A class-action shareholder lawsuit against managed-care giant United HealthCare Corp. is the latest fallout from a surprise $900 million restructuring charge largely generated by problems with its Medicare HMO plans.
It's also the most recent sign that the Medicare risk business is becoming an increasingly risky venture for health plans, investors and providers considering entering the business as Medicare provider-sponsored organizations.
Cincinnati-based Anthem Blue Cross and Blue Shield was hit in June by a class-action suit that attempted to block its proposed exit from 19 Ohio counties and parts of three others.
The latest lawsuit, filed Aug. 17 in U.S. District Court in Minneapolis, charges that the Minneapolis-based company artificially inflated its stock price by withholding critical information from investors until its surprise Aug. 6 restructuring announcement.
As of June 30, United's Medicare HMO plans covered 427,000 enrollees in 27 markets in 21 states. The plan is known as United Medicare Complete except in California and Wisconsin, where it's called United for Seniors and PrimeCare Gold, respectively.
United officials would not provide a financial breakdown for the Medicare plans.
But the suit alleges that United officials knew or should have known that underperformance by its Medicare plans in recent months "was pervasive."
According to the suit, between Feb. 12 and Aug. 5 United officials repeatedly overstated the success of Medicare and other business units. The overstatements were made in press releases and comments to analysts.
Company officials declined to comment on specific charges.
But a spokesman said United "believes the lawsuit is without merit and we will vigorously defend it."
Also named as defendants were William McGuire, United's chairman and chief executive officer, and former Chief Financial Officer David Koppe. McGuire and Koppe, whose current role with United is unclear although he is still an executive with the organization, allegedly sold $22 million of their United stock "at artificially inflated" prices in early April, before the company divulged information about its Medicare HMO problems and huge restructuring charge, according to the suit.
Neither McGuire nor Koppe had sold any United stock between May 1997 and the April transactions, according to the lawsuit.
News of United's huge write-off and resulting $565 million second-quarter loss torpedoed its planned acquisition of Louisville, Ky.-based Humana and sent its stock price plummeting. The sudden sell-off cost the company some $3 billion in market capitalization and left some shareholders with stock that had declined in value by as much as 54% since early April, when McGuire and Koppe sold the United holdings.
United blamed problems in many of its Medicare risk plans for about $120 million of its unexpected second-quarter loss.
In response, the company said it would reduce its Medicare risk exposure in 35 counties in 12 unspecified geographic markets, which reportedly include the Atlanta, Denver, Houston and Austin, Texas, metropolitan areas, and shutter start-up efforts in four other counties.
But as recently as Feb. 12, the lawsuit notes, United was trumpeting rapid growth in enrollment in its Medicare risk plans, including an 11% growth rate in the fourth quarter of 1997. Overall, the company's Medicare HMO enrollment shot up 53% last year.
The suit contends that the pattern continued when the company announced its first-quarter 1998 results on May 7, reporting "strong performance" in all of business lines and the strengthening of its health plan business.
The suit, filed on behalf of shareholders who purchased United stock between mid-February and early August, was initiated by plaintiff and shareholder Charles Dahl of Minneapolis, who on March 16 bought 500 shares of the stock at $65.25 each.
On Aug. 21, United's stock closed at just $34.06 a share. Its 52-week high was $73.94 a share.