Maxicare Scrambles to Pull It All Together : Faces Challenge Absorbing 2 Financially Ailing Health-Care Firms
The office of Maxicare Health Plans Chairman Fred W. Wasserman is about the same size as his old office in Hawthorne and has some of the same furnishings. But it has one important advantage: It’s just minutes away from the Los Angeles International Airport.
That will be a big help to the head of the nation’s largest for-profit health maintenance organization. Wasserman will be doing a lot of flying in the aftermath of his company’s agreement last week to pay $400 million to acquire the nation’s No. 2 for-profit HMO--financially troubled HealthAmerica Corp.--just three weeks after Maxicare snapped up the nation’s third-largest for-profit HMO, HealthCare USA, for $69 million.
“He’s going to be on the road a lot for the next couple of weeks talking about the latest acquisitions,” said company spokeswoman Tobi Nyberg.
This week, Wasserman begins a tour of East Coast investment houses in an effort to raise about $250 million to complete the two ambitious deals that have propelled Maxicare from a mostly regional operator of HMOs to a nationwide billion-dollar health-care concern with projected revenue of $1.6 billion from operations in 26 states.
Wasserman does not expect to encounter any trouble rounding up $250 million. For years, his company has been the darling of investors by delivering on promises of double-digit earnings growth.
“We are way ahead of schedule,” an obviously pleased Wasserman observed. “We had only expected to have $1 billion in revenue and 1 million members by 1990. Already we are at about double that.”
It’s not the first time that Wasserman has guessed right.
A few years ago, he positioned his company to climb atop the HMO heap by amassing a $300-million war chest in anticipation of the consolidation of the HMO industry. When competitors such as HealthAmerica and HealthCare USA began to falter, Maxicare’s stepped in with its $300-million fund and began buying.
“You can’t be lucky in this business,” said Randall Huyser, an analyst with Montgomery Securities in San Francisco. “Fred’s really a visionary.”
Just how much of a visionary Wasserman is will become clear in the coming months as Maxicare absorbs its two new financially troubled acquisitions and launches a new health plan in densely populated New York, where doctors have been particularly resistant to HMOs.
HealthAmerica reported a second-quarter loss of $962,000 last week. The company said its loss stemmed primarily from writeoffs of management contracts, but its utilization control system is said to be badly in need of repair. HealthCare USA, which lost $7.9 million on revenue of $183 million 1985, needs similar attention, analysts say.
Wasserman is convinced he can turn around both companies fairly painlessly with the help of Maxicare’s $15-million computer system. Housed on the fourth floor of Maxicare’s headquarters, the computer connects a far-flung network of 1,800 video display terminals that can instantly supply Maxicare executives with membership, cost and utilization data.
“It’s our contention that there is no way you can bring down health-care costs by a significant amount other than with a managed health-care program such as an HMO,” said Wasserman. Nevertheless, he has had to convince skeptical doctors and employers of the merits of HMOs, Wasserman added. They do not yet fully understand, he said, that “the (health-care) system will never be the same again.”
He began his HMO in Los Angeles in 1972 during a time when an entrepreneur couldn’t make a dime in the business, because California prohibited for-profit HMOs. Wasserman and his physician partners set up a nonprofit HMO to offer reduced medical costs by getting patients to prepay a fee and by putting doctors and hospitals on a budget.
By the time the state law was changed in 1980, Wasserman--a former medical consultant who has a master’s degree and a doctorate in public health administration, as well as a master’s of business administration degree--was ready to hit the ground running. His was among the first HMOs to be granted for-profit status under the state’s General Nonprofit Corporation Act. And it didn’t take long for Wasserman’s business experience to pay off.
Nearly 2 Million Members
Maxicare has managed to grow from fewer than 4,500 members in 1972 to about 700,000 members now. When the acquisition of HealthAmerica and HealthCare USA are completed, Maxicare will have nearly 2 million members.
Like other HMOs, Maxicare has been among the main beneficiaries of federal and private industry efforts to contain costs in America’s leading growth industry--health care--which in 1985 accounted for about $426 billion, or 11% of the gross national product, according to the Health Care Financing Administration. The U.S. Chamber of Commerce estimates that employers spend $104 billion each year on health insurance premiums for their workers.
More and more of that market is being served by the nation’s 244 profit-seeking HMOs as companies try to wean employees from higher-cost traditional health plans to lower-cost alternative plans such as HMOs and preferred provider organizations. Investor-owned HMOs, for example, numbered less than 100 just three years ago, according to InterStudy, a Minnesota research firm.
The traditional plans of major insurers use an indemnity or fee-for-service arrangement under which patients can go to any health service provider, usually paying a share of medical fees after service is rendered. HMOs, in contrast, require patients to use HMO-designated doctors and facilities.
Preferred provider organizations are a hybrid of HMOs and indemnity plans. PPOs let the insured select any doctor but provide financial incentives to encourage the use of designated doctors or hospitals.
Prove Its Staying Power
A PPO plan, for instance, might pay 90% for care by a preferred provider but only 70% for a doctor not on the preferred list. Although Maxicare, which has 1,700 employees, would still be somewhat smaller than the Kaiser Permanente Health Care Program, a nonprofit HMO in 15 states that in 1985 had $4.8 billion in revenue and 4.8 million members, Maxicare would become the undisputed sales and enrollment leader of the fledgling for-profit HMO industry.
But having climbed on top of the heap, Maxicare will have to prove its staying power.
Some analysts say now that Maxicare has focused new attention on itself with its two acquisitions, some larger insurance companies that in the past had not taken the HMO industry seriously may get ready to flex their own considerable financial muscle in the field.
“Blue Cross and outfits like Aetna Insurance Co. have lost market share to the HMOs, and they are not going to sit idly by and watch all of their business go out the door,” said one New York analyst who did not want to be identified.
But, as usual, Maxicare is planning ahead.
Wasserman’s wife, Pamela K. Anderson, who serves as chief operating officer, said the company is planning to launch an insurance venture which will offer the triple option of HMO, PPO and traditional insurance.
“It’s not like most regular insurance plans,” Anderson explained, “There are a lot more restrictions like (requiring) second opinions. . . . In order to be a national force, you have to be able to offer large Fortune 500 companies a quality network and wide choice of health-care options.”
