Maxicare Loses $169.7 Million in Quarter, Blames Costly Writeoffs
Maxicare Health Plans Inc., which has been awash in red ink for two years, Tuesday reported that it lost a whopping $169.7 million in the third quarter. The company blamed most of the deficit on a $113-million provision for losses from health plans that it sold, shut down or plans to sell in the near future.
The Los Angeles-based company also admitted that its financial problems may jeopardize crucial relations with its health-care providers, including doctors, hospitals and clinics. Maxicare, which generally does not provide health-care services directly to its members, relies instead on third parties to treat its members. The company said it intends to devote all its available cash to paying a backlog of bills from its health-care providers.
Although many observers have viewed Maxicare as a candidate for bankruptcy, company officials maintained that the concern can survive if they can concentrate on operating a core group of profitable plans. In advertising scheduled to run in today’s newspapers, the company attempts to assure health-care providers, as well as stockholders and employers participating in its health-care plans, that “we are taking the medicine necessary for our recovery.”
Since the beginning of the year, Maxicare has sold or shut down 19 plans in several states in an effort to rid itself of operating losses. The company continues to operate health plans in California and 12 other states. The divestitures have reduced Maxicare’s membership to about 1.4 million from 2.3 million last December.
Losses After Expansion
In its quarterly Securities and Exchange Commission filing, Maxicare said it received only $77.4 million in cash from the sale of these plans, plus $15 million in deferred payments. Buyers also assumed $54.5 million in liabilities. Maxicare said it does not expect to receive significant cash from the planned sale of three additional plans.
The plans sold include almost all of those acquired in the early 1980s, when Maxicare launched an ambitious expansion program to become a national health maintenance organization. The back-to-back purchases in 1986 of HealthCare USA and HealthAmerica saddled Maxicare with losses and management problems that the company said it had not anticipated. It acquired the two HMOs, which operated many of the plans that now have been sold, for $446 million in cash and the assumption of $157 million in debt.
“We did very well to get out of them,” said Peter J. Ratican, who was appointed Maxicare chairman and chief executive in August after the ouster of former Chairman Fred W. Wasserman and President Pamela K. Anderson. The company wasn’t able to receive better prices for the operations sold, he said, because of a general decline in the value of HMOs and because the plans were not profitable. Still, Ratican said the company has positioned itself for survival.
Analysts agreed that Maxicare has made progress but were mostly restrained in their views of the company’s prognosis. “I would say that they have taken the appropriate steps,” said Margo L. Vignola, an analyst with the Salomon Bros. investment firm in New York. But she noted that the company “is still losing money on an operating basis.”
Operating Income Cited
Maxicare’s stock, which had traded for as much as $12.75 a share in 1987, tumbled further Tuesday, closing at 56.25 cents in over-the-counter trading, off 6.25 cents a share. The company’s liabilities now exceed its assets by $278.3 million, up significantly from a negative net worth $29.3 million at the end of 1987. The company lost $255.9 million last year.
In interviews, company executives took pains to note that the health plans they intend to keep have generated operating income of $17.8 million for the first nine months of the current year, “before allocation of corporate overhead, net interest expense and taxes.”
That statement is meaningless, Vignola said. “That’s like saying, ‘We would have made money if we hadn’t operated the plans,’ ” she said.
Steven B. Reid, an analyst with L. H. Friend & Co. in Los Angeles, said: “I wouldn’t put much weight on it,” explaining that he also viewed the statement as misleading. In Reid’s view, expenses such as overhead and interest payments cannot simply be ignored. Nevertheless, the analyst said he believes that Maxicare will “prove to be a survivor.”
“I think they have made some operational improvements that will be evident in the fourth quarter,” he said, adding that he doesn’t expect the company to make money for the next nine months.
The company expects losses to continue at a reduced level during the fourth quarter, Maxicare’s Ratican said, but he declined to speculate about next year.
Maxicare’s SEC filing indicates that the company still has a daunting task ahead. State regulators have restricted the transfer of assets from certain Maxicare subsidiaries to others, have required “an examination of the net worth of those plans” and “have challenged the value of these assets.”
Needs Restructuring
Tighter regulatory controls have contributed to the company’s serious cash flow problems, Maxicare said, preventing it from promptly paying some health-care providers. Maxicare emphasized that its “future viability” depends on devoting all available cash to reducing that backlog of bills.
But the company said it can’t make significant progress toward assuring its network of health-care providers until it completes a planned restructuring of its $460-million debt. Maxicare earlier said it must restructure its finances because it cannot meet its obligations to bondholders or a group of banks holding $150 million in debt.
Ratican said the banks have been “extremely understanding” and have agreed to discuss a restructuring of the debt, which already had been restructured once in March. Last month, the company in effect suspended interest payments to bondholders.
Maxicare recently hired the investment banking firm of Goldman, Sachs & Co. to help devise a recapitalization plan, which may include exchanging new debt for old or swapping stock for debt. Ratican said Goldman Sachs is looking at all options, and the plan is expected to be announced in January.
In any event, the company said the recapitalization will result in a “substantial dilution” of current stockholders’ interest in the company.
Maxicare reiterated that it must improve its operating results. It has already trimmed its corporate staff and expects further “substantial reductions in the coming months.”
In addition to operating losses, which the company says will result in negative cash flow in the fourth quarter, state regulations have placed tight restrictions on the use of cash. Almost all of the company’s cash is held by its subsidiaries and is restricted to use in the operations of specific units, or groups of subsidiaries. “Overdue claims payable by some subsidiaries substantially exceed the amount of their cash resources, including restricted cash,” the company said in the SEC filing.
