Maxicare Health Inc. Files for Bankruptcy Protection

Facing increasing pressure from a long list of creditors, Maxicare Health Plans Inc. on Thursday filed for Chapter 11 bankruptcy protection while it tries to work out a reorganization plan that would salvage at least part of what was once Wall Street’s favorite health maintenance organization.

The company said it will continue to serve its members, including about 282,000 in Southern California, and will pay its bills incurred after Thursday. But the filing created great confusion about the company’s future among its members, client companies and health care providers.

Peter J. Ratican, Maxicare’s chairman and chief executive, said the filing will allow the company “to protect our operations while gaining the time to finalize and implement a plan for reorganization.”

At the same time, the Los Angeles-based company said it is negotiating to sell its subsidiary serving about 320,000 Californians. The sale might make Maxicare’s recovery from two years of huge losses more difficult because the California plan is Maxicare’s most profitable. Previously, the company included California in a core group of operations that it intended to retain.

Apparently, Maxicare’s urgent need for cash led to a reassessment, industry analysts said. The California plan “is probably one of the few plans that’s worth anything,” said Bernard F. McDonagh, an analyst with Piper Jaffray & Hopwood in Minneapolis.

The bankruptcy filing was reportedly precipitated Wednesday, when the company’s banks, led by Bankers Trust Co. of New York, vetoed Maxicare’s acceptance of a new $15-million loan from an unnamed investor, according to Leon Marcus, the New York bankruptcy lawyer handling the case.

Maxicare filed its Chapter 11 petitions, covering subsidiaries in California, Washington, Arizona and 10 other states, in federal Bankruptcy Court in Santa Ana. Maxicare’s HMO in Wisconsin is the only plan not affected by the filings.

Under Chapter 11, a company and its subsidiaries may continue operating with protection from creditor demands. In that regard, Maxicare offered its critical network of independent health care providers some incentive to continue treating its members. The company pledged to pay them on time for all services rendered after Thursday. In most cases, Maxicare does not provide services directly but contracts with independent doctors, hospitals and pharmacists.

‘Business as Usual’

“It will be business as usual. We will continue to serve patients as long as Maxicare lives up to that statement,” said Mitch Zevin, marketing director for Hawthorne Community Medical Center, which is the independent provider owed the most money by Maxicare.

Hawthorne, which serves 49,000 Maxicare members, interprets Maxicare’s statement to mean that it will be paid for April services on April 10, Zevin said. “If we are not paid on April 10, we are going to have to make some decision. We can’t continue indefinitely without being paid,” he said.

By filing Thursday, Maxicare avoided having to pay many providers for services in March.

Maxicare officials declined to comment beyond a statement announcing the bankruptcy filings.

“We acted in the face of increasing demands by creditors and our inability at this time to obtain additional financing,” Ratican said in the statement. “By filing now, we believe Maxicare will be better able to protect its asset values and to maximize those values for all our constituencies: the health care providers, members, employers who offer our health plans as benefits, bondholders and other creditors, and our employees and stockholders.”

Maxicare’s stock, which traded as high as $28 a share in the company’s boom years a decade ago, closed at 18.75 cents a share Thursday, down 50 cents from Wednesday’s close.

Maxicare’s filing was not a surprise to analysts, regulators and industry officials who have followed the company since 1986, when it made what would prove to be two disastrous acquisitions. Fred J. Wasserman, the former chairman who helped establish Maxicare in 1973, intended to build a national firm that would attract large corporate clients looking for a single HMO for their scattered employees.

HMOs charge patients a prepaid fee for medical services. By law, employers who provide medical insurance must offer a HMO as an option to employees if a HMO is available in the area.

By acquiring HealthCare USA and HealthAmerica Corp. in 1986, Maxicare became the undisputed leader among for-profit HMOs, tripling its membership to 2 million. But both acquired companies were in deep trouble. Over the next two years, Maxicare would have to cope with long-term debt that increased to nearly $500 million from the acquisitions.

Interest payments on the debt, combined with medical cost increases that were going through the roof, created continuing losses for the company in 1987 and 1988. Competitive pressures prevented Maxicare and many HMOs from raising premiums to cover increased costs. Wasserman left in a management shake-up last August.

In the first nine months of 1988, the company lost $250.5 million. Final 1988 results have not been reported.

Debt as of December included $150 million in bank loans and $295 million in bonds. In the company’s bankruptcy filing, it listed assets of $498.8 million and liabilities of $535.8 million.

Maxicare made it a priority to pay past due debts to providers, but in recent weeks some providers have sued, said Margo Vignola, an analyst with Salomon Brothers in New York. “I think they just had to call a halt to it,” she said.

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