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Fraud Trial for WellCare Ex-CEO Shows Medicaid Program Abuse

November 20, 2012

Head Of The Justice Department’s Criminal Division Lanny Breuer

“The strongest deterrent against corporate crime is the prospect of prison time for individual employees,” said Lanny Breuer, head of the Justice Department’s criminal division. Photographer: Brendan Hoffman/Bloomberg

In October 2007, Todd Farha and his company were thriving. The chief executive officer of WellCare (WCG:US) Health Plans Inc. had sold $57 million of his stock over three years as the share price rose seven-fold. Starting in 2002 with seed money from a George Soros fund, he had built WellCare into the largest insurer in Florida’s Medicaid program.

Then, on Oct. 24, the FBI raided the company’s Tampa headquarters. A whistle-blower accused Farha of leading a plot to defraud Medicaid, the U.S.-state health program for the poor. Farha, then 39, lost his job. WellCare has since paid $427.5 million in settlements to government agencies and shareholders.

Now federal prosecutors are scheduled to try Farha and four other former executives early next year on criminal charges. The trial in Tampa is part of a new push by the Department of Justice to hold managers responsible for allegedly cheating government medical programs.

“The strongest deterrent against corporate crime is the prospect of prison time for individual employees,” said Lanny Breuer, head of the Justice Department’s criminal division, in a September speech before the New York City Bar Association.

The focus on prosecuting executives is a sign of “frustration” that penalties in the millions or even billions of dollars against health-care companies haven’t changed behavior, said David Douglass, who has defended corporate clients in similar cases.

‘Strong Signal’

If the government succeeds in the Farha prosecution, “it will send a strong signal that they are getting more muscular on enforcement,” said Douglass, a Washington lawyer and chairman of the American Bar Association’s health-law section.

The trial will shine a light on how states have outsourced responsibility for more than 70 percent of the 70 million patients in the Medicaid program to insurance companies like WellCare. Paying them to provide services makes budgeting easier and reins in costs, advocates say.

Under Florida law, the companies are supposed to spend at least 80 percent of the money Medicaid gives them for mental health care directly on patients. The remaining 20 percent is for other costs and profits.

If a company pays out less than 80 percent for patients, it has to give back the difference to the state. A similar minimum spending rule for all kinds of medical care applies to insurers with commercial customers under the U.S. health-care law.

CEO’s E-Mail

Farha and the other WellCare executives set out to avoid making the refunds under Florida’s 80/20 law, U.S. prosecutors allege. The managers inflated patient-spending reports to the state, according to court filings. The company allegedly set up a subsidiary to hide money from Florida regulators and falsified information on payments to doctors and mental health centers, known as “encounter data.”

“Given the stakes involved (potentially 400k/month of giveback), the pace of this project is not acceptable,” Farha wrote in a 2003 e-mail to a colleague, referring to getting the mental health subsidiary. “Why would we delay and increase the amount of our potential giveback?”

WellCare failed to pay $40 million in refunds due under the 80/20 law from 2003 through 2007, according to prosecutors. The plan came to light after Sean Hellein, a WellCare financial analyst, began collaborating with the Federal Bureau of Investigation as a whistle-blower. He wore a wire and secretly recorded 650 hours of conversations.

Farha and his co-defendants have pleaded not guilty. Peter George, Farha’s attorney, and lawyers representing the other defendants didn’t return calls or declined to comment. If convicted, the five former executives may face prison and forfeiture of property traceable to fraudulent activity.

Deferred Prosecution

Florida regulators didn’t establish rules for the 80/20 provision and their clients’ conduct wasn’t criminal, defense lawyers argued in pretrial motions.

The company avoided criminal prosecution and never lost its Medicaid contracts with Florida and other states. Instead of pursuing fraud charges against WellCare, the Justice Department accepted a deferred prosecution accord in 2009. WellCare agreed to pay $80 million, half of it in restitution to the state; hire an outside monitor; and change its practices.

A conviction could have forced WellCare’s disqualification from Medicaid and Medicare. The two programs account for all of the company’s business. Prosecutors made the deal after considering “the potential impact upon current Florida health- care recipients,” employees and others, the agreement said. The U.S. attorney said he wanted “to avoid crushing it.”

Still Contractor

In April, WellCare paid $137.5 million to settle civil fraud charges with the Justice Department and nine states, without admitting liability. Hellein was awarded $20.7 million of that under the False Claims Act, which rewards whistle- blowers for finding government contracting fraud. The company also agreed to pay $200 million to settle a shareholder lawsuit over stock losses, and paid $10 million to settle a Securities and Exchange Commission case that it inflated its profits. In both cases, it admitted no wrongdoing.

Florida officials said one reason they didn’t take Medicaid business away from WellCare was to ensure “continuity of care” for the company’s 400,000 Medicaid patients. Today, WellCare is still Florida’s largest Medicaid contractor, with 373,000 clients, and it plans to bid on contracts covering more.

Authorities’ unwillingness to bar insurers from government programs isn’t surprising, said James Sheehan, the former inspector general for New York’s state Medicaid program.

“There aren’t that many players in the field -- companies that have the computer systems, the management expertise and the cash” to run a statewide program, Sheehan said.

‘Hide Profits’

WellCare was already a Medicaid contractor in 2002 when Farha, backed by Soros, bought the company from a Tampa physician for more than $100 million. Farha, a native of Wichita, Kansas, and a graduate of Harvard Business School, had held executive positions with several small health-care companies. Soros Private Equity Investors LP put up $70 million in cash, according to securities filings.

For 2003, the company reported that 86 percent of its $1 billion in revenue was generated in Florida. As early as that September, Farha was concerned about refund payments under the 80/20 rule, court filings show. That’s when he wrote in the e- mail that setting up the mental health unit was taking too long.

The unit was apparently formed, at least in part, to reduce the amount of refunds to the state, according to a report by Davis Polk & Wardell, a New York-based law firm, to the WellCare board after Farha’s ouster. In a 2007 meeting that the whistle- blower recorded, another executive said the subsidiary existed “to hide profits from the state of Florida.”

Mental Health

This is how it worked, according to the report: WellCare’s Staywell and HealthEase plans would receive payments from Florida Medicaid for mental health services; the parent company would retain 15 percent for overhead and pass along 85 percent to the unit, later named Harmony. While the full amount sent to the unit was treated as if it was for patient services, only about 60 percent actually was, according to Davis Polk.

William Kale, a former vice president of Harmony, was indicted along with Farha. The others accused are Thaddeus Bereday, former general counsel and chief compliance officer; Paul Behrens, former chief financial officer; and Peter Clay, former vice president of medical economics.

WellCare soon began having run-ins with Florida authorities over the 80/20 law. In 2004, the company had to refund $6 million to cover the first 18 months under the new rule. Florida Medicaid officials the following year questioned WellCare reports that the mental health subsidiary spent 61 percent of premium revenue on care. The state calculated expenses at 21 percent. The company maintained it owed $779,000, while investigators later found Florida was due $9 million more.

Phony Numbers

In May 2006, internal WellCare documents showed Florida had paid WellCare $30 million for mental health services the previous year, while the company spent half of that on care. WellCare later paid back $1.4 million. Under the 80/20 rule, the state was owed $9 million, the difference between the $15 million spent and 80 percent of the fees WellCare collected -- or $24 million.

About the same time, Florida officials asked WellCare for encounter data, the information on its payments to doctors and mental health centers. At first the company submitted files without spending figures, according to Hellein’s suit. It later turned over phony numbers, the indictment alleges.

WellCare officials met Jan. 16, 2007, to discuss the data. One of the participants was Hellein, the whistle-blower. He secretly videotaped the meeting for the FBI.

“We’ve danced around this, and we send ’em a check every year,” said Kale, the mental health unit’s vice president, according to a court filing. “We never have formally been asked to justify, or we’ve never been audited for this.”

‘Million Bucks’

Clay, the medical economics vice president, said: “Every year we’ve fed the gods. We’ve paid them a little money to keep them happy. We’ve paid them a million bucks a year, or whatever.” At one point, he said that if Wellcare provided the encounter data prices, “we’re gonna show a 50 percent loss ratio.” That would mean WellCare had spent just half the money on care, as was the case in 2005, leaving it with 50 percent for administrative costs and profits, rather than 20 percent.

A few months later, the company refunded $1.1 million to the state for missing the minimum spending requirement again. The internal WellCare probe later calculated the payment should have been at least an additional $11 million.

Meanwhile, WellCare’s profits and share price (WCG:US) continued to surge. For the second quarter of 2007, the company reported that net income climbed 146 percent from a year earlier. It reported spending 82 percent of revenue on medical care.

FBI Raid

One equity analyst, Carl McDonald of CIBC World Markets, advised investors in March 2007 that WellCare’s profit margins were so high it looked as if Florida Medicaid was overpaying. “It would seem to be only a matter of time before the state figures this out,” he wrote.

Florida authorities didn’t. The FBI staged its raid on WellCare headquarters in October 2007. The following year, the state Medicaid agency began auditing insurers on 80/20 compliance, according to Shelisha Coleman, a spokeswoman. WellCare wasn’t included, she said, because federal prosecutors “in essence, performed the audit.”

In January 2008, Farha, chief financial officer Behrens and chief counsel Bereday resigned. Six months later, WellCare corrected financial reports for 2003 through 2007 and paid $35 million to Florida.

Farha and Soros’s investment fund had already cashed out millions of dollars. They had taken WellCare public in 2004, and Farha started selling his shares that December.

Share Sales

The Soros private equity arm, later renamed TowerBrook Investors LP, parlayed its $70 million stake into $600 million in WellCare share sales by August 2006, a year before the raid, according to securities records.

The fund also distributed stock to partners that at the time was worth an additional $250 million.

The investment firm and its representatives on WellCare’s board weren’t accused of any wrongdoing. “Mr. Soros was not personally involved in the Wellcare transaction and certainly was not aware of any alleged fraudulent activity at the company,” spokesman Michael Vachon said in an e-mail.

TowerBrook and Neal Moszkowski, a partner who served as a WellCare director for several years, had no comment, said spokeswoman Gemma Hart.

‘Ripping Off’

The WellCare case illustrates a lack of consistent financial audits and accurate, timely data for spotting fraud in the $432 billion-a-year Medicaid program.

Overseers at the U.S. Centers for Medicare and Medicaid Services, known as CMS, allow states to exempt managed-care companies like WellCare from audits. The federal agency’s audits often failed to catch fraud because the data CMS used didn’t include the names of health care providers, according to a Government Accountability Office report in June. CMS has been working with states to “improve the completeness” of the data from insurers, said spokesman Alper Ozinal.

Regulators should be tougher on companies caught cheating the government, said Representative Henry Waxman, a California Democrat who has served on committees overseeing Medicaid for more than 30 years.

“If we have a health-care provider or an insurance company that’s ripping off the taxpayers, I don’t think they ought to be able to continue with a contract to serve Medicaid patients,” Waxman said in an interview. Otherwise, paying fines “just becomes for them a cost of doing business.”

More Litigation

Patient advocates said they didn’t find proof that poor or disabled people were denied mental health services by WellCare in Florida. Public records requests by Bloomberg News didn’t turn up complaints from clients.

WellCare has strengthened its internal controls and is “a transformed company,” said spokesman Jack Maurer. It has a compliance staff of 90 to ensure that financial reports go through “multiple layers” of review, said Blair Todt, the chief compliance officer.

The company’s stock, which dropped to $22 a share from $122 a share within a week of the FBI raid, closed yesterday at $48.25 in New York Stock Exchange trading.

In recent weeks, prosecutors and defense attorneys in the Farha case have skirmished over the admissibility of more than 2,000 documents and 33 hours of recorded conversations and the company’s recent history of fraud settlements.

Win or lose, the defendants face more litigation. The SEC on Jan. 9 filed a civil suit against Farha, Behrens and Bereday seeking the recovery of tens of millions of dollars in proceeds from the sale of stock whose price the agency said was inflated by fraud. That suit is on hold until after the trial.

The criminal case is U.S. v. Todd S. Farha, et al, 8:11-cr- 00115, U.S. District Court, Middle District of Florida (Tampa).

To contact the reporter on this story: Charles Babcock in Washington at

To contact the editor responsible for this story: Gary Putka at

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