How Wall Street Reacts to Fraud in Our Health Care Industry

This appeared on Bloomberg News today:

“WellCare Shares Jump After Analyst Calls Fraud Probe `Limited’

Nov. 20 (Bloomberg) – WellCare Health Plans Inc., the U.S. health insurer under investigation for possible government overpayments, rose the most in two weeks in New York trading after an analyst upgraded the company.

“The analyst, Carl McDonald of CIBC World Markets in New York, called the probe ‘limited’ and raised his rating of WellCare to ‘sector outperform-speculative’ from ‘sector perform.’ WellCare rose $2.38, or 6.8 percent, to $37.39 at 9:40 a.m. in New York Stock Exchange composite trading after touching $38.14.

“A U.S. government raid of WellCare’s Tampa, Florida, headquarters on Oct. 24 yielded thousands of records, including papers pulled from a shredder bin and files on offshore bank accounts, according to court filings. McDonald said the filings suggest the probe is focused on Florida’s Medicaid program for the poor.

“’It’s possible that the Florida Medicaid investigation spreads into other areas, but the document seems to rule out widespread, systemic fraud,’ the analyst said in a note to clients today.”

Bloomberg also reveals that: “The agents seized records from the desks of Chief Executive Officer Todd Farha and Chief Financial Officer Paul Behrens, according to the court records. From Behrens’ desk, agents grabbed a document called the ‘Stairway to Heaven Plan,’ according to the inventory.

“Also taken were wire transfers, tax returns, bank accounts in the Grand Cayman Islands, a calendar of political visitors and contributions, and phone lists. One seized document was labeled ‘Re: Possible Kickback,’ according to the court records”.

Yet none of this seems to bother the analyst who upgraded the stock or the many investors who followed his upgrade–pushing the share price up 6.8 percent this morning.  The analyst predicts that “that WellCare [will] settle, pay a fine, but remain in all its businesses, rather than being put out of business.”

I’ve been following the stock market for more than two decades and I
know that he is probably right. The scandal represents a Buying
Opportunity for investors interested in WellCare.  If they will jump in
while the price is low, the can make a bundle, and the stock will
recover.

From the company’s point of view, paying the fine is simply part of
the price of doing business. Its reputation will not be ruined on Wall
Street because the Street doesn’t care about the ethics of what the
company is doing; investors care about whether or not the company is
making a profit.  As long as customers continue to buy the company’s
product—and they usually do—earnings will continue to flow. 

Meanwhile, both companies and individuals in our for-profit health care industry continue to engage in criminal
activities. In one case, a device-maker knows that its defibrillator
may kill someone, but doesn’t disclose this knowledge to patients and
doctors. In another case, a drug-maker hides what it knows about the
risks of its newest “blockbuster” drug while spending millions to
advertise its product “direct to consumers.” In a third case,
orthopedists at some of our top academic medical centers take millions
from device-makers in exchange for teaching residents how to implant
the device-maker’s newest, most expensive artificial knee—and only that
knee.

No one goes to jail. And everyone makes money.

13 thoughts on “How Wall Street Reacts to Fraud in Our Health Care Industry

  1. Wall Street doesn’t really mind bad news all that much. What it can’t stand is uncertainty — not knowing HOW bad something is going to be.
    Stocks will regularly rise sharply on VERY bad news if it means taking much (or all) of the uncertainty out of the picture. Look at what happened to Merck stock recently after it announced a $4.5 billion settlement with respect to most of the outstanding Vioxx litigation. The market doesn’t care that Merck is paying out $4.5 million — it cares that the cloud of uncertainty is lifted. And Merck shares skyrocketed.
    The “limited” scope of the probe was the signal that uncertainty is significantly reduced.

  2. maggie,
    the reason this shit happens is because all business interests and wall street knows one fundamental fact about the govt prosecution of healthcare fraud: all bark and no bite.
    Running a major hospital is a license to steal directly from the federal govt with virtually zero repercussions.
    Here’s a typical timeline:
    1) Hospital CEO decides to steal money from Medicare in fraudulent billing
    2) Hospital CEO gets away with it for about 5 years till Medicare fraud teams finally discover it.
    3) Hospital CEO goes to CMS and says “if you make us pay that money back we will go out of business and all those poor people will have no hospital to go to”
    4) CMS buys the line of bullshit and gives them a slap on the wrist, forcing the hospital to pay back only a very small fraction of what they stole. We’re talking less than 20% here.
    5) CEO gets a huge raise for stealing billions from Medicare.
    This scenario happens over and over again nationwide. CMS essentially refuses to make hospitals pay back the money they stole because they are being blackmailed over this bullshit bluff about how the hospital will go out of business and people will have no healthcare.
    If I was a hospital CEO, I would steal as much money as possible from Medicare/Medicaid. The WORST case scenario is that I get caught 5 years later and only have to pay back 20%. No jail time, big time bonus, whats not to like about it?

  3. Joe Blow, Rick and Tim,
    You are right–jail time would make hospital exectuives think twice.
    But it doesn’t happen, in large part because the CEO’s often have political backing that makes them virtually untouchhable.
    In Money-Driven Medicine I write about for-profit hospitals and how difficult it is for them to make the type of double-digit profits that Wall Street expects from a growth stock.
    It’s a virtually impossible goal because the hospital business is a labor-intensive business. If you try to “down-size” (cut the number of nurses) patients die. Meanwhile you have to make huge capital investements in equipment that can become obsolete quick quickly. The price of the drugs and devices that you have to buy always rises. Competition virtually never brings prices down.
    The only way for-profit hospitals have managed to satisfy investors’ expectations is by cheating Medicare and private insurers (the fraud is not limited to Medicare) cheating patients (performing unncessary procedures) and/or cheating investors (lying about earnings)
    Eventually, as you say, they are caught, they pay fines, no one goes to jail, “new” hospital management comes in (often cronies of the old management), they change the name of the hospital, paint the front door, and start over.
    And I should add that fraud is not limited to for-profit hosptials. Not-for-profits do it too,.
    This of course is true in most industries. CEOs of large companies very rarely go to jail.
    But I think health care is a special case because in the end, these people are stealing from the sick–stealing dollars we need to care for the sick.
    That’s why I think it would be appropriate to have special laws covering healthcare fraud–mandatory sentences, etc.
    I wonder if Congress would ever do that?
    Tim– You are absolutely right. What Wall Street hates is uncertainty. Clear bad news, on the other hand, can create a buying opportunity.
    What’s interesting is that consumers also don’t seem to mind healthcare fraud. They can read that Merck has lied about the risks of a drug, and they are perfectly willing to believe what Merck says about its next new blockbuster drug– Gardasil (the supposed “vaccine” for cervical cancer).
    See what I wrote about Gardasil on this blog on August 27 ( http://www.healthbeatblog.org/2007/08/drug-makers-dir.html ) and on Oct. 22
    (http://www.healthbeatblog.org/2007/10/we-cant-fund-sc.html
    I would be nice if consumers would show some skepticism. If a company lies once, don’t you think they might lie again?
    IF an auto-maker produces a dangerous car, it hurts its reputation. But that doesn’t seem to be true in the health care industry. I wonder why?

  4. WHAT ABOUT NON-PROFIT THIEVES?
    Non-profits appear to love to criticize those who own property (a.k.a., “capitalists”).
    As if a former United Way of America wasn’t convicted of fraud. As if the presidents of colleges are not making $1,000,000.00+. As if the Red Cross hasn’t been criticized for being inefficient. As if MD-surgeons are not driving Mercedes. As if the “Great Society” has nearly destroyed the nuclear family. And so on.
    Non-profits ought to take a look in the mirror. Not always a pretty picture.

  5. Rus–
    You’re right, not-for-profit hospitals also commit crimes– cheating Medicare, their patients, etc.
    But I would point out that while CEOs of some not-for-profit hospitals now earn six figures, they still earn far less than the CEO’s of for-profit hospitals.
    Moreover, for-profits are always tempted to do “whatever is necessary” to boost the price of their stock (both because executives are judged by the company’s share price and because they often receive bonuses in the form of stock.)
    Since not-for-profits don’t issues shares, their executives aren’t exposed to the same temptation.

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  7. It’s hard to know what the new health care bill is going to do to the economy. Do you think this is the beginning of a downward socialism spiral? Or will this really help people in the long run?