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Mercy Services, Western Health Plans Miss Agreement Deadline

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Times Staff Writer

Mercy Services Corp. and Western Health Plans, which operates the Greater San Diego Health Plan, failed to complete a deal by the deadline that called for Mercy to make a $15-million capital infusion into loss-ridden Western, the companies announced Tuesday.

According to terms of a Feb. 24 agreement, Mercy Services agreed to make the infusion in return for notes and warrants equal to 45% of Western’s common stock. However, the companies failed to complete a prescribed letter of intent by the Friday deadline.

State regulators have described the proposed cash infusion as an important element in Western’s plan to raise capital needed to meet regulatory net worth minimums. Western, which Tuesday reported a $2.9-million net loss for the third quarter ended March 31, has lost $26.9 million in the last few years.

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The agreement with Mercy Services, an affiliate of Mercy Hospital in San Diego, “was the critical variable” in Western’s recapitalization, according to Warren Barnes, supervising attorney for the state Department of Corporations’ health care services division. State regulators “have not yet been advised that the deal is not still on track,” he said.

According to Barnes, the deal had been “progressing nicely . . . the department has been following it closely and we’ve met (regularly) with the respective parties.”

Western “continues to hold discussions with Mercy Services Corp. and other interested parties,” according to a prepared release issued Tuesday by Western. However, Western has “no assurance that a transaction with (Mercy) will be accomplished or that the company will be able to successfully obtain” capital needed to meet regulatory net worth minimums.

Western blamed the most recent loss on “rising health care costs, losses from a discontinued health maintenance organization division and expenses that were incurred as the company sought assistance in eliminating the deficit in shareholders’ equity.”

The quarterly loss increased Western’s need for new capital, Barnes said. “Any loss makes their cumulative problem worse.”

In another setback for Western, the California Public Employees Retirement System on Monday voted not to renew a health care contract with Western that covers about 3,000 state employees in San Diego County. The contract accounted for about 2% of Western’s total revenue.

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