The Magazine of Corporate Responsibility

WellCare Director Resigns, Questions Accounting Oversight

by Michael Connor

In a rare public display of boardroom in-fighting, the head of the audit committee for WellCare Health Plans Inc. resigned from its board, asserting that the company’s accounting systems were in need of greater oversight and that some board members had conspired to undercut her authority and force her from the board.

Board RoomThe resignation came from director Regina Herzlinger, a prominent Harvard Business School professor and leading expert in health care economics.  WellCare, a managed-care insurer specializing in Medicare and Medicaid benefits, only last year paid $80 million to settle criminal and civil charges that it defrauded the federal Medicaid program and a Florida state program that provides health care to uninsured children.

In a "Dear Colleagues" resignation letter letter to fellow board members, made public by the company, Herzlinger said the board’s Nominating and Governance Committee had not re-nominated her despite the fact that “much work remains to be done to ensure that the company is governed by the highest finance and accounting standards, work that can only be done by those, like me, who not only have extensive experience in health insurance accounting but also understand the unique needs of our firm.”

She added: “It is likely that conspiring directors decided not to re-nominate me to the Board simply because of my vigorous and uncompromising pursuit of the interests of our shareholders and members.

In a response filed with the Securities and Exchange Commission, WellCare said the  “Company and the Board strongly disagree with the unsupported claims made by Dr. Herzlinger in the Resignation Letter and take exception to Dr. Herzlinger’s mischaracterization of facts and motive and her erroneous conclusions.”

The company said the board’s objective with this year’s slate of nominees “was to achieve a better balance between technical accounting and operational experience in order to continue efforts to create an organizational culture that strikes an appropriate balance among the Company’s obligations to its stockholders, members and clients.”

"Improper Motives"

Herzlinger, a member of WellCare’s board since 2003, said in her letter there was “need for continuing, knowledgeable oversight of the Firm’s finance and accounting functions.”  She said WellPoint had been fined $610,000 by the state of Georgia for violations in 2009; company auditors had also discovered that company overbilled the state of Illinois $1 million, she added.

In response, WellCare said the company “believes its internal controls over financial reporting are effective and notes, as did Dr. Herzlinger, that accounting matters identified in the Resignation Letter were discovered by the Company’s internal auditor as part of the Company’s internal audit process.”

Herzlinger said it was “painfully obvious” that some of her fellow directors “do not want me here” and that the effort stems from “improper motives.”   She quoted a transcript of a 2008 conference call involving three directors in which board chair Charles G. Berg is quoted as saying: ““I think every time Chris and Neil put aside time and get on the phone with Regi in these long calls they want to kill themselves and I think I have very little prospect that we can attract new great directors if one of the things they have to do is sit and deal with that woman.

To which Herzlinger, in her resignation letter, said: “I have served on a number of boards and am currently considering joining others. Needless to say, I have never been dismissed as ‘that woman’ even where, as here, I am the sole female director on the board. In the pursuit of shareholder and member interests, I will ask hard questions and persist until I get satisfactory answers.”

Herzlinger is the Nancy R. McPherson Professor of Business Administration at the Harvard Business School.  According to her official biography, she was the first woman to be tenured and chaired at Harvard Business School and the first to serve on a number of corporate boards.  Her newest book, Who Killed Health Care?, was selected by the U.S. Chamber of Commerce as one of the ten books that “changed the debate in 2008.”   Among many honors, she has been the recipient of the Healthcare Financial Management Association’s Board of Directors award.

Deferred Prosecution Agreement

WellCare provides managed care services exclusively to government-sponsored health care programs, focused on Medicare and Medicaid.  The company serves about 2.3 million members, according to recent financial filings, and had 2009 revenue of $6.9 billion.

In 2007, more than 200 federal and state agents raided WellPoint’s Tampa offices armed with search warrants.  In May 2009 the company entered into a deferred prosecution agreement to settle charges by the U.S. Department of Justice and the Florida State Attorney General’s Office that it had fraudulently inflated medical expenses submitted to federal and Florida state heath care programs.

Under its deferred prosecution agreement, WellCare agreed to hire an independent monitor who would supervise its compliance activities for 18 months.  That monitor, Stan Twardy at Day Pitney LLP, in Stamford Conn., said he was aware of the issues raised in Ms. Herzlinger's resignation letter, The Wall Street Journal reported.

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