Plan Would Give 49% of Maxicare to Doctors, Hospitals

Doctors, hospitals and other health-care providers who have continued to serve Maxicare Health Plans’ members while the company has been under Chapter 11 bankruptcy protection would end up owning 49% of the company under a reorganization plan filed Tuesday with the Securities and Exchange Commission.

The reorganization would produce a smaller, financially stronger company, which will benefit investors, creditors and the health maintenance organization’s members, Maxicare officials said.

Overall, creditors would own 98% of the Los Angeles-based HMO, which filed for Chapter 11 protection last March 16. The plan calls for replacing Maxicare’s existing bonds, other debt and 34 million shares of common stock with new issues.

Current Maxicare stockholders would receive only 2% of the new issue of stock, plus warrants to purchase up to 5% of total stock outstanding. They appear to lose the most in the reorganization. But sources familiar with bankruptcies said the stockholders are faring about as well as could be expected in a case where creditors are only getting a few cents for every dollar of their claims.

The only groups getting full cash payment are individual Maxicare members, employees and a select group of others who the company said have claims totaling $16 million.

“The only reason they (shareholders) are getting 2% is so they won’t object to the plan in court,” said Chris Street, managing director of Seidler Amdec Securities group specializing in bankruptcy stocks and bonds. “They can’t win in court. But they have friction value, which is addressed here with the 2%,” he said. Stockholders of Manville Corp. got only 2.5% of the common stock in that company’s reorganization from a Chapter 11 bankruptcy brought on by huge asbestos damage claims, he said.

In addition to equity in the reorganized company, creditors, who have claims totaling $761 million, would receive a total of $78.8 million in cash and notes with a total face value of $67 million. The notes have a 10-year maturity and carry a 13.5% interest rate that would be paid semiannually, Maxicare said.

The company said it expects all of the securities to be accepted once the plan is approved by the bankruptcy court. The creditors’ committees agreed to the proposal last month.

“Maxicare will emerge as a well-capitalized, competitive health maintenance organization,” Peter J. Ratican, chairman and chief executive, said in a prepared statement. “The new Maxicare will have adequate cash for operations and regulatory requirements, along with manageable debt and substantial shareholders’ equity on its balance sheet. We believe this capital structure will maximize the value of the new Maxicare.”

Health-care providers are happy with the plan despite the fact that they will receive only 23 cents in cash for every dollar owed when Maxicare filed for Chapter 11 protection in March, said Dr. Rafael A. Amaro, president of Hawthorne Community Medical Group, which serves 27,000 Maxicare members. Hawthorne is Maxicare’s largest health-care provider.

“I think it’s a great reorganization plan,” Amaro said. The fact that providers will be the company’s largest shareholder group, he said, “provides an incentive for them to perform for the company to succeed. If the company succeeds, everybody wins.”

Maxicare appears to have worked hard to satisfy the health-care providers, who had the power to undermine its recovery, despite court orders forcing them to continue serving Maxicare patients during the reorganization. The court orders wouldn’t guarantee loyalty, said Peter Boland, a Berkeley-based health-care consultant. “There are lots of ways for doctors to cut cost and undermine quality,” he said.

Some health-care providers felt betrayed when Maxicare filed for Chapter 11, but they gradually began expressing support for the company. A key reason, Street said, was that Maxicare provides them with a large volume of patients.

The jury is still out on what Maxicare’s recovery will produce, Street said. “What’s clear is that Maxicare goes forward,” he said. Analysts said a good omen for the company is that the newly reorganized company will start out with relatively little debt.

“It’s too early to say how good a company Maxicare will be coming out of bankruptcy,” said Leigh Walzer, a senior research analyst with R. D. Smith & Co., a New York investment firm specializing in bonds of companies in bankruptcy proceedings. “It does appear that Maxicare will successfully emerge. Of course there are other constituencies other than creditors to be satisfied. Most--but not all--of the state regulators appear to be on board,” he added.

Walzer said physician groups may have more leverage with Maxicare than they have had in the past, meaning that the company may not be able to get as favorable contracts. Another uncertainty is the number of employer groups that will renew with Maxicare next year. “The behavior of employer groups is difficult to predict,” he said.

Maxicare has begun an aggressive television advertising campaign in preparation for January, when a large number of employer groups will renew. The company currently has about 400,000 members--including roughly 150,000 in Southern California. That’s down from its peak membership of 2 million in 1987, but the company lost most of its membership as a result of selling or closing plans across the nation.

Maxicare filed for Chapter 11 after its lenders vetoed a crucial new loan. The company’s problems began in 1986 when it purchased two large HMOs that proved to be troubled.

NEXT STEP

Maxicare is expected to ask U.S. District Court Judge John J. Wilson of the U.S. Bankruptcy Court in Santa Ana next month to approve its reorganization plan. The court will order a vote on the plan by creditors and stockholders. The votes will be counted two ways. Maxicare is seeking a majority of the votes cast and the approval of the holders of two-thirds of the stock and two-thirds of the debt owed. The court will then issue its order. Maxicare will file a prospectus on its new issues of stock and debt with both the court and the Securities and Exchange Commission so that it can issue the securities immediately.

MAXICARE’S PROPOSAL The chart illustrates Maxicare’s proposal to satisfy creditors who have claims totaling about $761 million. The company proposes issuing new senior notes and new common stock to replace its existing bonds and common stock. The following is the amount of cash, notes and percentage of the new stock each class of creditors will receive to satisfy their estimated claims.

Senior Estimated Cash notes Common claims Creditor (millions) (millions) stock (millions) Banks $12 $22 15.9% $150 $7 (deferred) Continuing health-care 47 35 49% 201 providers Discontinued health-care 17.8 10 -- 110 providers Bondholders 2 -- 33.1% 300 Stockholders -- -- 2% --