State Seizes Control of Maxicare
State regulators seized control of Maxicare Health Plans Inc. on Friday, triggering a bankruptcy filing by the California subsidiary of the troubled health maintenance organization.
California regulators took over Maxicare in a drastic attempt to prevent the Los Angeles-based HMO from slipping into insolvency. The Department of Managed Health Care said Maxicare has failed to meet minimal financial requirements and is being run in a manner that is unsafe and injurious to its enrollees. It cited delays in administering mammograms and hearing patient grievances.
The state and Maxicare pledged that there would be no interruption in service to patients or payments to physicians. The company joins a growing roster of physicians groups and insurers in financial distress because of rapidly escalating costs.
The flurry of legal actions cast doubt on who is in control of Maxicare, which has 272,000 enrollees in California, most of them in Southern California.
Department of Managed Health Care Director Daniel Zingale called the filing an illegitimate bankruptcy. He said the state took control of Maxicare on Friday morning and the company no longer “owns the assets to liquidate.” Zingale said Maxicare apparently had misled state regulators about its fiscal health.
Maxicare did not respond to requests for comment beyond a press release, which suggested the company was considering liquidation. Paul Dupee, chairman and chief executive of Maxicare, pledged in a statement to work with regulators to “assure continuity of care for our members, compensation for health care providers and an orderly transition of Maxicare enrollees to appropriate health plans.”
In a regulatory filing earlier this week, Maxicare signaled that its financial situation had become dire. It disclosed that it had hired an investment bank to sell some of its California operations, raising enough cash to meet state-imposed financial requirements while continuing to operate on a smaller scale.
But the company warned investors that state regulators might seize its assets if it failed to find a buyer. Maxicare reported assets of $112.3 million and liabilities of $123.8 million as of March 31. It posted a quarterly loss of $18.3 million.
The state on Friday appointed a receiver, Mark Abernathy of Peterson Consulting of Los Angeles, to run Maxicare while regulators sort through its finances to determine whether the HMO should be preserved, sold or closed, Zingale said.
Maxicare also announced Friday that it has asked the federal Health Care Finance Administration to terminate Maxicare’s Medicare contract effective Aug. 31. According to state regulators, 13,000 seniors are enrolled in Maxicare’s Medicare program. An additional 78,000 are covered by a Medi-Cal program administered by Maxicare.
The state takeover comes against a backdrop of rising health care costs that have been hurting profits of strong health insurers and threatening weaker HMOs.
Health care costs have been rising, driven by costly life-extending medical technologies and higher prescription drug prices. Insurers are feeling the squeeze because employers are reluctant to share the burden in the form of higher premiums. Physicians groups, meanwhile, are resisting a return to the low reimbursement rates that in recent years drove some providers into insolvency.
Zingale said no other HMO in California appears to be in financial danger. But some experts said that picture could change if the economic situation in health care does not improve. PacifiCare Health Systems, the nation’s largest health plan operator, has been under financial strain, though its situation is not dire.
“Given the condition of California’s health care system, the state may need to step in again,” said Betsy Imholz, an executive at Consumers Union.
The state’s action comes on the heels of a similar takeover in Indiana, where Maxicare’s 99,000 enrollees are being assigned to other HMOs. Maxicare has ceased operations in that state. Zingale said his department moved to take control of Maxicare before it ran low on cash in California, as it had in Indiana.
Zingale said that Maxicare has $35 million in cash, enough to ensure continuity of service as regulators determine the depth of the company’s problems. But its cash on hand is down significantly from the $69.5 million it reported on March 31.
“Our action is intended to arrive in time to protect the patients,” he said. In recent months, Maxicare has provided state regulators with “inconsistent financial information,” Zingale said. Because of that, the state conducted an emergency audit finding that Maxicare fell $8 million below tangible net equity requirements in March and April.
Maxicare has disputed the results of that audit. In documents filed with the Securities and Exchange Commission earlier this week, Maxicare said it met the state-imposed tangible net worth requirements as of March 31. But Zingale said that Maxicare included such items as goodwill in the Maxicare name, an accounting item that regulators “did not accept as tangible.”
The department, he added, also worried about a slippage in quality of some of Maxicare’s services, especially preventive care. He said that the company did not provide mammograms to patients when it should have and that it did not handle patient grievances in a timely fashion.
“Our goal is for the care to continue uninterrupted for patients,” Zingale said. “We lost confidence in Maxicare’s ability to do that.”
Consumer advocacy groups applauded the state’s intervention.
Anthony Wright of Oakland-based Health Access said its “aggressive stance” could stave off disaster down the road. “The state acted decisively to ensure patients are protected and providers are paid,” he said.
For instance, New Jersey authorities took over HIP Health Plan--then the state’s fourth-largest HMO--only after the insurer failed spectacularly in October 1998. By then, the insurer owed hospitals $150 million and 200,000 HIP members had to search for new coverage, he said.
Maxicare has a long history of financial trouble, and Friday’s bankruptcy filing marks its second trip to Bankruptcy Court. Once the nation’s largest HMO, it emerged from bankruptcy in 1990 after trimming debt taken on in an ambitious expansion drive that put Maxicare in 26 states. Its California business is the last vestige of that empire.
