Western Health Plans May Get Needed Cash

An affiliate of Mercy Hospital has agreed to invest as much as $15 million in financially troubled Western Health Plans, company officials said Friday.

The proposed cash infusion would give Western, which operates the Greater San Diego Health Plan, enough capital to meet minimum requirements set by the state Department of Corporations, Western Vice Chairman Jack W. Savidge said Friday.

Western and Mercy Hospital’s Mercy Services subsidiary hope to complete the proposed cash infusion within 45 days. However, “there is no certainty as to when or if the transaction will be accomplished, Savidge said.

In return for its investment, Mercy Services would receive promissory notes and warrants for Western stock that, if exercised, would give Mercy Services 45% of Western shares. Mercy Services also will appoint five members of Western’s 10-member board of directors.

Western, a publicly traded company that is owned mainly by the 1,500 doctors who provide health care for the company’s 140,000 members, has reported $24 million in net losses during recent years. Western on Wednesday closed a Pomona-based health-care plan that covered 16,000 members. It previously withdrew from the highly competitive Nevada health-care market and discontinued a money-losing management company.

In a recent filing with the federal Securities and Exchange Commission, Western acknowledged “substantial doubt about its ability to continue as a going concern” without a sizable cash infusion. Western’s capital shortfall had jeopardized the company’s state license to operate health maintenance organizations such as the Greater San Diego Health Plan.

Western’s 140,000 San Diego members should not notice any changes if Mercy completes its cash infusion, Keyser said. Those members will continue to be treated by the doctors who have contracted to provide primary care under the Greater San Diego Health Plan. Members of the HMO will continue to enjoy their “choice of hospitals throughout the community,” Keyser said.

“What this agreement really does is keep Western Health Plans, which is a very important (health-care) plan in this community to survive,” Keyser said. “That’s important to hospitals like ours and other private hospitals.”

Mercy’s investment “will give us the capital strength and the marketing momentum to move ahead aggressively,” Savidge said.

Cash to be invested in Western will not be generated by Mercy Hospital’s revenues, Keyser said.

Mercy Services, a “sister corporation,” will invest funds to be provided by San Francisco-based Catholic Healthcare West, the parent company of Mercy Hospital and 11 other Catholic hospitals in California, Arizona and Nevada.

Mercy’s proposed investment in Western marked the second time in recent months that a local group has expressed interest in acquiring all or some of Western’s outstanding stock.

Late last year, a consortium of San Diego-based hospitals that included Sharp HealthCare, Scripps Memorial, Palomar-Pomerado, Grossmont and Children’s hospitals made a $21-million bid for Western. Western on Nov. 18 rejected that bid, but subsequently acknowledged that it was discussing a cash infusion or sale with nearly a dozen companies.

Health-care observers suggested that Mercy’s parent company agreed to make the investment in order to bolster Mercy’s share of San Diego County’s patient population.

“Mercy might want to try and capture the patients that Western now sends to other hospitals,” said Charles Ewell, a San Diego-based health-care consultant. “It might try to develop contracts (with other health-care providers) to serve patients who are geographically scattered.”

Another health-care expert suggested that Catholic Healthcare West agreed to make the investment in order to keep Mercy competitive with other hospitals that have been striking up strategic alliances with other health-care outfits.

“Mercy lost out when Community Hospital of Chula Vista paired up with Sharp HealthCare, and they would have lost (more patients) had the local consortium led by Sharp acquired Western,” the observer said.

Mercy Services is Mercy Hospital and Medical Center’s development arm, Keyser said.