57% of Revenue)^[10]

The Medicaid Segment provides health insurance plans for those low income and disabled individuals who qualify for government-funded medical assistance under the Medicaid program, as established by the U.S. Social Security Act of 1965. WellCare enters into one to three year contracts with local, state, and federal governments that allow it to serve Medicaid members that are assigned to, or agree to, the company's health plans. WellCare’s more than 1.2 million customers in the Medicaid segment receive coverage under Temporary Assistance to Needy Families (“TANF”) programs (targeting low-income families with children), Supplemental Security Income (“SSI”) programs (targeting the low-income disabled), State Children’s Health Insurance (“S-CHIP”) programs, and Family Health Plus (“FHP”) programs.^[11] WellCare receives premiums from state and federal government for each customer in return for paying the expenses of involved health providers, primarily on a fee-for-service basis. In 2006, this segment accounted for 52% of WellCare’s revenue.^[12]

Medicare (42% of Revenue)^[13]

The Medicare Segment provides hospital, medical insurance, and prescription drug benefits to the elderly and disabled who qualify under government programs. As in the Medicaid Segment, WellCare enters into one to three year contracts with local, state, and federal governments that allow it to serve Medicare members that are assigned to, or agree to, the company's health plans. Plans offered to the 1.0 million customers in this segment include Prescription Drug Plans (“PDPs”) and Medicare Advantage (“MA”) plans, which includes both coordinated care (preventative) plans and private fee-for-service plans. WellCare receives per-customer premiums from the Centers for Medicare and Medicaid Services in exchange for paying the expenses of involved health providers, also primarily on a fee-for-service basis.^[14] This segment generated 47% of WellCare’s 2006 revenue, up from just 27% the previous year.^[15]

Trends and Forces

Reduced government funding for Medicare and Medicaid threatens WellCare’s profit margins

Revenue from Medicare and Medicaid premiums, all paid by state and federal governments, accounted 99% WellCare’s revenue in 2006 (with the remainder generated by investment income). However, the 2006 Deficit Reduction Act included a plan to cut Medicaid and Medicaid funding by over $4.8 billion and $6.4 billion, respectively, before 2011.^[16] Additional legislation of this form would either hurt WellCare’s profit margins, or force them to cut benefits, which would potentially decrease enrollment in the long-term. More specifically, a mere 1% increase in the company’s Medical Benefits Ratio (medical expense payments as a percentage of premium revenue) would have decreased WellCare’s pre-tax income by $36.2 million (~16%) in 2006.^[17]

Dependence on a limited number of short-term, geographically-limited government contracts creates a lack of diverse revenue streams

WellCare provides its Medicaid and Medicare services through 17 contracts with state, federal, and local government agencies, which typically span a time period of one to three years. These contracts allow WellCare to receive government premiums in exchange for services in New York, Florida, Connecticut, Ohio, Georgia, Illinois, and Missouri. Many of these contracts, however, are subject to cancellation or enrollment freeze in the event of insufficient funding, and none are guaranteed to be renewed when they expire. In 2006, for example, WellCare’s contract in Indiana was not renewed, resulting in the loss of over 70,000 customers. If this were to happen in Florida or Georgia (representing 33% and 26% of total 2006 premium revenues, respectively), it would cripple WellCare’s revenue streams.^[18]

Federal and state investigations raise cost and risk for WellCare

In October of 2007, federal and state officials raided WellCare's corporate headquarters. Since then, an investigation underway has involved the U.S. Department of Justice, the FBI, and the Florida Attorney General's Medicaid Fraud Control Unit. While the scope of these investigations remains undisclosed, WellCare has since spent over $32 million in related legal and consulting fees.^[19] As the investigation continues, especially if the company is charged with any serious offenses, these legal fees will continue to mount, cutting into the company's margins.

If WellCare's Medical Benefit Ratio does not remain far below that of its competitors, it will threaten WellCare’s margins

Since 2003, WellCare’s Medical Benefit Ratio (medical expense payments as a percentage of premium revenue) has been well below its competitors^[20]. In 2006, for example, the company posted an MBR of 81.1%, to a peer average of 83.5% ^[21]. While this comparison offers WellCare a competitive edge in the present, some analysts believe that this is an unsustainable number, and that the ratio’s regression to the mean will hurt profit margins in the long-term.^[22] They cite the 2005 margin shortfalls of competitors Molina Healthcare (MOH) and AMERIGROUP (AGP), both of which were due to an unexpected increase in medical costs. Already, in the first half of 2007, WellCare’s MBR was up to 82.0%, although final numbers for the year have not been published.^[23] On top of the legal fees that it is facing to handle its federal fraud investigation (see above), any increase in its MBR could devastate its profit margins.

Competition

As Medicare and Medicaid are sponsored by government funding, companies insuring these individuals generally compete primarily on the comprehensiveness, quality, and availability of their benefits and customer service. Top competitors to WellCare include Humana (HUM), WellPoint Health Networks (WLP), and Aetna (AET). Other similar-sized peers include AMERIGROUP (AGP), Centene (CNC), and Molina Healthcare (MOH).

References

1. ↑ WCG 2006 10-K, Risk Related to Our Business, pg 17-18
2. ↑ WCG 2006 10-K, Risks Related to Our Business, pg 17-18
3. ↑ Morningstar Report, WCG, 07/08/2008
4. ↑ WCG 2006 10-K, Consolidated Statements of Income, pg F-4
5. ↑ WCG 2006 10-K, Risk Related to Our Business, pg 23
6. ↑ WCG 2006 10-K, Comparison of Premium Revenue, pg 43
7. ↑ WCG 2006 10-K, Comparison of Premium Revenue, pg 43
8. ↑ WCG 2006 10-K, Consolidated and Combined Statements of Income, pg 34
9. ↑ WCG 2006 10-K, Consolidated and Combined Statements of Income, pg 34
10. ↑ WCG 2006 10-K, Item 6. Selected Financial Data, pg 34
11. ↑ WCG 2006 10-K, Item 1. Business, pg 2
12. ↑ WCG 2006 10-K, Consolidated and Combined Statements of Income, pg 34
13. ↑ WCG 2006 10-K, Item 6. Selected Financial Data, pg 34
14. ↑ WCG 2006 10-K, Item 1. Business, pg 2
15. ↑ WCG 2006 10-K, Consolidated and Combined Statements of Income, pg 34
16. ↑ WCG 2006 10-K, Risks Related to Our Business, pg 23
17. ↑ WCG 2006 10-K, Risks Related to Our Business, pg 18
18. ↑ WCG 2006 10-K, Risks Related to Our Business, pg 17-18
19. ↑ Morningstar Report, WCG, 07/08/2008
20. ↑ Credit Suisse Report, WCG, 11/6/06
21. ↑ Credit Suisse Report, WCG, 11/6/06
22. ↑ Credit Suisse Report, WCG, 11/6/06
23. ↑ Deutsche Bank Report, WCG, 8/2/07
24. ↑ WCG 2006 10-K, Consolidated and Combined Statements of Income, pg 34
25. ↑ AGP 2007 10-K
26. ↑ CNC 2007 10-K
27. ↑ HUM 2007 10-K