1149 South Broadway Street
Los Angeles, California 90015
Telephone: (213) 765-2000
Fax: (213) 765-2693
Sales: $663.8 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: MAXI
SICs: 6311 Life Insurance; 6321 Accident & Health Insurance; 6324 Hospital & Medical Service Plans
Maxicare's quality assurance, consumer education, utilization review, and member service departments are dedicated to the service of our employer groups and members.
Maxicare Health Plans, Inc. provides managed health care and other employee benefits to over half a million customers. The benefits provided by the company include group benefits, Medicaid, and Medicare HMO policies, as well as PPO insurance, group life and accidental death and dismemberment policies, and organization insurance. The company also deals in administrative services, wellness plans, claims processing, and pharmacy programs. Maxicare Health Plans helped popularize the concept of national health maintenance for profit in the 1980s. By the end of that decade, however, it epitomized the problems and pitfalls of the new industry. Maxicare began its second decade struggling to emerge whole from bankruptcy, under the protection of the federal courts. The company began an innovative concept for reshaping the country's health care-delivery system, and rapidly mushroomed into a profitable chain. At one point, Maxicare stock traded at 55 times earnings.
Maxicare began as Fred W. Wasserman's dream. It was founded by Wasserman and his wife, Pamela K. Anderson. Wasserman saw his opportunity in the 1973 Federal HMO Act, which required employers who were engaged in interstate commerce to offer workers a choice between conventional insurance coverage or HMO membership. Maxicare originated as a California nonprofit HMO in 1973. In 1980 Wasserman convinced a group of Los Angeles-area physicians to convert the company into a for-profit HMO. Maxicare was supported by the charter participation of Lockheed Corporation and Northrop Corporation. Selling prepaid health care plans to employers, Wasserman rapidly built Maxicare into a national network by acquiring HMO's across the country.
Maxicare began interstate operations in 1982, by purchasing CNA Health Plans, which had operations in Illinois, Indiana, and Wisconsin. Maxicare's net income ballooned from $5.4 million in 1983 to $20.4 million in 1985. By the end of 1987, Maxicare owned or managed 33 consumer-oriented, high-quality health maintenance organization systems in 26 states, with a combined enrollment of 2.3 million members. By the mid-1980s, the husband-and-wife duo had parlayed their initial $37,000 investment into the nation's largest for-profit HMO. As the number of HMO's in the United States nearly doubled&mdashø more than 600--between 1984 and 1986, competition stiffened and Maxicare found itself paying inflated prices for the local health-maintenance organizations it acquired as part of its growth strategy. Maxicare grew quickly, especially in the Southeast, but some of the local plans it acquired proved to be poorly managed, with sizably underestimated expenses.
Wasserman's dream began to unravel in 1986, when Maxicare acquired two HMO's, HealthCare USA and Health-America Corporation, for $446 million. The highly leveraged transaction doubled Maxicare's enrollment and boosted the company's overall revenues to $1.8 billion, from only $118 million in annual revenues six years earlier. The two new HMO subsidiaries, however, brought hidden costs and considerable debt. Maxicare's undiscriminating growth strategy had emphasized fast expansion, and the company had simply purchased almost every HMO that it could. Maxicare soon became a victim of its own centrally managed, inter-entity borrowing system, which was taxed by a handful of overextended HMO subsidiaries.
Maxicare's long-term debt soared to $464 million in 1987, at a time when competition and health care costs intensified. Shortly after the acquisitions, the company began experiencing serious financial and operating difficulties, which resulted in Maxicare reporting net losses of $255.9 million in 1987 on $1.8 billion in revenues. In 1988 Maxicare's losses swelled to $611.8 million on revenues of $1.6 billion. The growing reservations of lenders toward the HMO industry made it difficult for Maxicare to obtain the further financing needed to turn the company around.
Management Changes in 1988
In the wake of Maxicare's inability to stem losses, the company's senior management--including Chairman Wasserman and President Anderson--and five of its seven directors resigned in August 1988. Peter J. Ratican, who had been an outside member of Maxicare's board since 1983, was named Maxicare's second chairman, chief executive officer, and president. The senior management team Ratican assembled immediately launched an in-depth review of Maxicare's operations. Wasserman remained for a time after his resignation as a consultant to the company. Ratican brought more financial, rather than health care management, experience to the job. He had worked for a time at Price Waterhouse, where Maxicare was among his audit clients. He also had served as a medic in the California National Guard. Prior to joining Maxicare in 1988, Ratican was a member of the office of the president, and chief financial officer of De Laurentiis Entertainment Group.
In mid-1988 New York-based Bankers Trust Company dealt Maxicare a particularly critical blow. Bankers Trust and five other lenders had provided Maxicare with a revolving bank loan. In mid-1988, Maxicare lost its ability to make interest payments on the $175 million loan, and Bankers Trust forced a fire sale of some of Maxicare's local HMO plans.
Initially, under pressure from Bankers Trust, Ratican abandoned Wasserman's plan for a national HMO company, focusing instead on California and select midwestern and southern states. Beginning in late 1988 Ratican began selling some of Maxicare's plans, for an estimated total of $120 million. The money was used to reduce the company's overall debt and to offset ongoing administrative and personnel costs. Ratican also hired McKinsey & Company, New York-based management consultants, to identify ways to improve management, client relations, and claim processing. McKinsey was the first of three management consultants Ratican would hire between August 1988 and March 1989.
Further dramatic change was spurred by Ratican's decision to increase Maxicare's premiums by an average 32 percent--twice the annual hike of its competitors'--combined with the company's highly publicized financial problems. The move prompted massive client defections.
After missing principal loan payments in January 1989, Maxicare's new management unsuccessfully attempted to pursue several financial restructuring alternatives, including exchange offers, new arrangements with trade creditors, new infusions of equity, securing new investors, and selling Maxicare or any of its subsidiaries outright. Discussions with outside parties concerning such alternatives, however, never moved past the preliminary stage.
Chapter 11 Bankruptcy in 1989
Ratican's goal simply became to avoid complete liquidation of Maxicare's assets while nursing the ailing company. Increases in health care costs continued to outpace increases in premiums and overall revenues by nearly two to one. On March 17, 1989--still wrestling with close to $300 million in long-term debt, mounting losses, and unavailable financing--Maxicare and 45 of its direct and indirect subsidiaries filed for protection from creditors under Chapter 11 of the Federal Bankruptcy Code. Two additional local Maxicare subsidiaries subsequently filed for Chapter 11 protection in April 1989.
Soon after filing, Maxicare found itself inundated with lawsuits filed by participating hospital and doctor groups, alleging delinquency in making payments. Even Maxicare shareholders filed a class-action suit, alleging violation of securities laws. State insurance regulators struggled with the dilemma of how to repay Maxicare's medical constituents. Federal bankruptcy laws shielded Maxicare from state regulators' attempts to seize plan assets in their respective states in order to cover enrollees' unpaid claims. In 1989 a handful of states unsuccessfully appealed to the bankruptcy court to allow their individual insurance regulators to supervise debt repayment to creditors under their authority.
Through the reorganization process, the bankruptcy court consistently dismissed claims by various states, including Illinois, Indiana, Ohio, and California, seeking jurisdiction over Maxicare's local subsidiaries. Perhaps the most difficult and influential group of constituents to appease was the nation's health care providers, many of whom unabashedly challenged Maxicare in bankruptcy court. Two dozen Philadelphia hospitals and other providers participating in Pennsylvania's Medicaid program, for instance, asked the judge to appoint a trustee to oversee Penn Health, the Maxicare subsidiary that administered the program. Settlement in some of the many disbursement cases involved transferring existing Maxicare plans to other health maintenance organizations. Many Maxicare providers had to settle for partial payment. The bankruptcy court eventually extended full protection to Maxicare from creditor interference, pressure, or cancellation during the reorganization process.
At the time of its filing, Maxicare was in the midst of an asset-disposition program. At the end of 1987 Maxicare had managed a system of 33 HMO's in 26 states with combined enrollment of about 2.3 million members. By the time it filed for bankruptcy, Maxicare had sold or closed 23 HMO's in 17 states with a combined enrollment of about 837,000 members in order to raise cash and reduce its operating losses. Between March 1989 and May 1990, Maxicare sold or closed an additional seven HMO's located in six states. Maxicare also sold nearly $5 million in real estate and property, including a California medical building and other clinic facilities located throughout the United States. During the disposition process, in early 1990, Maxicare rejected an unsolicited buyout bid from competitor PacifiCare Health Systems. In acknowledging that the two companies had been unable to reach an accord, Maxicare management reiterated its commitment to an independent reorganization.
Many other HMO companies struggled with similar problems. The concept of providing a full range of medical services for one annual fee appeared to have worked better in theory than it did in practice. Other national HMO's were also unable to hold down costs by keeping patient visits and charges to a minimum.
Wall Street also had its reservations. Maxicare stock plummeted to $2 a share just before the company filed for bankruptcy, from its all-time high of $28 a share. Maxicare's management, however, found itself facing a broader challenge: regaining the confidence of investors, consumers, financial institutions, and the medical community. Based on surveys it conducted in 1988 and 1989, Maxicare reported that at least 80 percent of its enrollees remained satisfied with the services the company provided, even though many employers had opted not to renew their Maxicare contracts. To curb defections, Maxicare moved quickly to improve its services, instituting new practices such as paying claims within 15 working days after receipt.
By 1990 Maxicare was marketing its services aggressively with the help of an advertising agency, trying to convince the public that as one of the nation's first HMO's, it remained one of the best. Maxicare signaled its revitalization with a new patriotic logo. Decked in red, white, and blue, the logo silhouettes three Maxicare members looking ahead to what was hoped to be a brighter future. The new logo was an inverted, updated version of Maxicare's old logo. Maxicare officials also began commenting publicly about assuming new HMO accounts, but declined to identify them. On July 9, 1990, Ratican told Managed Care Report that his personal goal was independently to build Maxicare back to a 500,000-plus-enrollee concern within five years. Refuting suggestions that Maxicare management would sell out after completing the company's financial reorganization, Ratican stated that he and his management team were determined "to stick it out and turn it around because that's what we came to do."
Reorganization in 1990
A reorganization plan first filed in January 1990 was adopted by Maxicare and its subsidiaries, creditors, and bondholders in May 1990 and received final approval from the bankruptcy court in July 1990. The plan provided creditors and shareholders of the multistate health maintenance organization with $129.3 million in cash payments; ten year 13.5 percent senior notes with a face amount of $67 million; and common stock and stock warrants that were to be traded publicly. Creditors were also to share in the cash proceeds of a distribution trust established to liquidate Maxicare assets that would not be used in its ongoing businesses and operations.
Maxicare's reorganization called for creditors and shareholders to receive at least as much as they would have if the company had been completely liquidated. The reorganization plan also called for an estimated $200 million in claims from general unsecured creditors of Maxicare's ongoing operations--mostly physicians and hospitals&mdashø receive $47 million in cash, $35 million in senior notes, and 49 percent of the reorganized company's common stock. Another $110 million in claims from general unsecured creditors of Maxicare's discontinued or divested operations were to receive $17.8 million in cash and $10 million in face amount senior notes.
Members of the Bankers Trust-led bank group--who were general unsecured creditors of the parent holding company--represented about $150 million in claims, and were to receive up to $12 million in cash, $22 million in face amount of senior notes, and 15.9 percent of the common stock of the new Maxicare. The company also pledged approximately $7 million of notes to the banks as collateral. Holders of four bond issues, representing about $300 million in claims as general unsecured creditors of the parent holding company, were to receive approximately $2 million in cash and 33.1 percent of the new common stock. Maxicare's public shareholders were to receive two percent of the reorganized company's common stock and stock warrants entitling them to acquire up to an additional five percent of the common stock on a fully diluted basis.
The reorganization plan also provided Maxicare's senior management golden parachutes, including severance and benefits up to annual base compensation if Maxicare was bought out or if management control was changed. Top management was also assured of $500,000 to $1 million in collective cash bonuses if the firm had at least $60 million cash in hand at the time of the company's effective reorganization date. Top management also had an option to acquire five percent of the company's new common stock at a 20 percent discount. On the effective date, Maxicare merged into its own subsidiary, HealthCare USA. HealthCare USA, as the surviving entity, was renamed Maxicare Health Plans. On July 16, 1990, the bankruptcy court approved Maxicare's reorganization plan.
At the time the bankruptcy court approved Maxicare's reorganization plan, company officials said it had about 305,000 enrollees in seven states--Illinois, Indiana, Wisconsin, California, North Carolina, South Carolina, and Louisiana. The disposition or closing of local HMO subsidiaries resulted in a reduction of Maxicare employees from a one-time high of 8,000 to about 600. Maxicare's annual sales also had declined in 1989, to $400 million from a one-time annual high of $1.84 billion. A vastly streamlined Maxicare also had cut its losses from $611.8 million at the end of 1988 to $22.3 million in the third quarter of 1989, primarily reflecting the expense of its reorganization. Ratican told Managed Care Report that he remained optimistic about the company's revamped future.
Growth in the Mid-1990s
Maxicare had approximately 370,000 members nationwide by May 1996--its growth was slower than expected due to increased competition in an ever-growing arena. An expected boost to membership came later that year due to an agreement reached by Maxicare California to become a health care partner with the Local Initiative Health Authority for Los Angeles County. The California Department of Health Services' effort was in line with its strategy to improve access to quality health care for Medi-Cal recipients by moving them into managed care.
A similar deal in North Carolina was announced a week later, which brought Maxicare's involvement with Medicaid programs to four states, including also Indiana and Wisconsin. Chairman and Chief Executive Officer Peter J. Ratican explained, "Our partnerships with state and local governments are helping solve the challenge of how to arrange for quality health care at a reasonable cost for Medi-Cal and Medicaid eligibles around the country."
A significant increase in operating revenues (18 percent) from the three months ended June 30, 1995, to the same period in 1996, resulted mainly from the 25 percent increase in Maxicare's membership. The doubling of membership--which occurred primarily in the company's California and Indiana Medicaid and Medicare lines of business--helped boost the numbers. Maxicare experienced a decline in net income (from $4.9 million to $500,000) between 1996 and 1997, although sales growth from year end 1996 to 1997 reflected a 17.9 percent increase.
Thus, Maxicare initiated a restructuring of management and began an evaluation of the company's operations and businesses. Focusing on those operations which had substantially generated membership growth and profits in recent years, Maxicare entertained plans which included possible dispositions and or acquisitions of already-owned or other health plans. The health plans in Illinois and the Carolinas suffered a loss from operations of over $4 million for the three months ended March 31, 1998, and slight increases in Indiana and California memberships did not compensate for the negative slide elsewhere. Higher drug prescription costs boosted health care expenses as the medical loss ratio increased to 94.2 percent for the first quarter of 1998.
1998 Shareholder Disagreement
Shareholder Paul R. Dupee launched a campaign in March 1998 to investigate the possibility of selling Maxicare by electing an expanded slate of directors. Dupee was quoted in The Boston Globe as saying, "On a stand-alone basis it doesn't make any sense. They need to be consolidated with somebody else." After several months of hostile disagreement, Maxicare announced a settlement it had reached with Dupee. The agreement included the election of Dupee, Robert M. Davies, and Elwood I. Kleaver, Jr. to serve as directors of the company. Dupee would additionally become a member of the Board of Directors' Executive Committee. Chairman Ratican explained the situation: "After extensive discussions with Mr. Dupee and his representatives, and several of the company's larger shareholders, as well as the new board members, our board concluded that all parties share the same collective goal of enhancing shareholder value. The board welcomes the new members to the board and believes the company and its shareholders will benefit from these additions."
A.M. Best's B++ rating of Maxicare in June 1998 cited "strong earnings and good enrollment growth" in 1997. Maxicare stock continued to struggle in August 1998, however, dipping as low as $4.25 a share, from a 52-week high of $20 a share. Even so, a membership of over 500,000 and the August 1998 cash sale of all of the stock of Maxicare Health Insurance Company in Wisconsin were both encouraging.
Principal Subsidiaries: Health America Corp. (California); Maxicare Health Plans of Southern California; Maxicare Life & Health Insurance Co. (California); Maxicare Northern California; Maxicare Pharmacies Inc. (California); Maxicare Health Plans-Midwest (Illinois); Maxicare Indiana Inc.; Maxicare Louisiana Inc.; Maxicare North Carolina Inc.; Maxicare Southeast Health Plan (South Carolina).
A.M. Best Company, "A.M. Best Affirms Maxicare Rating of B++," quoteserver.com, http://quoteserver.dogpile.com, June 15, 1998.
Andresky, Jill, "The Mess at Maxicare," Forbes, June 27, 1988.
Bailey, Steve, and Steven Syre, "Dupee in Fight for California HMO," The Boston Globe, April 10, 1998.
Cole, Patrick, and Jon Friedmann, "Even Heroic Measures May Not Save Maxicare," Business Week, March 27, 1989.
"Maxicare Poised to Reorganize," Managed Care Report, July 9, 1990.
Maxicare Corporate Web site, http://www.maxicare.com.
Smith, Scott, "Maxicare's New N.C. Chief Promises Changes at HMO," The Business Journal of Charlotte, October 20, 1997.
Source: International Directory of Company Histories, Vol. 25. St. James Press, 1999.