Michael Neidorff had a roadmap that he believed would catapult Centene Corp. to the top, the summit of success, in fact. The CEO’s plan was for Centene to be part of the major league, perhaps join the circle of America’s most prominent insurance players – the elite Big Four. In November 2014, the Centene CEO saw an opportunity to realize his grand ambition. California-based Health Net came under his radar, and Neidorff set out to make his dream come true.
So Neidorff wasted no time and reached out to Health Net CEO Jay Gellert, and a year later, Centene made public its intention to merge with the California insurer. He sold the deal as beneficial to Centene, explaining it will give “us a critical mass and a capability and size that builds a lot of stability into what we are doing.”
Neidorff further argued that because of Health Net, Centene would gain an inside track in California, aligned with his vision of long-term expansion for the Fortune 500 company. “We have good growth and good visibility into 2016, 2017, and a little bit of 2018,” the Centene boss assured.
How The Merger Deal Played Out, And Quickly Unraveled
Dangling incredible growth scenarios to the Centene board and shareholders, Neidorff pushed ahead with the execution of his takeover plan for Health Net. For the Centene CEO, Health Net’s massive Medicaid portfolio was reason enough for the merger, eventually costing Centene over $6 billion. Even more promising was Health Net’s established presence in California. That alone convinced Neidorff that the merger was worth the trouble.
However, Centene soon found out that Health Net was an ailing company. The latter’s liability totaled an estimated $390 million, and there would be significant payouts to come in the next few years. These are responsibilities that would be passed on to Centene, and if Neidorff had the company’s welfare in mind, he would walk away from the deal. But the CEO decided against dropping Health Net. Instead, he drew up a plan that would convince the merger was advantageous for Centene.
The basic idea was to camouflage Health Net’s financial standing. The books for viewing would still show negligible liabilities, and reserves, courtesy of inflated revenue projections, would be available to plug these holes. Neidorff had wanted to paint his move on Health Net a sound business decision. And he made efforts that his charade would win approvals from Centene investors and government regulators.
Neidorff had his way and largely due to the cooperation provided by Gellert. The Health Net chief worked with his Centene counterpart to ensure that the merger would proceed smoothly. And it did, thanks to the tweaks that left Health Net’s books looked good to unsuspecting eyes. Gellert collected an exit package of $55 million for his efforts after turning Health Net over to Centene.
And The Problems Started To Surface
The collusion between Neidorff and Gellert would have gone unnoticed, but it soon proved that Health Net’s dismal condition was hard to suppress. Just a few weeks after the Centene takeover of Health Net was made official, the giant insurer admitted that the deal was fraught with serious issues. Soon enough, Neidorff confirmed that Health Net was saddled with deeply concerning liabilities.
The market’s reaction was swift. Centene’s stocks suffered a sharp decline, and company shareholders could only watch in horror as Centene shed a value of over $1 billion. It was revealed later that the shock episode did not hurt Neidorff and a few Centene executives at all. Neidorff avoided absorbing a huge loss when he sold off $20 million worth of stocks in December 2015. It was clear that he had inside information of the imminent wipe-out. He capitalized on this advantage and bothered not about the sorry outcome that befell Centene shareholders
The conscious effort to hide the truth also prompted Centene to cut its losses by ensuring that Health Net will stop bleeding financially. Aided by expensive lawyers, Health Net started an audit dragnet to put the claims of treatment centers in California under scrutiny. The action, carried out by Health Net special investigation unit (SIU), led to the sweeping suspension or denial of payments to policyholders. The letters issued by the SIU made accusations of fraud, and those targeted were deemed guilty unless they can prove otherwise.
Among those hit hard was Sovereign Health. The care provider was forced to cease many of its operations in California, but it decided to fight back. Sovereign filed a billion-dollar lawsuit against Centene, and part of its complaints was the giant insurer violated the RICO law. Sovereign said the SIU audit was a mere pretext for Centene to honor its commitment. The Health Net SIU sent out letters that outlined demands, which were designed for impossible compliance. It was like that Centene had weaponized a valid proceeding for its advantage. It was an elaborate scheme to commit fraud, a glaring case of racketeering, said the Sovereign lawsuit, explaining that Centene deliberately cheated thousands of policyholders and drove hundreds of treatment centers out of business.
Michael Neidorff’s California Dreams
In retrospect, the complications created by the anomalous union of Centene and Health Net can be traced to the vision that played in the mind of Michael Neidorff. The Centene CEO thought that the merger would lead to his company becoming an alpha player sooner than he imagined. He aimed high and missed the mark, resulting in the innocent becoming collateral damage.
Neidorff dreamed of expanding in California so Centene would have a more extensive playing field. But his missteps along the way destroyed countless lives. Centene investors incurred losses while Neidorff enjoyed immunity. Behavioral care providers like Sovereign Health closed shop because Centene refused to pay. And thousands of patients were left without quality medical care when Centene abruptly cut them off. Michael Neidorff had his California dream, and many people were left struggling with a nightmare.
