WellCare Dives 63% After Raid On HQ, But Prognosis Positive For Most HMOs

Then came Wednesday's news that federal and state law enforcement officers raided the Tampa, Fla., headquarters of WellCare Health Plans, one of the sector's top performers.

WellCare's stock halted trading on the news. When trading resumed Thursday morning, investors couldn't get out fast enough. Shares fell to as low as 40 -- 69% off a record high set two days earlier -- before closing down 63% to 42.67.

But WellCare's sell-off had minimal impact on other HMOs. In fact, much of the sector got a boost from better-than-expected results from Aetna (NYSE: - ) and Amerigroup (NYSE: - ).

Amerigroup's third-quarter profit rose 38% to 58 cents a share, easily beating views. Its stock rose 9%.

Aetna's profit rose 24%, beating views by a nickel. It also raised full-year targets. Aetna's shares rose almost 6% to a new closing high.

Strong stock gains also were logged by Humana (NYSE: - ), Cigna (NYSE: - ) and Coventry Health Care (NYSE: - ).

That good news was overshadowed by the shocker at WellCare. Not much is known about why officials raided WellCare's headquarters. But the raid included agents from the FBI, the Department of Health and Human Services and the Florida attorney general's Medicaid fraud control unit.

WellCare wasn't sharing much information. Chief Executive Todd Farha confirmed in a Thursday statement that the company was served search warrants for various documents and files.

He added that WellCare "remained committed to operating our business and serving our members." Members would see no interruption in service, he said.

After the close, WellCare said it has hired lawyers and is in contact with regulators and its auditors.

It might be some time before the full details are public. Some analysts said the problem was company-specific, not industrywide.

A good chunk of WellCare's revenue comes from Medicare, the federal health program for the elderly and disabled, and Medicaid, a program for the poor run through federal and state offices.

HMOs that deal heavily in government programs have fared well in the current market, experts say.

"Government markets are less volatile than commercial markets," said Les Funtleyder, a Miller Tabak analyst. "As long as the government doesn't make any radical changes to Medicare, that part of the business should be pretty stable. And any changes won't take place for at least a couple of years."

But government programs also bring scrutiny -- especially when it comes to how the money is spent.

Last week, execs at Humana and UnitedHealth (NYSE: - ) testified in front of the House Ways and Means Committee during a hearing on oversight of the Medicare Advantage program, the privately run government health benefit for seniors.

The program has been criticized for overpaying health care firms. One GAO report cited overpayments of $34 million in 2003.

But the hearing unearthed no specific wrongdoing. It also did little to take the steam out of the managed care sector's recent run.

The 19 stocks in IBD's HMO group hit a record high Tuesday. It was up 14% for the year before WellCare's Thursday crash.

Humana, like Aetna and WellCare, reached a new all-time high this week. It's set to report quarterly results on Monday.

Much of the success is due to a captive market, Funtleyder said.

"Health care costs continue to go up, and until the government does something about it, the HMOs are the only line of defense in trying to keep costs down," he said. "Demand for their services is going to keep going higher."

The challenge is delivering those services at a price that doesn't scare members away or shave margins.

"Only companies with solid enrollment growth can hold or expand margins in this environment," Banc of America Securities analyst Joseph France wrote on Oct. 17.