Maxicare Wins Ruling on Its HMO Status in 3 States
In a victory for beleaguered Maxicare Health Plans Inc., a federal court in Santa Ana has denied regulators in three states jurisdiction over the company’s subsidiaries that are operating under bankruptcy law protection.
The states--Arizona, Louisiana and Texas--had asked the court to dismiss several Maxicare health maintenance organizations from proceedings under Chapter 11 of the federal Bankruptcy Code, arguing that the HMOs in those states operate as domestic insurance companies. The Bankruptcy Code precludes domestic insurance companies from filing under Chapter 11. The states argued that they--rather than the federal bankruptcy courts--should oversee the reorganization of the companies.
The rulings are important developments in Los Angeles-based Maxicare’s favor. The company has been seeking to preserve as much as possible of its former nationwide network of health maintenance organizations since it filed on March 16 for protection from creditor lawsuits under Chapter 11. Although state regulators said they had the expertise to rehabilitate the Maxicare HMOs, some industry sources speculated that the states would liquidate the units to pay claims owed to Maxicare members and health-care providers.
A backlog of past-due debts to providers was among the reasons Maxicare gave for filing under Chapter 11 and including nearly all of its operating units in the bankruptcy proceedings.
‘Not Specifically Excluded’
Although the three rulings by U.S. District Court Judge John J. Wilson were specifically in response to petitions filed by Arizona, Louisiana and Texas, the judge’s orders seemed to indicate that he is inclined to rule in Maxicare’s favor on similar pending motions filed by Illinois, Indiana and Ohio regulators. Wilson’s orders were signed Friday and distributed to parties in the case Monday.
Maxicare argued vigorously that its HMOs are not insurance companies for purposes of bankruptcy law.
“This court finds that HMOs are eligible for bankruptcy relief since they are not specifically excluded by Section 109” of the Bankruptcy Code, Wilson said in his order. “It may be presumed that Congress was aware of the existence of HMOs when the code was enacted in 1978. For example, in 1973, Congress passed federal HMO legislation ‘to provide assistance and encouragement for the establishment and expansion of health maintenance organizations.’ From the failure to include HMOs, it may be inferred that Congress intended to make them eligible for bankruptcy relief.”
Maxicare has about 625,000 members, down from about 900,000 at the time of the bankruptcy law filing and less than half its peak membership in 1987.
Regarding the court ruling, a Maxicare spokesman said: “Obviously, we’re pleased. Regardless of these decisions, we want to keep working with each state regulator for the benefit of our members.”
The state regulators couldn’t be reached for comment.
