Maxicare Health Plans creditors approve proposal to take HMO out of bankruptcy; doctors, health providers would control 49 percent.

Maxicare Health Plans creditors approve proposal to take HMO out bankruptcy

Doctors, health providers would control 49 percent

Maxicare Health Plans Inc., the Los Angeles-based health maintenance organization that went into Chapter 11 bankruptcy last March, edged closer last week to implementing a reorganization plan to make itself solvent.

The necessary majority of the HMO's creditors, in U.S. Bankruptcy Court in Santa Ana last week, voted to approve Maxicare plans to erase old debts, in exchange for cash, IOU's and equity stakes in a "new" Maxicare.

"We are entirely supportive of the plan," said Robert Nelson, a lawyer in the Los Angeles offices of Sidley & Austin who represented Maxicare bondholders. "The creditors vote for the plan was overwhelming favorable."

As of presstime last week, U.S. Bankruptcy Court Judge John Wilson had yet to confirm the plan, but was expected to do so.

Basically, health care providers, banks and bondholders will end up owning Maxicare, a health plan which is vastly smaller than before and which will have to prove itself in California's hotly competitive health care marketplace.

Maxicare now has about 320,000 enrollees in seven states, compared with 2.3 million in 29 states at its peak in 1987. The HMO's operations are concentrated in California, where it has about 180,000 enrollees .

Maxicare officials last week expressed confidence in their ability to go forward. "We are thrilled with the significant progress we have made to date," said Peter Ratican, Maxicare chairman and chief executive. "I see a bright future by continuing to concentrate on providing good service along with access to quality managed care. We will increase our membership and profitability."

Maxicare's reorganization plan was largely drafted by the Westwood offices of investment banker Oppenheimer & Co., and the law firm of Milgram Thomajan & Lee.

Under the reorganization plan as proposed, doctors and other health care providers will end up owning 49 percent of Maxicare, and will get $7 million in cash and $35 million in IOUs, which will take the form of publicly traded bonds. The health care providers had been owed $200 million.

Banks and bondholders will also get a 49 percent stake in the new Maxicare, and will get $14 million in cash and $22 million in IOU's. Banks and bondholders had been owed $450 million. The plans may be altered before final approval.

"The general economics of the deal that we drafted has held up through the bankruptcy hearings," said Roger Kahn, managing director at Oppenheimer & Co. who designed Maxicare's reorganization plan. "Things went smoothly, given the complexities of the matter."

Maxicare's problems are generally traced back to overly ambitious expansion plans of the company's founder and former chairman, Fred Wasserman. In 1987 Wasserman borrowed $454.6 million to buy two rival HMOs, thus increasing Maxicare's total number of enrollees to 2.3 million from 700,000. Interest payments per year soared by $47.5 million.

The expansion could not have been more badly timed. In 1987 HMOs, insurance companies and other plans were vigorously competing for customers, and offering discount prices to employers to lure new accounts. From 1985 to 1987 many plans, such as HealthNet in Woodland Hills, basically did not raise prices to customers, although the cost of providing care increased. Margins for insurers and HMOs shrank.

Debt, shrinking margins and losses in many states hammered at Maxicare: For the 12 months ended Dec. 31, 1988, Maxicare ultimately reported losses of $611.8 million on revenues of $1.6 billion. Much of the losses stemmed from selling off the money-losing plans for prices far below the acquisition prices.

Maxicare is a "contract-model" HMO. Unlike Kaiser Permanente, which owns its hospitals and has on-staff doctors, Maxicare contracts with medical groups and hospitals to provide health care to its enrollees.

The enrollees come from employers who are seeking health insurance for their employees.