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Maxicare Hurt Own FHS Unit, Critics Contend : Firm Denies It’s at Fault for Demise of Operation That It Purchased in ’86

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Times Staff Writer

Maxicare Health Plans Inc. bought a lot of trouble when it acquired HealthCare USA in 1986. But there was one piece of gold in the package: HealthCare USA’s Orange-based Family Health Services Inc., known in some areas as General Med, was making money. Today, Maxicare is dismantling the unit, leaving in its wake bitter employees, many of whom claim that Maxicare is largely responsible for FHS’ demise.

“This is a classic example of the ills of corporate medicine,” said Dr. David Garcia, an internal medicine specialist who is among about 500 FHS employees losing their jobs. “There was a systematic strangulation of General Med. Maxicare would compete with us directly for the same corporate clients and undercut our bids.”

Los Angeles-based Maxicare, citing losses at FHS of about $1 million a month, said last week that it had no choice but to shut down the unit. Its 15 clinics, operated in the Southland under the FHS and General Med names, will quit seeing patients on March 31.

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For many FHS employees, it has been a swift and bewildering fall from grace. HealthCare USA was in such poor shape when Maxicare bought it in 1986 that one analyst would later say the expensive purchase--along with another acquisition completed at about the same time--”might now be charitably classified as junk.”

While HealthCare USA overall was reporting losses, FHS made close to $5 million in profit and served about 117,000 members. The unit also made money in 1984 and 1985, according to reports filed with the California Department of Corporations.

Garcia and other employees said Maxicare erred in not making a better effort to retain key managers who were instrumental in the unit’s success over the years. The unit’s president, its senior vice president of operations and its two top marketing managers left to take jobs at other HMOs. Maxicare also failed to adequately support the unit’s marketing staff, they claimed.

“The marketing organization was in competition with Maxicare Southern California,” said another employee who has worked at FHS for 15 years. “When we needed support, we got statements that we were never profitable. That’s not true. Essentially, we became profitable in the early 1980s, when we passed 35,000 members,” the employee said.

Doesn’t Own Hospitals

Staff members were left in the dark about what was happening to the company, Garcia said, yet they had to face the repercussions of FHS’ bills not being paid by its corporate parent.

“Pomona Valley Hospital, which we had been using for a long time, kicked us out because of a $5-million bill,” he said, explaining that FHS physicians constantly heard complaints from doctors who provided FHS with specialty services on a contract basis. “We would see them every day because we had the same patients. They would always tell us that they hadn’t been paid for six to eight months.”

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In most cases, Maxicare plans don’t provide services directly but contract with independent hospitals and physicians to provide treatment for its members. The FHS and General Med clinics have staff physicians, nurses and support staff, but the unit doesn’t own hospitals and has to use independent physicians in areas where it doesn’t have specialists.

Maxicare, which overall has suffered heavy losses in the past two years, admits that its financial problems have prevented it from making timely payments to providers. However, the company says improving the payment schedule is its major priority.

When first asked about the FHS employees’ complaints, Tobi Nyberg, Maxicare’s vice president for corporate communications, insisted that the unit was not profitable when Maxicare acquired HealthCare USA. “The company was not profitable. The enrollment was higher, but it was a troubled health plan,” she said.

When asked about state records that show FHS’ history of profitability, she said she wouldn’t argue with the public record. Instead she presented a list of factors that she said were responsible for the unit’s swift decline. Those factors were beyond Maxicare’s control, she said.

“Maxicare is proud of its employees. (Closing FHS) was not something we wanted to do. We did everything we could to sell it. No one wanted to cause disruptions. No one wanted to go out of business,” she said.

Responding to employee criticisms, Nyberg said the former top managers of FHS left on their own accord. She denied that Maxicare failed to support FHS’ marketing efforts. The question of whether FHS was in competition with other Maxicare plans is irrelevant, she said, because it was always in competition with Maxicare and other plans.

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Contracting Costs Rose

Nyberg said FHS suffered from the same problems that plagued all HMOs in recent years, mainly rapidly rising medical costs. “The whole HMO environment changed drastically in 1987. Health-care costs exploded,” she explained.

FHS was hit harder than some other HMOs for several reasons, she explained. As an HMO with its own staff, it “had a large number of fixed costs that couldn’t be controlled.” FHS had a number of contracts with independent providers mandating payment on a full “fee for service” basis, she said, while other HMOs pay independent contractors a flat monthly fee on a per-patient basis. As medical cost escalated, FHS was caught with ever rising contracting costs, she said.

A “significant portion” of FHS’ membership were Medi-Cal patients, Nyberg added. But FHS began to lose money on those patients because the state premium payments for Medi-Cal patients increased only 1% to 2% a year, while the HMO’s cost were increasing 10% to 12% a year.

FHS recognized that its premiums were too low and raised rates, she said, but at the same time the membership declined.

Larry Selwitz, an analyst with Cruttenden & Co., a Newport Beach investment banking company, said in an environment of rising health-care costs, “staff model” HMOs like FHS have generally fared better than HMOs that contract for all medical services. Staff model HMOs, for example, have had better control over such factors as the cost of physician services, he said. Fountain Valley-based FHP Corp., a staff model HMO unrelated to FHS or Maxicare, “had a little bit of a setback in 1986. But they’ve been very strong since,” he said.

Selwitz said he would have expected FHS to do better, although it was disadvantaged by the fact that it didn’t own hospitals and charged low rates when costs started rising rapidly. “My suspicion is that, with all of the problems Maxicare had with the other HealthCare USA plans, it just didn’t pay enough attention to FHS.

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“I think (FHS) just got lost in the shuffle.”

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