A controversial bid by the management of Health Net to convert the health maintenance organization to for-profit status won state approval Friday after Health Net agreed to cede majority ownership of the company to an independent health foundation.
State Corporations Commissioner Thomas S. Sayles required Health Net to donate $75 million to the Wellness Foundation, which will acquire 80% of the Woodland Hills-based HMO, and to donate an additional $225 million plus interest to the foundation over 15 years. Including the interest, Health Net’s contribution will exceed $500 million, Sayles said.
The foundation will use the cash for disease-prevention and health-treatment programs, said Sayles, who announced his approval at the private, nonprofit Watts Health Center in Los Angeles to illustrate the type of facility that would benefit from the foundation’s efforts.
The plan Sayles approved is vastly different from Health Net’s original proposal, which triggered an outcry among consumer groups and politicians.
Health Net, with 860,000 members and revenue of $1.2 billion in 1991, is the state’s second-largest HMO.
Like more than two dozen other California HMOs that have converted, Health Net wanted to become for-profit to gain access to capital markets.
Any nonprofit HMO wanting to convert must donate an amount equal to its “fair market value” to charity.
When it applied about a year ago, Health Net estimated its value at $108 million, then raised it to $127 million.
Health Net management--led by Chief Executive Roger F. Greaves--proposed purchasing Health Net after the conversion for $1.5 million, an investment that could have earned the group an enormous profit if Health Net went public or was resold. Management will now pay $1.5 million to buy the 20% of the HMO that the foundation is not acquiring--but the group can’t sell its stock for at least five years.
Consumers Union, publisher of Consumer Reports and a major critic of the management proposal, applauded Sayles’ blueprint.