State to Enter Legal Battle of 2 HMOs : Maxicare Bidding for FHP, Which Seeks to End Nonprofit Status
The state attorney general’s office is expected to enter a legal battle between Maxicare Health Plan, a Hawthorne-based health maintenance organization, and rival FHP Inc., which wants to convert to for-profit from nonprofit status.
FHP’s founder and other key employees have made a $36-million bid for the assets of the Fountain Valley-based health-care organization. But last month, Maxicare filed a lawsuit to force FHP’s management to accept its $50-million cash offer. When a nonprofit organization converts to for-profit status, the buyer must repay the public for the value of its assets, usually by making contributions to other charities.
Attorneys for both HMOs said they have been notified that the charitable trust division of the attorney general’s office intends to seek a temporary restraining order today in Los Angeles County Superior Court to prevent FHP’s sale at the lower offer. That offer would pay $7.2 million in cash, with the remainder to be paid during a 10-year period.
Both sides say the outcome of the case could affect plans by many of the nation’s 235 nonprofit HMOs to convert to for-profit status. So far this year, 73 nonprofit HMOs have converted to for-profit status, according to the Office of HMOs in the federal Department of Health and Human Services.
650,000 Subscribers
Maxicare, which converted to for-profit status four years ago, has 650,000 health subscribers in 11 states. The addition of FHP, with its 220,000 medical subscribers in Southern California, Utah and Guam and 70,000 dental subscribers, would significantly increase Maxicare’s market share in two of its principal markets, Southern California and Salt Lake City.
FHP Chairman Dr. Robert Gumbiner said FHP had surplus revenue, the nonprofit equivalent of net earnings, of $14.8 million in the year ending June 30, up from $8.6 million in 1984 and $2.4 million in 1983.
In its suit, Maxicare argues that the highest offer represents fair market value and that FHP must accept the highest bid in order to convert. Maxicare Chairman Fred Wasserman said his firm’s bid for FHP “will go up to between $60 million and $80 million” if it gains access to FHP’s books.
In other cases, courts have held that, when charitable assets are sold, they must go to the highest bidder. But Gumbiner and FHP attorney John Houck said they do not believe that FHP must accept the highest bid.
The state Department of Corporations approved on Sept. 20 the bid by HMO Health Group, a company formed by Gumbiner and 17 other employee-investors, to assume FHP’s business after the conversion. Gumbiner, who founded FHP in 1961 and also serves as its chief executive, owns 50.5% of HMO Health Group.
Although the Department of Corporations originally had proposed $47 million as the fair market value of FHP’s assets, when it accepted the Gumbiner group bid, it agreed to value FHP at $36 million. It said it had calculated the price based on analysis of unaudited financial statements.
Study of Asset Value
One study, filed by FHP’s management with its conversion request to the Department of Corporations, estimated that, if FHP’s charitable assets had been sold on the open market when HMO stocks peaked last spring, the assets would have been worth $216 million. FHP says the figure is now grossly overstated. Indeed, in trading Wednesday, prices of several health-care companies’ stocks plummeted on predictions that the industry’s period of rapid earnings growth had come to an end.
Gumbiner said that, if FHP is forced to accept Maxicare’s higher bid, he will stop the conversion and remain a nonprofit organization. “Maxicare, which paid less than $300,000 when it converted four years ago, is attempting to make the law so that no one can convert,” he said. “If Maxicare prevails, they would effectively establish a law that anybody wanting to convert would have to auction the assets, and then large companies would simply bid more than the fair market value to eliminate competition.”
FHP attorney Houck said: “The conversion process is not an auction.” Citing the 1980 state law authorizing conversions of HMOs to for-profit status, he said that FHP’s directors “owe a duty in general to the public to pay the fair market value for the charitable assets, but they also specifically owe a duty to their subscriber group.”
