Maxicare collapses, files for bankruptcy after two-year slide.

Maxicare collapses, files for bankruptcy after two-year slide

In the two-year struggle to keep troubled Los Angeles-based Maxicare Health Plans Inc. afloat, separate teams of investment bankers from montgomery Securities Inc., Prudential Bache Capital, Goldman Sachs & Co. and then Oppenheimer & Co. were called in for advice and planning.

Last week a new name was added to the ranks: Myerson & Kuhn, a New York-based law firm specializing in bankruptcy.

Unable to keep the debt-wolves away from the door any longer, Maxicare declared Chapter 11 bankruptcy last Wednesday night, throwing the health care of roughly 300,000 Southern Californian Maxicare enrollees into limbo.

A buyer for Maxicare's California operations reportedly has already been lined up.

Chairman Peter Ratican said that beginning March 16, the health maintenance organization would honor new bills on a current basis, a ploy to encourage doctors and hospitals to treat Maxicare patients, even as they get stiffed on old Maxicare bills.

Most providers said they would continue to treat Maxicare patients.

Maxicare owes $175 million to its bank consortium, led by New York-based Bankers Trust Co., and owes $291 million to bondholders, who face a bleak outlook, said analysts.

"What is going to happen to the providers, the bondholders, the banks and the patients now?" asked Steven Reid, veteran health care industry analyst with the L.H. Friend & Co. brokerage house. "Nobody knows. But Maxicare bonds are nearly worthless, and the banks aren't much better off."

Indeed, in its latest quarterly filing with the federal Securities and Exchange Commission, Maxicare stated, "(I)t is unlikely that any significant value would be available to (bondholders) or general creditors, other than health care providers, in a bankruptcy reorganization."

Health care providers last week expressed shock at Maxicare's bankruptcy, particularly since officials had consistently denied they planned to file.

"I met with Ratican (Maxicare chairman) on Tuesday night. He looked me in the eye, shook my hand, and said there was no way Maxicare would declare bankruptcy," said Mitch Zevin, director of marketing for the Hawthorne Community Medical Group, a major doctors' group and Maxicare contractor. "Then they declared bankruptcy 24 hours later."

Nevertheless, Zevin said his group would continue to treat Maxicare patients "as long as bills are paid."

Last week was a frenetic one for the Maxicare board and senior management, which met repeatedly, according to Maxicare insiders.

The board first tentatively scheduled a "major announcement" for Wednesday and then canceled it, and concluded the week with the bankruptcy declaration.

Evidently, there is still no long-term plan on how to cure Maxicare's ills.

A long-awaited debt restructuring plan for Maxicare, first expected in December, then February, and then March, appears postponed even further.

Maxicare may sell its California operations to another HMO, such as Pacificare, according to Maxicare insiders.

Before declaring bankruptcy, Maxicare had planned to issue new stock to the banks and bondholders in exchange for the debt, a so-called stock-for-debt swap.

In an exclusive interview, Maxicare's newest investment banker, Thomas Weinberger of the Century City offices of Oppenheimer & Co., said the HMO must solve certain short-term cash problems before it can work out a long-term restructuring to avoid bankruptcy.

"First we have to work out some short-run problems, before we can address the long-run restructuring," said Weinberger, speaking before the bankruptcy declaration. "We have work out something with suppliers, providers."

What ails Maxicare is chronic red ink, stretching back to 1986.

In the fall of 1986, in an ambitious expansion by Maxicare founder and deposed chairman Fred Wasserman, Maxicare borrowed $445.6 million to buy two rival health maintenance organizations, the Nashville, Tenn.-based Health America Corp. and Healthcare USA Inc., based in Orange County.

the acquisitions more than doubled the size of Maxicare from under 1 million enrollees to roughly 2.3 million enrollees.

Suddenly, with enrollees in 28 states, Maxicare vaulted into the big leagues of health care providers and became the nation's largest publicly held HMO. Wasserman was profiled in national business news magazines.

But there was a price: The yearly vigorish on the borrowed $445.6 million amounted to $47.5 million. And the new acquisitions were money-losers.

Maxicare became a deadbeat corporation. Last year it renegotiated its $175 million credit line with a consortium of banks, and then in December announced it would suspend debt payments to the bank group, and to holders of $291 million worth of Maxicare bonds.

Maxicare bondholders are much in the same boat. Last week Maxicare's $125 million of senior subordinated debt due 1996 traded last week for 7.5 cents of face value, while $120 million of Maxicare convertible bonds traded for 4.5 cents of face value. "These bonds are not even worth wallpaper; its toilet paper," said analyst Reid.

Maxicare stock traded for 25 cents a share last week. The stock in 1986 traded for as high as $28.50 a share.

Maxicare's problems, though inflamed by the 1986 expansion program, are endemic to the health plan industry.

Maxicare, like local rivals Health Net and insurer Blue Cross of California, raised premiums only slightly from 1984 through 1987, due to the competition for enrollees from rival health plans.

Yet in the same time period the cost of health care surged 22 percent, according to the federal Department of Labor. Bills went up as premium income remained flat.

The ceiling on premium increases was caused by a flood of new competition into the health plans industry.

For example, there are approximately 700 preferred provider organization plans, or PPOs, today, a type of health plan virtually unheard of five years ago, according to the American Association of Preferred Organizations in Washington, D.C.

PPOs are networks of hospitals and physicians that offer cut-rate health care plans to employers, the major private-sector buyers of health care.

Too, today there are roughly 650 HMOs, up from 20 in 1970, according to Interstudy, an industry research group.

In the mid-1980s, the multitude of health plans and insurers competed for enrollees by offering low premiums.

There have been complaints in the industry of "low-ball" competitors -- insurers offering low come-on prices to employers in hopes of landing a contract. Rates would be raised in later years.

And rates are going up now. Maxicare has said it will raise rates an average of 15 percent in California in 1989, while Blue Cross said it raised rates an average of 18 percent last year. Some companies faced Blue Cross rate hikes of more than 50 percent last year.

Maxicare is largely a "network model" HMO -- it does not have facilities and doctors of its own, in the manner of HMO giant Kaiser Permanente. Instead, Maxicare has contracts with doctors and hospitals who agree to provide care to Maxicare enrollees.

Maxicare has announced it will close it Family Health Services staff model HMO in Orange County, laying of 500 workers, and severing care to 55,000 enrollees, at the end of this month. The subsidiary was acquired when Maxicare bought Healthcare USA in 1986.