Maxicare Agrees to Buy HealthCare USA as HMO Merger Wave Rolls On

After more than a year of intermittent merger talks, Maxicare Health Plans Inc. reached an agreement Tuesday to acquire HealthCare USA for about $67 million in cash.

The acquisition creates one of the nation’s three largest operators of health maintenance organizations and is expected by analysts to be just one in a series of big mergers and acquisitions in an industry beset by cutthroat competition and tighter profit margins.

Also on Tuesday, for instance, National Medical Enterprises Inc. of Los Angeles reached an agreement to sell its 100,000-member, Miami-based AV-MED Inc. HMO subsidiary for an undisclosed amount to Gainesville, Fla.-based Santa Fe Healthcare Systems Inc., Florida’s second-largest HMO.

The prepaid medical plan, “did not complement our existing hospital operations,” said Anthony Pace, a spokesman for NME.

Maxicare had been wooing HealthCare since early 1985 and in May disclosed that it had purchased an 11.9% stake in the company. But its overtures were largely rebuffed until two weeks ago, when it upped its offer to $12 a share. The two companies then entered into serious negotiations, and on Monday the directors of Orange-based HealthCare voted unanimously to accept Los Angeles-based Maxicare’s $13.50-a-share bid. Wall Street analysts had valued HealthCare at $12 to $15 a share.

Although the $13.50-a-share buyout price is well below HealthCare’s most recent 12-month high of $22 a share, Harlan Loomas, HealthCare’s chairman and chief executive, said the price accurately reflects the company’s current value.

In trading on the New York Stock Exchange on Tuesday, HealthCare shares closed at $13, up 87 1/2 cents for the day.

Maxicare, traded over the counter, closed at $24.50 a share, down $1.75 for the day.

“It’s an appropriate deal for our shareholders,” Loomas said. “Obviously by a vote of the board, we think it’s a fair price for where we are today.”

Fred Wasserman, Maxicare’s chairman and chief executive, said that while HealthCare’s 100,000-member California HMO subsidiary will be operated as an independent entity, its 150,000-member Michigan HMO will probably be identified with Maxicare in some way.

Beyond that, Wasserman said, “there is no way of knowing” what changes will take place at HealthCare “because there hasn’t yet been a review of the company.”

Before the merger can be completed, it must be ratified by HealthCare’s shareholders, HealthCare’s Loomas said. Although the company’s annual meeting is scheduled for July 30, it will probably be delayed because new proxy statements must be prepared, he said.

Loomas will continue to work for the combined company under the terms of his current employment contract, which expires in 1987, officials said. After that, he may be retained as a consultant, Wasserman said.

With 850,000 members in 14 states, Maxicare currently is the nation’s largest publicly held HMO. With the addition of HealthCare’s 250,000 members, Maxicare will become one of three HMOs with more than a million members.

The other two are Kaiser Permanente, based in Oakland, and United Healthcare Corp. of Minnetonka, Minn. Kaiser Permanente is a nonprofit HMO.

And, although competition within the HMO industry is heating up, bringing with it the twin forces of merger and consolidation, many health care analysts say Maxicare is poised to become a major player among a small group of rapidly emerging national health care providers.

“Maxicare is really pulling ahead in the market,” said Jeff Goldsmith, a health care analyst with the Chicago office of Ernst & Whinney, a national accounting firm. “I continue to be impressed with Maxicare because they are the most aggressive of the investor-owned HMOs.”

Adding to the increased competition and fueling much of the consolidation among HMOs has been the rapid emergence in recent years of many small, often poorly capitalized plans, said Paul Ellwood, founder of InterStudy, an Excelsior, Mich.-based health research group.

Ill-equipped to compete with bigger plans, many of smaller HMOs will eventually be acquired by larger national firms such as Maxicare, he said.

Last month, for instance, United Healthcare announced plans to acquire Peak Health Care Inc. of Colorado Springs, Colo., for $83.2 million in cash and debt. United operated HMOs in 22 states, and Peak operates prepaid plans in five states.

“We’re moving along toward having eight or 10 large companies,” Ellwood said. “We had little organizations taking over smaller organizations, and now we have got bigger organizations taking over the modest ones.”