January 13, 2009 / 5:19 PM / in 10 years

UPDATE 1-WellPoint shares slump on Medicare violations

(Recasts to include government comments; adds analyst comments and byline; updates share price)

By Lewis Krauskopf

NEW YORK, Jan 13 (Reuters) - Shares of WellPoint Inc WLP.N fell as much as 10 percent on Tuesday after the U.S. government ordered the health insurer to stop marketing and enrollment for its Medicare plans because of violations of federal regulations, including denying seniors access to prescription drugs.

The government found thousands of Medicare beneficiaries were improperly denied access to drugs for heart disease, seizures and asthma, according to a scathing letter sent to WellPoint on Monday from the Centers for Medicare and Medicaid Services.

Among other violations, CMS said WellPoint improperly charged its enrollees, failed to properly administer a low income subsidy benefit, distributed unapproved marketing materials, and failed to process enrollment and disenrollment requests accurately or on a timely basis.

“CMS is imposing these intermediate sanctions immediately because it has determined that WellPoint’s conduct poses a serious threat to the health and safety of Medicare beneficiaries,” the government agency said in a letter to Krista Bowers, WellPoint’s president for its senior business and consumer business marketing.

The violations stem from problems with WellPoint’s computer systems, according to CMS, which cited a “serious, pervasive problem” affecting the company’s Medicare plans.

The government said a spike in complaints from Medicare beneficiaries this month prompted CMS to act to ensure WellPoint address the issues.

WellPoint, the largest U.S. health insurer by overall membership, said it had been working with CMS for six months to resolve the issues and was surprised by the government’s actions. The problems were identified from company compliance audits and findings from a recent government audit, WellPoint said.

“We have made significant progress in addressing these issues,” WellPoint said in a statement. “Our plan is to continue to work with CMS to make improvements as expeditiously as possible.”

WellPoint shares were down $2.25, or 5.5 percent, at $38.71 in midday trading on the New York Stock Exchange after falling as low as $36.77 earlier in the session.

Medicare, the federal health program for seniors, contracts with insurers such as WellPoint to administer full-service Medicare Advantage plans and Medicare Part D prescription drug plans.

WellPoint has 472,000 Medicare Advantage members and 1.9 million Medicare Part D members, as well as 836,000 members who get insurance to supplement their government Medicare plans.

WellPoint’s Medicare products represent 8 percent to 12 percent of the company’s revenue and a smaller percentage of its profit, Wachovia analyst Matt Perry said in a research note.

Perry said that because open enrollment for Medicare ended at the end of 2008, the government sanctions should not dramatically hurt WellPoint.

But he said the setback “does not reflect well on WellPoint management’s attempts to improve execution and investors’ perception of the company.”

UBS analyst Justin Lake said the “rather harsh” CMS letter “clearly spells out a troubling service pattern to Medicare patients.”

“These claims are certain to bring into question potential for broader CMS sanctions down the road,” Lake wrote in a research note. (Reporting by Lewis Krauskopf; Editing by Steve Orlofsky and John Wallace)

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