WellCare’s boardroom spat isn’t over…

May 3, 2010

On April 23, an apparently long-simmering spat in the boardroom of WellCare Health Plans (WCG) spilled out into the open with the noisy resignation of board member Regina Herzlinger, a well-known health-care accounting and management guru at the Harvard Business School.

Herzlinger warned in her resignation letter about the company’s accounting systems, lagging financial and stock performance, and —conspiring directors who sought —not to re-nominate me to the Board simply because of my vigorous and uncompromising pursuit of the interests of our shareholders and members. WellCare, unsurprisingly, said the board and company —strongly disagree with the unsupported claims made by Dr. Herzlinger, describing them as —mischaracterization of facts and motive and — erroneous conclusions, and said would have been left off the nomination slate —to achieve a better balance between technical accounting and operational experience, not because of her outspoken views.

Though we covered this in a Footnoted Pro report that afternoon (subscription required), the episode served to highlight both the potential problems at a company with a history of accounting and related issues, and also some of the pitfalls that await the entire health-care sector as federal health reform kicks in. (Others also noticed WellCare’s 8-K on the resignation, and Herzlinger’s press release on the subject, including The Wall Street Journal, which published this article on the squabble.

But don—t bet on this dust-up ending any time soon. We caught up with Herzlinger by phone last week, and she told us she’s planning a response to the one the company included in its 8-K, possibly as soon as early this week.

In the meantime, we wanted to find out a little more, both about the WellCare-specific concerns she raised, and also about what it takes to bring an ordinarily discreet board member to raise her concerns so publicly.

Key to Herzlinger’s concerns, she told us, is the looming need for WellCare and other health insurers to integrate accounting and health-record systems, to convince regulators that federal funds are going to care rather than administrative expenses or inefficiency. —Increasingly, health insurance firms that deal with Medicaid and Medicare are going to be paid for performance, she said, —which really means the accounting system has to be coupled with the clinical system.

The company, of course, has had well-publicized issues on that front, most notably in 2007 and 2008, when the company’s headquarters were raided by state and federal authorities investigating Medicaid fraud. Ultimately, WellCare restated three years of financial results and paid $90 million in forfeitures and restitutions over allegations that it claimed to spend more on care than it actually had, to avoid returning millions in government funds. As the WSJ noted on the afternoon of WellCare’s latest 8-K, there have been other incidents since then. WellCare, in its response to Herzlinger’s letter, argues that the company itself discovered those subsequent problems, mitigating the problem, and that her other accounting concerns were immaterial.

This morning, in response to several questions raised by Herzlinger, WellCare spokeswoman Amy Knapp sent this statement to footnoted: —Dr. Herzlinger became aware of these issues only as a result of their being reported to her, as Chair of the Audit Committee, by the Company’s chief financial officer and chief internal auditor. The Company and Board take Dr. Herzlinger’s assertions very seriously and the Board and has concluded a comprehensive and appropriate review.

Herzlinger disagrees. —The internal auditor caught them, which is great, Herzlinger said. —What’s not so great is they keep having these accounting problems.

Add to that the fact that the internal auditor has been on the job for about 15 months, and the company’s chief accounting officer since January, and you have a real risk that key officials unfamiliar with the company’s systems miss something, Herzlinger said. She also clarified another pretty stinging comment in the letter, that —knowledgeable people in the company have expressed concern about the accounting skills of our relatively new Chief Financial Officer.

Some CFOs, Herzlinger explains, are —the accountant’s accountant, with instant command of the breadth and depth of U.S. accounting pronouncements; others are —more the finance and relationship type of CFO. WellCare’s CFO falls into the latter camp, by her reckoning.It doesn—t mean he’s a bad guy — he’s not, she told us. —It just means he hasn—t memorized all the [accounting standards].

All told, —the combination is worrisome, given our continuing problems with the accounting systems, and the fact that we now have to merge this faltering accounting system with the clinical systems, Herzlinger says. —I had a relevant skill-set in that I knew both accounting and health insurance very well, and I knew the company systems very well.

She was less inclined to elaborate on her allegations about the behavior of other board members. Herzlinger said the effort of some board members to oust her only failed because they couldn—t recruit a replacement quickly enough, an allegation the company says is —undermined by the unanimous decision of the Nominating Committee and the Board to nominate Dr. Herzlinger for election as a director at the 2009 annual meeting.

Ultimately, Herzlinger said, she decided to resign and make her concerns public because she worried that retiring quietly would mean the company never faced up to the risks she saw. The decision cost her over $100,000 in equity grants, by her estimate. (The company—s proxy, filed April 30, says she forfeited unvested stock awards that were valued at $164,611 on Dec. 31 though WellCare’s stock has dropped since that date, which would lower that estimate).

—I have not a second of regret about that, Herzlinger told us. —I hoped that this letter would be salubrious.

We—ll see. In the meantime, with WellCare’s earnings and earnings call coming before the market opens on Wednesday, and its annual meeting on June 10, hang tight for round two — and maybe more.

Image source: eschipul via Flickr

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