Agency Chief Tackles New Job, HMO Buyout Plan : Health Net: Five months after taking over as head of the state Department of Corporations, Thomas Sayles is moving toward a ruling in controversial case.
No sooner had Thomas Sayles become head of the state Department of Corporations last June than he was handed his first major test: Decide whether Health Net, the state’s second-biggest HMO, can proceed with its controversial plan for a leveraged buyout.
Five months later Sayles has yet to rule because he’s been busy learning not only the Health Net case, but how his agency works overall. He will probably decide the matter by year’s end, but won’t publicly discuss its specifics until then.
Nonetheless, Sayles is aware of the widespread interest in Health Net’s outcome. “I certainly want what I do to be used as precedent, in terms of how my administration views HMO conversions,” he said. “I’m either going to reject the transaction on the terms proposed, or accept it on terms I find acceptable.”
Sayles, a 40-year-old former corporate lawyer for TRW Inc. who took a pay cut for the $99,805-a-year commissioner’s job, said he has other goals that will affect the DOC long after his Health Net ruling is forgotten. But it’s the Health Net decision that has put him in the spotlight.
Health Net, a Woodland Hills-based health-maintenance organization with 850,000 members, wants to convert from nonprofit to for-profit status. Under state law, such a conversion requires the HMO to donate a sum equal to its “fair market value” to a public charity, and Health Net claims its value is $127 million. In the second step of the deal, Health Net’s management wants to buy the HMO for $1.5 million, an investment that could yield enormous profits to the executives if Health Net later went public or was resold.
Critics are outraged at the plan, saying the $127 million understates Health Net’s actual value by plenty and so would shortchange the public. Several outside bidders have offered up to $300 million for Health Net, offers Health Net has shunned. The critics also charge Health Net with self-dealing, because its board is dominated by members of the management buyout team.
Sayles has refused to talk to representatives from Health Net, the bidders or any other outside parties about the case, studying the paperwork himself with his staff.
Before Sayles arrived, the DOC had cleared 28 other HMO conversions in the state. In some of those cases the HMO’s executives did indeed reap huge profits later, and the Health Net proposal gave critics an opportunity to renew their complaint that the DOC was a lax regulator in the earlier conversions. Consumers Union, publisher of Consumer Reports, griped about the agency’s “mild-mannered approach” to conversions “which is looting the public trust.”
Such complaints add to a public-relations problem that has dogged the agency in recent years. Despite being one of the state’s most powerful business authorities, Sayles still must convince legislators, lawyers, business people and the general public that the DOC is an active watchdog over California commerce and not, as some critics have charged in the past, a regulatory paper tiger.
“I don’t think we’ve gotten our message out as well as I’d like to,” Sayles said. “Often people don’t know how much we do.”
Based in Los Angeles, the DOC also has offices in Sacramento, San Francisco and San Diego, staffed by 420 people, including 60 lawyers. The agency regulates securities transactions and registration, consumer lending firms, credit unions, check-cashing firms, certain real estate escrow firms and, of course, HMOs.
But instead of making headlines by cracking down on fraud, the DOC itself was the subject of critical stories in the late 1980s stemming from the collapse of Irvine-based Lincoln Savings & Loan. Lincoln’s parent, American Continental Corp., sold $200 million of ill-fated junk bonds to the public after getting DOC clearance. So now Sayles is under scrutiny by a state Legislature that doesn’t want another scandal to surface.
“We know that the DOC is the first line of defense against fraud, and the Legislature will be watching closely this time,” said Gwen Moore, (D-Los Angeles), who chairs the Assembly’s Utilities and Commerce Committee.
Sayles won’t comment on his predecessors, Christine W. Bender and Franklin Tom, who headed the DOC for most of the 1980s. But he acknowledged that the Lincoln affair hurt the agency’s morale. “The department took a beating from a PR standpoint,” he said.
In his effort to bolster that image, Sayles probably will never be in front of television cameras as often as, say, his counterpart at the Insurance Department, John Garamendi. But Sayles said he “will be making myself more accessible to the public, and not sitting here in a cloistered ivory tower.”
With an annual budget of $23 million, the DOC also marches into court to get receivers appointed for ailing enterprises, or to shut down illegitimate businesses--although if criminal prosecution is warranted, it will turn over its findings to the local district attorney or the attorney general.
“We are the only state agency other than the attorney general’s office, so far as I’m aware, that has independent litigation authority,” Sayles said.
The commissioner’s post is a political appointment that requires state Senate approval, and Sayles was named by Gov. Pete Wilson. Bender and Tom were appointees of former Gov. George Deukmejian.
Sayles said he didn’t lobby for the commissioner’s job. But his seat on the state Community Colleges Board of Governors and his earlier government posts apparently caught the eye of Wilson’s staff.
After getting a political science degree from Stanford University in 1972 and a law degree from Harvard University in 1975, Sayles was a deputy attorney general in California and then an assistant U.S. attorney in Los Angeles. In 1982, he became general counsel for TRW’s Space & Technology division based in Redondo Beach.
At TRW, “he was not a mere passive lawyer who waited for clients to ask him a narrow legal question, but rather was part of the management team” that handled divestitures, acquisitions and joint ventures for the company, said Joseph McCann Jr., legal vice president for TRW’s space and defense sector and Sayles’ former boss.
Another of Sayles’ goals is to make the DOC more efficient and to raise its workers’ productivity and morale. Agency divisions that formerly ignored each other are now under orders to share skills and resources. Senior staffers now must provide Sayles with more formal and consistent status reports. Each Wednesday, Sayles holds “brown-bag lunches” with his clerical employees to hear their views.
“Nobody ever sat down and listened to the support staff before,” said Richard Murakami, the DOC’s assistant commissioner for health-care services and a 32-year DOC veteran. “He does what I call ‘managing by walking around.’ ”
Sayles also claims to have no political ambitions, and he seems unruffled about any political fallout for himself or Wilson that might stem from his Health Net decision, and the state’s biggest potential HMO conversion yet.
“I’m not going to run for office,” Sayles said. “I hope, when I make my decision, that it’s good public policy. What the politics are, so be it.”
