Maxicare’s Plan to End Red Ink : Higher Premiums and Corporate Staff Cuts on New Chief’s Agenda
With his Hollywood credentials and accounting background, Peter J. Ratican might appear to be out of place as the new chief executive of Maxicare Health Plans Inc.--a Los Angeles-based health maintenance organization where doctors and nurses mostly hold sway.
But Ratican, a certified public accountant who previously was chief financial officer at De Laurentiis Entertainment Group and also worked for the entertainment conglomerate MCA Inc., thinks of his latest assignment as a homecoming of sorts. After serving on a state advisory committee that in 1976 helped draft legislation setting standards for HMO quality and financial solvency, Ratican is now in a position to control how well one of the nation’s largest HMOs, Maxicare, meets those standards.
Consumers, doctors and health-care workers may find Ratican’s return to the industry a costly homecoming.
‘90% of Costs Are Variable’
Ratican says he plans to hike Maxicare’s health-care premiums an average of 15% to 25% this winter to reverse the tide of red ink that has engulfed the HMO. That would boost the monthly premium for single Maxicare members in Los Angeles to over $108 from an estimated $94 currently and would increase monthly family rates to over $288 from about $252, according to a Los Angeles benefits analyst.
What’s more, Ratican plans to trim Maxicare’s 1,600 corporate staff by an unspecified amount through attrition and possibly layoffs and slash Maxicare’s membership to as few as 1 million by jettisoning unprofitable plans. Currently, Maxicare has about 1.7 million members in 17 states.
“In the past, the company started out with the assumption that there were inherent economies of scale in bigness,” Ratican said. “We don’t look at it that way. Because 90% of our costs are variable, there’s only 10% we have to look at on a fixed basis. So, the 10% we can control; it’s the 90% that becomes the real problem.
Company Battered by Losses
“We have to plan to reposition ourselves for profitability in 1989,” Ratican said.
Maxicare has been battered by losses since the mid-1980s, when Fred W. Wasserman and Pamela K. Anderson, the husband-and-wife team that founded Maxicare in 1973, launched an ambitious expansion program.
Back-to-back purchases in 1986 of two money-losing competitors, HealthCare USA and HealthAmerica, sent profits plummeting by 79% to $4.3 million. After amassing losses of nearly $256 million last year, the hemorrhaging continued in 1988. Last month, Maxicare reported a $59.5-million second-quarter loss, more than double the amount that many analysts had predicted.
Wasserman and Anderson departed in a surprise shake-up of Maxicare last month. The couple’s housekeeper said the two were out of town this week and could not be reached for comment.
“I think his timing was unfortunate,” Ratican said of Wasserman’s tenure at Maxicare. “The acquisitions came along, and they incurred a lot of debt. They got caught in a situation where they couldn’t effectively deal with the problem.”
Ratican said he believes that some of the plans gobbled up by Maxicare under Wasserman didn’t have enough incentives for doctors to treat patients efficiently. Costs have gotten out of hand at some of the offices acquired in the two 1986 deals. He said the solution to the problem is to terminate those providers unwilling to control costs. “Only time will tell whether we are effective,” Ratican said.
But some analysts are skeptical of that plan.
“Anyone can divest assests and pay down debt,” said Steven B. Reid, a health-care analyst at Wedbush Securities, a Los Angeles investment house. “It doesn’t take a rocket scientist to improve these companies short-term. But most of these CPAs have never been able to show any long-term growth.”
Adds Thomas Cope, an analyst at Dillon, Read & Co., a New York investment firm: “They (Maxicare) can make money with higher profits per member. But it is unclear whether they can raise premiums enough to lower their indebtedness.”
