Maxicare’s Stay in Chapter 11 Is Almost Over : Health care: The medical services provider may clear its last hurdle in court today. Although it’s come a long way in 15 months, its future is in doubt.
Maxicare Health Plans is to appear before a federal judge in Santa Ana today to complete the final hurdle before emerging from Chapter 11 bankruptcy.
However, once outside the shelter of the U. S. Bankruptcy Court, the Los Angeles-based health maintenance organization’s survival as an independent company is in doubt. And even if Maxicare can remain independent, industry analysts say there are major questions about its ability to compete in an environment where purchasers of health care--primarily employers who provide benefits for workers--are demanding much more of the so-called managed health-care companies.
It is remarkable that Maxicare has come so far so soon after filing for Chapter 11 relief in March, 1989. Maxicare--with relative ease--got the court-appointed creditors’ committees to endorse a reorganization that would distribute a combination of cash, bonds and stock to creditors to pay claims. The votes of individual creditors are expected to be announced today, as the court opens a hearing on whether to confirm the reorganization plan.
Upon court approval, Maxicare would convert existing bonds and stock into new issues for the reorganized company.
Some observers think that Maxicare will be vulnerable when it emerges from bankruptcy.
“My sense is that someone is going to take them over,” said Larry Selwitz, an analyst with the investment banking firm of Cruttenden & Co. in Newport Beach.Selwitz noted that the reorganization plan will place about 49% of the stock of the new Maxicare in the hands of doctors and hospitals who serve Maxicare members.
Most public HMOs, like Maxicare, provide medical care through contracts with independent hospitals, clinics and doctors, Selwitz noted. And the healthier ones tend to have cash for acquisitions because they don’t have to invest in hospitals, equipment and medical staff, he said.
Moreover, Selwitz thinks that few of the doctors and hospitals will be able to resist a decent cash offer for their stock, especially when it would not be inconvenient for them to deal with a new owner.
Most of the medical groups that have contracts with Maxicare also have contracts with other HMOs, he said, including Cypress-based PacifiCare Health Systems, which in April proposed to buy Maxicare. When selling to an HMO like PacifiCare becomes merely a matter of “changing names on a file,” he added, the attitude of many providers will be: “Why fool around with Maxicare?”
Managers of PacifiCare and Maxicare talked, but the bid died abruptly.
Chris Street, managing director of Seidler Amdec Securities’ group, which specializes in bankruptcy stocks and bonds, said he hopes Maxicare will remain independent. But he conceded that the new stock will trade at a low price compared to other public HMOs.
“I believe it’s going to be cheap. It would be a very inexpensive deal for someone to take them over,” he said.
Still, Street said, “I’m personally not in favor of selling out. The company is going to be worth a heck of a lot more in 12 months.”
He said he believes that Maxicare’s membership will grow because the new physician owners will steer more of their patients to the HMO. Also, Street said, he believes that corporate employee benefit managers will behave “much more kindly” toward Maxicare when it emerges from the Chapter 11 proceedings.
“I think Maxicare has the highest name recognition of any HMO other than Kaiser. It will be a very well-capitalized company that has a strong provider network,” he added. The company will grow, he said, and the “real loser will be PacifiCare . . . which is why it wants to buy Maxicare.”
Since the court filing, Maxicare’s membership has declined more than 50% in the divisions it plans to keep. Membership as of March 31 was about 320,000.
However, Street’s is an optimistic view. Berkeley-based health-care consultant Peter Boland thinks that Maxicare may have trouble persuading employers to keep offering its plan. And it is employers--not doctors--who really control HMO selection.
Many companies are reducing by “at least 50%” the number of HMOs they allow employees to choose from, Boland said. “They will limit the HMO choice to possibly one or two. . . . It’s probable that the companies that offer Kaiser will continue to do so. If there is going to be another HMO option, it is likely to be a point-of-service HMO.”
Point-of-service plans allow members to make a decision based on each medical need about whether to seek service from the network’s medical providers or go outside the network and pay more.
“Those employers who continue to offer Maxicare will be under a fair amount of pressure to offer a plan that is broader and more diverse,” Boland said. “It’s an uphill struggle for Maxicare to be seen as a credible competitor on an equal footing with others,” he said.
Maxicare officials declined to be interviewed before the hearing.
In the disclosure statement on the proposed reorganization, Maxicare’s managers are optimistic about its future as a smaller company operating in only a handful of states. Management projects that Maxicare will earn about $7.5 million in 1990 and boost its earnings to $32.8 million in 1994. The projections are based on “reasonable assumptions” but may not be realized in light of uncertainties about inflation and increases in medical cost, the statement said.
Maxicare filed for Chapter 11 after it was squeezed by high interest costs resulting from an acquisition binge in 1986 that made it the nation’s largest publicly traded HMO. The acquisitions saddled it with a number of unprofitable plans with high overhead. The company, deeply in the red, was also facing pressure from state regulators and creditors.
To help improve its bottom line, Maxicare sold, or closed, several plans, pulling completely out of most states. Nearly half the current membership is in California, where Maxicare competes with several HMOs. They include Kaiser and PacifiCare, plus new HMOs and preferred provider organizations created by indemnity insurers such as Travelers Corp. and the Blue Cross and Blue Shield organizations.
Although some Maxicare members complained that doctors and hospitals harassed them for payment of debts that Maxicare owed after the Chapter 11 bankruptcy, Maxicare boasts that its members suffered no interruption of service during the reorganization.
MAXICARE: THEN AND NOW
Membership at the health maintenance organization peaked at more than two million before heading down. At the time Maxicare filed for protection from creditors, membership stood at less than half that amount, and has declined to 325,000 as of March 31, 1990.
Maxicare membership 1986-1990 6/30/86: 822,000 12/31/87: 2.3 million 3/31/89: 1 million 3/31/90: 325,000
Toned areas indicate states where Maxicare had operations as of Dec. 31, 1987, a total of 26. The darker tone indicates the seven states where the reorganized company is operating as it emerges from Chapter 11.
