Maxicare Won’t Fight Takeover by State

Maxicare Health Plans Inc. agreed Thursday not to challenge the state takeover of the troubled Los Angeles-based health maintenance organization.

Its deal with the state Department of Managed Care removes a legal cloud over the HMO that threatened to disrupt its operations.

The pact gives state-appointed conservator J. Mark Abernathy oversight of Maxicare’s finances and final word on any sale or transfer of its assets, including membership contracts. Maxicare’s current management will continue to run day-to-day operations.

Regulators on May 25 seized control of Maxicare, which has 254,000 enrollees, mostly in Southern California. Hours later, Maxicare sought federal bankruptcy protection from its creditors.

The state maintained that it controlled Maxicare. But the banks that oversee Maxicare’s accounts needed further assurance, said Daniel Zingale, director of the Department of Managed Care.

“The banks did not know who to release funds to,” Zingale said. The agreement, he said, “resolves the potential state-federal conflict” over control of Maxicare.

The state seized Maxicare’s California operations after finding it provided inadequate care and failed to meet minimal financial requirements. According to regulatory filings, the company had been bleeding cash. In early May, Indiana authorities seized Maxicare’s operations in that state.

Maxicare is seeking a buyer for its California operations, but analysts say prospects are slim. Greg Crawford, an analyst with Fox-Pitt Kelton in San Francisco, said it is unlikely another insurer would want to take over Maxicare’s contracts with doctors groups and other providers.

“The contracts are what got them into trouble in the first place,” said Crawford, noting that Maxicare assumed much of the risk associated with rising medical costs. Crawford said other HMOs are likely to absorb Maxicare enrollees.

Zingale said Maxicare has operated smoothly since the state takeover and is current on obligations incurred since May 25. Debts outstanding before the bankruptcy filing will be sorted out by the court, he said.