WellCare reports $128.9 million net loss for second-quarter 2010

WellCare Health Plans, Inc. (NYSE: WCG) today reported results for the three and six months ended June 30, 2010. As determined under generally accepted accounting principles ("GAAP"), the Company reported a second quarter 2010 net loss of $128.9 million, or $3.05 per diluted share, compared with net income of $37.0 million, or $0.88 per diluted share, for the prior year period. The 2010 second quarter net loss arose principally due to two charges associated with the previously disclosed government investigations and related litigation, which are described below.

“WellCare has achieved solid progress on our objectives this year, including our strategic and organizational restructuring, placing leaders in roles critical to our future, quality accreditations for our Florida health plans, and resolution of some important legal matters”

Adjusted net income for the second quarter of 2010, which excludes these two charges and other government investigation-related expense of $7.8 million, was $38.6 million, or $0.90 per diluted share, as compared with $59.8 million, or $1.42 per diluted share, for the same period in 2009.

"WellCare has achieved solid progress on our objectives this year, including our strategic and organizational restructuring, placing leaders in roles critical to our future, quality accreditations for our Florida health plans, and resolution of some important legal matters," said Alec Cunningham, WellCare's chief executive officer. "These and other developments will drive our second half momentum in continuing to improve health care quality and access, our medical and administrative cost positions, and our growth outlook."

In addition to results determined under GAAP, net income and certain other operating results described in this news release are reported after adjustment for certain selling, general, and administrative ("SG&A") expenses, primarily related to previously disclosed government investigations and related litigation, that management believes are not indicative of long-term business operations. Please refer to the schedules in this news release that provide supplemental information reconciling results determined under GAAP to adjusted results.

Strategic and Organizational Restructuring

The Company also announced today a strategic and organizational restructuring with the objective of ensuring administrative efficiency and a competitive cost structure. The Company will allocate new resources and direct substantial investments to priority areas such as health care quality, information technology, and business development.

The restructuring includes a workforce reduction resulting from streamlining and improving business processes and operations, including the centralization and consolidation of certain functions. The reduction affects less than 100 associates. In addition, the Company is eliminating a significant number of open positions, while adding a smaller number of new positions.

"Changes of this nature are difficult, and we are sensitive to the potential impacts to our associates, members, government customers, and business partners," said Cunningham. "Nevertheless, we believe these steps will strengthen our position for future opportunities and new requirements in government-sponsored health care programs."

Each associate affected by the workforce reduction will receive severance pay and outplacement support and will be eligible to apply for the Company's open positions.

Charges Associated with Government Investigations and Related Litigation

As described above, the 2010 second quarter net loss arose principally due to two charges associated with the previously disclosed government investigations and related litigation. One of the charges results from a preliminary agreement with the Civil Division of the U.S. Department of Justice and certain other government agencies to settle their pending inquiries for the total principal amount of $137.5 million. The estimated fair value of the settlement is $134 million. The Company previously had accrued $79 million in anticipation of a settlement. During the second quarter, the Company accrued an additional $55 million for the settlement, based on the preliminary agreement.

Separately, WellCare announced this morning that it has reached agreement on the material terms of a settlement to resolve the claims asserted against the Company in the previously disclosed securities class action consolidated complaint. Total principal payments under the agreement amount to $200 million. During the second quarter, the Company accrued the $194 million estimated fair value of the settlement.

The Company believes it will be able to meet its known near-term monetary obligations, including the terms of these settlement agreements, and maintain sufficient liquidity to operate its business. There can be no assurance that these settlements will be finalized. In addition, the outcome of these matters may differ materially from the preliminary terms.

Highlights of Operations for the Second Quarter

Adjusted net income for the second quarter of 2010 was unfavorable in comparison to the second quarter of 2009 primarily due to the loss of gross margin from the December 31, 2009, withdrawal of the Company's Medicare Advantage private fee-for-service ("PFFS") plans, as well as decreased premium revenue from Medicare Advantage coordinated care plans ("CCPs") and Medicare stand-alone prescription drug plans ("PDPs"). These factors were offset in part by a reduction in SG&A expense, as well as improvement in the PDP medical benefits ratio ("MBR").

Membership as of June 30, 2010, decreased to 2.2 million compared with 2.4 million members as of June 30, 2009. Medicaid segment membership decreased by 9,000 year-over-year to 1.3 million as of June 30, 2010, driven by the withdrawal in mid-2009 from certain Florida counties and programs, but offset in part by growth in Georgia. Medicare Advantage membership decreased year-over-year by 138,000 members. The withdrawal from PFFS plans reduced membership by 107,000 year-over-year. Medicare Advantage CCP membership decreased 31,000 year-over-year, principally due to the impact of the previously disclosed 2009 CMS marketing sanction. PDP membership decreased 57,000 year-over-year, also largely due to the CMS marketing sanction.

Premium revenue for the second quarter 2010 decreased 25% year-over-year to $1.3 billion. The decrease is attributable to the withdrawal of PFFS plans and to the impact of the 2009 CMS marketing sanction on Medicare Advantage CCP and PDP premium revenue.

Medical benefits expense was $1.1 billion, a decrease of 25% from the second quarter of 2009. The MBR was 83.9% in the second quarter 2010, compared with 84.1% in the second quarter of 2009. Excluding the impact of premium taxes, the second quarter 2010 MBR was 84.5%, a decrease of 100 basis points from 85.5% in the second quarter of 2009. The decrease was driven by the improved performance of the Company's PDPs and Medicaid plans, as well as the withdrawal from PFFS plans.

SG&A expense as determined under GAAP was $405 million in the second quarter of 2010, compared with $215 million in the same period in 2009. Adjusted SG&A expense, which excludes the government investigations and related litigation charges and expense described above, was $148 million in 2010, a decrease of 21% from $188 million in the same period last year. The decrease in adjusted SG&A expense resulted principally from the withdrawal from PFFS plans, as well as gains in operating efficiency. In addition, the elimination of the premium tax associated with the Georgia Medicaid program reduced SG&A expense in 2010 relative to 2009. These favorable variances were offset in part by increased costs for Medicare Advantage CCP marketing and infrastructure investments. Adjusted SG&A expense was 11.1% of total revenues in the second quarter of 2010, compared with 10.5% of total revenues in the same period in 2009 due primarily to a lower revenue base in 2010 resulting from the withdrawal of the Company's PFFS plans and the impact of the 2009 CMS marketing sanction.

Cash Flow and Financial Condition Highlights

Net cash used in operating activities as determined under GAAP was $245 million and $150 million for the six month periods ended June 30, 2010 and 2009, respectively. Net cash used in operating activities, modified for the timing of receipts from and payments to the Company's government clients, was $121 million for the six months ended June 30, 2010, compared with $116 million of net cash provided by operating activities for the six months ended June 30, 2009.

As of June 30, 2010, unregulated cash and short-term investments were approximately $160 million. Unregulated cash and short-term investments were approximately $121 million on March 31, 2010, $120 million on December 31, 2009, and $77 million on June 30, 2009.

Days in claims payable were 54 days as of June 30, 2010, compared with 55 days as of March 31, 2010, and 52 days as of June 30, 2009. Excluding the impact of Medicare Advantage PFFS plans, days in claims payable were 51 days as of June 30, 2010, 50 days as of March 31, 2010, and 50 days as of June 30, 2009.

Financial Outlook

WellCare is updating its financial outlook for the year ended December 31, 2010. Adjusted net income per diluted share now is expected to be between approximately $2.05 and $2.20, an increase from the previous guidance for adjusted net income per diluted share of between approximately $2.00 and $2.20. The following elements of WellCare's financial outlook are unchanged from the Company's previous guidance.

• Premium revenue is expected to be between approximately $5.30 and $5.40 billion.
• The 2010 Medicaid segment MBR is anticipated to be below the 2009 MBR.
• The 2010 Medicare Advantage segment MBR will decrease relative to the 2009 MBR.
• The 2010 PDP segment MBR is anticipated to decrease from the 2009 MBR.
• The adjusted administrative expense ratio is expected to be in the high 12% range.