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WellCare Director Resigns, Says Board Action Improper

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April 23 (Bloomberg) -- Harvard Business School professor Regina Herzlinger said she was forced off the board of WellCare Health Plans Inc., an insurer specializing in Medicare and Medicaid benefits, by directors acting against shareholders’ interests.

Herzlinger said the insurer faces “serious challenges” and has underperformed its competitors. Two board panels chose not to nominate her again in light of her “vigorous and uncompromising pursuit” of the shareholders’ interests, she said in a resignation letter filed today by WellCare. The insurer called Herzlinger’s charges a “mischaracterization of facts and motive” in its filing.

WellCare, based in Tampa, Florida, settled U.S. and Florida claims last year that it had kept money owed to the government and used it to inflate earnings. Herzlinger, a director since 2003, said the board needs members with extensive experience in health insurance accounting to ensure continued proper oversight.

“I have been committed to remaining on WellCare’s board to help address these and other challenges,” she said in her letter.

WellCare insured 2.32 million people as of Dec. 31, according to its Feb. 18 earnings statement. That included 1.35 million in Medicaid programs for the low-income and 972,000 more in Medicare plans for the elderly and disabled.

Internal Audit

Herzlinger, in her resignation letter, said WellCare’s internal auditor found the company overbilled the state of Illinois’ Medicaid program by $1 million, and said the state of Georgia fined the insurer $610,000 last year for not properly documenting care. “The identification of these problems underscores the continuing issues in our accounting and finance functions and difficulties in remediating them,” she wrote.

WellCare has been working with a search firm to find new independent directors for the board to “bring fresh eyes and a fresh perspective,” spokeswoman Amy Knapp said today in a telephone interview. Herzlinger has been on the board since 2003 and was chair of the audit committee since it was started in 2004, Knapp said.

The company has added four new directors since March 2009, including Glenn Steele, a doctor and chief executive officer of Geisinger Health System, based in Danville, Pennsylvania, Knapp said.

WellCare fell 42 cents, or 1.4 percent, to $30.53 at 4 p.m. in New York Stock Exchange composite trading. The company’s shares have more than doubled in the past 12 months.

Little Harm

The accounting issues may not harm the company if they don’t lead to official investigations, said Sarah James, a Wedbush Securities insurance analyst in Los Angeles. Because of the difficulty predicting how much care Medicaid patients may need in a given year, it’s not uncommon for insurers to have to return some money to states, she said.

James said she has a “sell” rating on WellCare, primarily because the company hasn’t been open enough about its strategy or where and how it expects to grow. “For a turnaround, typically you like to see as much information as possible,” she said.

Herzlinger didn’t return a call for further comment. She was the first woman to be tenured at Harvard Business School. She is known for research in health care, including her early predictions of the unraveling of managed care and the rise of consumer-driven health care, a term which she coined.

To contact the reporter responsible for this story: Pat Wechsler in New York at pwechsler@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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