Matthew Holt

Reg strikes back! Apparently Wellcare were a bunch of crooks after all. Maybe

Everyone’s favorite Harvard Business School professor is back in the news. Those of you with long memories may remember that at THCB I’ve been a tad critical of Regina Herzlinger’s ideas, her presentation of said ideas and—resulting in a letter from her lawyer whose previous gig was writing the Patriot Act—her stewardship of the shareholders and other stakeholders of Wellcare. Wellcare is a pretty scummy Medicare and Medicaid HMO in Florida. The scuttlebut I heard about Wellcare a few years back was that it was hiding money offshore in some weird re-insurance arrangement with a fully owned subsidiary, and was essentially faking profits a la Enron.

While that may or may not have been exactly accurate, Wellcare was certainly overcharging its client, the taxpayer in Florida. It was raided by the FBI and eventually settled with the state.

What did one of its best known directors says when she joined the board in 2003?

Dr. Herzlinger said, “WellCare is a case study of a successful public-private partnership, and a model for delivering quality affordable healthcare. Over the years to come, companies like WellCare that reach out to members with information, wellness planning and screenings will be agents of change in the delivery of managed care under government programs.

So by late 2007 Herzlinger had been on the board for four years. What had been her major achievement given the the close-to-criminal activity that was going on the company? Oh yes, it was selling nearly $2.3m worth of stock—completely coincidentally—three months before the FBI raid when the stock was worth 5 times what it fell to shortly afterwards.

And then early last year (2009) Wellcare was suspended from Medicare sales for more bad behavior. Did Regi resign at that stage? Uh….no.

But on Friday she actually did quit!

Why? She claims that she was asking difficult questions about their internal accounting processes and low MLR rate—below the newly enforceable (in 2014) 85%. But amazingly just coincidentally Wellcare apparently didn’t want her back on the board for another term. So maybe she was just using the time honored employee tactic of saying “You can’t fire me, I quit.”

So that now that she’s no longer restrained by whatever loyalty she felt to Wellcare’s shareholders, I look forward to her commenting on the situation over the past seven years, as her lawyer said that she (and he) would. Given that, as her lawyer wrote to me, “responsible directors” hold on “to significant numbers of their shares…—a practice that ensures that their incentives are aligned with the interest of shareholders” is she going to explain why she sold the stock when she did, and why it took until this year for the misbehavior at Wellcare to suddenly be bad enough for her to feel the she was morally obliged to quit? And how much stock does she have left and what is she going to do with that?

I for one am really looking forward to her explanation. But some of the hints are in her rather fun resignation letter which at least hints that she was having trouble with the management (and vice-versa) from January 2008, a few months after the raids and the stock collapse.

Categories: Matthew Holt

4 replies »

  1. I didn’t say she needs to go to jail. But if you want to push for it….
    More seriously, I want her to come clean on how this helped as opposed to Killed Healthcare and if she was working behind the scenes to fix it, what happened?

  2. That was a lot of words to say that she disagrees with you about health care, so she needs to go to jail.

  3. Thanks Nate. Looks like she gave back a little under 5,000 shares awarded as options in 2009
    see here
    In 2004 she owned 57,000 shares including 10,000 options granted in July. She sold the 10,000 shares in December 2007 for $304,000. Unclear what she paid for those 10,000 options (strike price is reported as $0) leaving her with 47,000 shares. I presume that she was given those 47K on joining the board. But who knows she may have purchased them. If that was the case, the stock price at IPO in 2004 was around $20, so she got them for well below that pre-IPO. My guess would be that they were free grants to get her on board, but maybe she paid $10 a share at most? Perhaps even $500,000 for the whole lot?
    In 2007 she sold 10,000 for $950,000 & another 18,000 for $1,368,000 in August
    That’s the $2.3m the WSJ reported, meaning that her share sales to date have been $2.6 million
    She still owns 18,000 — which at $29 a share (today’s closing price) that still means she’s got the better part of $540,000 in Wellcare stock–still. And the price is around where it was when the FBI raided in late 2007.
    So she had 57K shares, sold 37K of them & has around just under 20K left. Which meant that her lawyers statement about “holding significant quantities of stock” is only true if you mean holding about 40% of what she was originally given/purchased. And of course by then she was playing with OPM–given that she either spent zero or a pre-IPO insider price on the first 47K shares.
    Still, now she’s a free woman I look forward to her showing the real transparency which she’s so keen that the rest of the health care system lives up to! It would also be interesting to figure out what she did with the $3m. Not to mention the $1.5m she sold in Zimmer shares
    I still suggest she give up teaching health care which she knows so little about, and instead gives courses at HBS about personal finance–a subject I’d be willing to learn from her! (Just to prove I’m not jealous or sexist)

    Director Disposition (Non Open Market)
    21-Apr-10 18,331 shares
    Date Insider Shares Type Transaction Value*
    Director 4,478 Direct Disposition (Non Open Market) at $0 per share. N/A
    looks like she gave back some options