Leaner Maxicare Has Positive Quarter
After taking millions of patients and investors on a 1980s roller-coaster ride of massive acquisitions and growth that crashed at the end of the decade in one the biggest bankruptcies in Southern California history, Los Angeles-based Maxicare appears to be making a solid comeback as a more modest health maintainance organization.
On Monday, Maxicare announced its best quarter for earnings from continuing operations since 1986 and looks headed for the second year in the black since its bankruptcy filing in March, 1989. The company reported net from continuing operations of $1.8 million on revenue on $98.7 million, compared to $1.6 million on revenue of $95.5 million in the year-ago quarter.
The third-quarter net income was $1.2 million, after a $576,000 charge for reorganization expenses, compared to the year-ago net income of $22.1 million. However, the 1990 third-quarter net also included a huge $21.4-million extraordinary gain from a court settlement in addition to a $946,000 charge for reorganization expenses.
Nearly a year after emerging from bankruptcy, Maxicare, now one-eighth its former size, is paying its bills on time and keeping patients generally satisfied, say doctors and employers who offer the plan to their workers. After bottoming out at 273,000 in January, Maxicare’s enrollment nationwide is growing again, and its network of hospitals and doctors in California has doubled.
With about 100,000 members in Southern California, Maxicare appears to be gaining back the trust it established as an HMO pioneer in the early 1970s and squandered in the late 1980s.
Maxicare’s biggest problem now is probably not internal, but in the overall HMO environment. The sickly Southern California HMO market is rife with price competition that has recently sent other HMOs, most notably Fountain Valley-based FHP, into the dumps. But analysts say Maxicare, having so recently cleaned house, is in a relatively good position.
Maxicare’s present relatively sound situation is a far cry from the mess it created by the acquisition binge that peaked five years ago, an era when it took on nearly $800 million in debt to expand its network to include 33 HMOs in 26 states with 2.3 million enrollees. The debt and the far-flung management challenges were more than Maxicare could handle, and it started getting months behind on payments to doctors and hospitals.
Thousands of patients who had joined the HMO precisely so they wouldn’t have to worry about doctors’ bills suddenly found themselves getting dunned directly by physicians for Maxicare’s debts, and worrying about whether they had any health care guaranteed at all.
Maxicare filed for Chapter 11 protection in March, 1989, the 23rd-largest bankruptcy in U.S. history, leaving thousands of doctors and hospitals steaming over massive payments Maxicare owed them.
More than two years later, Maxicare has been reconfigured at about the same size and shape it was in 1983. It has shrunk back to 278,000 members in seven states, three-quarters of them in California, Indiana and Illinois. The company’s payroll has shrunk to 450 employees from 3,400 at its peak.
Maxicare’s tale is typical of HMOs in recent years. In the 1980s, HMOs gained popularity with large employers seeking to cut soaring health-care costs. And in an attempt to serve big companies with employees nationwide, a number of HMOs tried to become equally broad-based by acquiring other companies. For most of the HMOs that attempted rapid expansion, it was too much to digest.
Chief Executive Peter Ratican, the film industry finance specialist who took over in 1988, and Chief Financial Officer Eugene Froelich have received high marks from analysts for the way they directed Maxicare’s restructuring.
“Management went into a difficult situation, when it was hard to imagine how to pull any value out of the company, and they did,” says Geoffrey Harris, an analyst with Smith Barney.
Maxicare’s restructuring has won it back such clients as Sears, GTE and the State of Illinois.
Sandy Bill, state manager for compensation and benefits for GTE California, says her company dropped Maxicare in 1989 because employees complained that it wasn’t paying bills. But this year GTE put Maxicare back on the slate of HMOs available to its employees, and Bill says “we have been satisfied with them.”
Hospitals and doctors say they don’t have to wait for Maxicare to pay them anymore. Ron Dahlgren, president of Queen of Angels-Hollywood Presbyterian Medical Center, says he’s seen “extremely timely claims payment.” He’s also chosen Maxicare to insure his own employees, and says they’re generally satisfied. Despite the good news for Maxicare, it’s not entirely out of the woods.
The company remains highly leveraged, with debt nearly equal to its capital, compared to a ratio ranging from 1% to 37% for other major HMOS. Randall Huyser, an analyst with Furman Selz, says Maxicare is “doing all the right things” but that the tough HMO environment could make its recovery take a little longer than he predicted in July, when he forecast a robust 24% revenue growth for 1992. Although enrollment grew by 5,000 this year, that’s slower than he expected.
While the short-term environment for HMOs looks tough, most analysts believe that in the long run their role will continue to grow. “Everyone’s beginning to understand that managed care (cost-controlled insurance, including HMOs) is not going away,” says Dr. William Weil, medical director of Maxicare.
In over-the-counter trading Monday, Maxicare shares gained 12.5 cents to close at $7.75.
Maxicare’s Comeback Maxicare Health Plans grew rapidly in the 1980s, but overexpansion led to huge losses at the peak of its enrollment. The company has since reorganized and its returning to profitability as a much smaller concern. Enrollment bottomed out in January, 1991, at 273,000 but has been growing since.
