WellCare Health Plans Inc. (WCG), already burdened with a Medicaid fraud probe, said Friday that it would suspend new enrollments in its Medicare health plans after the government sent a sharply worded letter imposing sanctions on the managed-care concern.

The news sent WellCare shares down as much as 24%, reversing the stock's recent recovery, as the company's Medicare business represents about half its premium revenue. However, the suspension's ultimate impact is unclear because the 2009 open-enrollment season has passed and the next such period doesn't start until November, giving WellCare time to address its problems.

According to the U.S. Centers for Medicare & Medicaid Services, which ordered WellCare to suspend by March 7 the enrollment of, and marketing to, Medicare participants, WellCare's problems include noncompliance and deficiencies in the company's Medicare prescription-drug contracts, as well as alleged misleading of beneficiaries.

"WellCare has demonstrated a longstanding and persistent failure to comply" with government requirements for proper administration of its Medicare prescription-drug contracts, including those linked to Medicare Advantage health plans, CMS said in a letter dated Thursday.

"CMS has afforded WellCare numerous opportunities" to bring its Medicare drug contracts into compliance, and has discussed the issues with management many times, including an occasion earlier this month, "none of which have resulted in sufficient improvement in WellCare's operations or correction of the underlying deficiencies," said the agency, which is part of the Department of Health and Human Services.

WellCare has the highest number of beneficiary marketing complaints among large Medicare Advantage plans, with many beneficiaries alleging marketing misrepresentations, CMS said. The agency accused WellCare of misleading and confusing WellCare beneficiaries, among other alleged violations, and said CMS' own secret shoppers found evidence of such activity at December sales events. CMS also accused WellCare of failing to discover forged applications.

WellCare said in a release that it is working with CMS to address issues the agency raised, and Chief Executive and President Heath Schiesser said the company takes CMS's concerns "very seriously." Existing WellCare Medicare plan members, as well as its Medicaid and state children's health insurance plan, or Schip, enrollees, aren't affected by the actions, the Tampa company said.

"We are committed to complying fully with CMS requirements and serving the needs of our members," Schiesser said.

The move by CMS comes more than a year after federal and state agents raided WellCare's headquarters as part of a separate Medicaid fraud investigation. That probe has led the company to delay financial filings, which caused it to default on debt covenants, and made it even more difficult for WellCare to raise capital in a rough credit market.

WellCare shares, which were as low as $10.71 Friday, recently were down 22% to $10.94. Before Friday, the stock had more than doubled from its November lows as the company took steps to increase cash balances, started to catch up on filings and continued to talk with authorities to resolve the Medicaid fraud probe.

Deutsche Bank analyst Scott Fidel noted that Medicare is a core business for WellCare, generating about half of its premium revenue.

"This is thus the latest body blow for troubled WellCare, which is already facing both federal and state investigations into its Medicaid business, which accounts for the other half of the company's revenue," Fidel said in a note.

While CMS recently took similar action against WellPoint Inc. (WLP), Medicare is only a token earnings contributor to the massive managed-care company, the analyst said.

"Moreover, it appears that CMS is now taking a much more vigorous approach to oversight of Medicare health plans, which increases regulatory risk in that market segment," Fidel said.

While the open-enrollment season has passed for Medicare Advantage and Medicare "Part D" prescription-drug plans for 2009, some movement can still occur. Existing beneficiaries enrolling in a Medicare plan may change plans until March 31, and those eligible for low-income subsidies can switch plans at any time, Credit Suisse analyst Gregory Nersessian said.

As a result, Nersessian called WellCare's suspension an "unfavorable development" but said the financial impact could be "relatively benign if addressed quickly."

Oppenheimer analyst Carl McDonald said the major risk for WellCare is that the suspension isn't lifted by the start of the next open-enrollment season on Nov. 15.

In the worst-case scenario, McDonald said, WellCare's Medicare enrollment wouldn't grow next year, but even more important, the company's medical cost ratio would get worse because "WellCare wouldn't have the opportunity to refresh its Medicare book with younger, healthier members."

-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-656-8285; dinah.brin@dowjones.com