WellCare restates earnings after finding accounting errors, owed refund could top $46M

WellCare Health Plans Inc. is restating its earnings for 2004, 2005, 2006 and the first half of 2007, after determining that the company owes refunds under contracts to provide managed care services for government health care programs in Florida and in Illinois.

The restatements stem from accounting errors related to contracts with the Florida Agency for Health Care Administration, the Florida Healthy Kids Corp. and the Illinois Department of Health and Family Services, WellCare said in a filing with the Securities and Exchange Commission.

The announcement provides some insight into the possible nature of a state and federal probe that's been underway at WellCare (NYSE: WCG) since Oct. 24, when state and federal law enforcement officials raided the company's Tampa headquarters. WellCare has not filed any financial reports with the SEC since the raid. The senior management team has been replaced and the new executives are improving processes and procedures governing internal control over financial reporting, WellCare said.

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Three contracts are the focus of the SEC filing. One covers the behavioral health component of WellCare's contract with AHCA for Medicaid recipients in Florida. Another is the "Healthy Kids" contract in which WellCare provides health insurance for children whose family income makes them ineligible for Medicaid. The third is a contract to provide health care services to Medicaid recipients in Illinois.

Under the contracts, WellCare receives premiums to pay for medical and health benefits. If WellCare spends less on eligible medical expenses than the minimum in the contract, the company is required to refund all or some of the difference.

WellCare said it included ineligible medical expenses in calculating premiums for the AHCA and Healthy Kids contracts, which understated the amount of refunds. In the Illinois Medicaid contract, WellCare said it did not record an adequate liability for the anticipated refund.

WellCare said it owes an aggregate refund of up to $42 million under these contracts as of Dec. 31, 2006, and expects to owe another $4.5 million in refunds for 2007.

As a result of the restatements, earnings a share for the six months ended June 30, 2007, is expected to be cut by 5 percent, or 10 cents a share, to $1.80 a share from the previously reported $1.90 a share.

For the year ended Dec. 31, 2006, earnings per share will drop 9 percent, or about 30 cents a share, to $3.13 from the previously reported $3.43.

For the year ended Dec. 31, 2005, earnings per share is expected to be reduced by 9 percent, or 12 cents a share, to $1.20 from the previously reported $1.32.

For the year ended Dec. 31, 2004, earnings per share is expected to be reduced by 14 percent, or 22 cents a share, to $1.34 from the previously reported $1.56.

The company said in the filing that its former senior management "set an inappropriate tone" in connection with the company's efforts to comply with the regulatory requirements related to the AHCA contract and Healthy Kids.

WellCare said a review by a special committee is ongoing, but the company doesn't expect to make further financial adjustments. The company said it is continuing to cooperate with state and federal regulators and with the SEC, which is conducting an informal investigation.