Judge OKs FHP’s Buy-Out Plan, Thwarting Maxicare

Over the state attorney general’s protests, a Los Angeles Superior Court judge on Friday let officials of an Orange County nonprofit health maintenance organization proceed to buy their HMO and convert it into a for-profit concern even though rival Maxicare Health Plans offered to pay millions more.

Judge Eli Chernow’s ruling came after Hawthorne-based Maxicare filed a lawsuit last month to force nonprofit FHP Inc. of Fountain Valley to accept its $50-million cash offer instead of a $36-million offer from FHP founder Dr. Robert Gumbiner and 17 other executives.

At stake in the case was the ultimate ownership and value of a nonprofit HMO that has enjoyed tax breaks and government support since its creation 24 years ago.

Maxicare’s hopes were buoyed two weeks ago when a judge issued a temporary restraining order delaying Gumbiner’s attempt to make FHP a for-profit concern.

Although the state Department of Corporations approved the purchase by the FHP executives in September, the state attorney general went into court Friday to press Maxicare’s claim by seeking a preliminary injunction to prohibit the FHP executives from consummating their $36-million deal. That $36-million offer would pay $7.2 million in cash, with the remainder disbursed over a 10-year period.

But Judge Chernow, siding with the Department of Corporations and FHP, said: “An HMO conversion, under the law established by the Legislature, doesn’t require sale to the highest bidder.”

Maxicare, which converted to for-profit status four years ago, has 650,000 consumers enrolled in its health plans in 11 states. The addition of FHP, with its 220,000 members in Southern California, Utah and Guam, would have significantly increased Maxicare’s market share in two of its principal markets--Southern California and Salt Lake City.

FHP still has some hurdles to overcome, however. Its Department of Corporations approval to convert expired on Oct. 7. And Gloria M. Richards-Johnson, corporations counsel for the department, said Friday that FHP will have to resubmit an application for conversion.

The department “will be looking for a new valuation . . . of (FHP’s) fair market value,” Richards-Johnson said, explaining that FHP founder Gumbiner and his colleagues could end up paying more than the $36 million that was approved last month.

William S. Abbey, a deputy attorney general, said the state has not decided whether to appeal the decision.

The controversial case was closely watched by experts in the $400-billion-a-year health-care industry because it could affect plans by many of the nation’s 258 nonprofit HMOs to convert to for-profit status.

Said FHP spokesman Stuart Byer: “We are very happy about the decision. We looked at this as a ‘David and Goliath’ story. Here we had a very large HMO (Maxicare), which had converted to for-profit for a very negligible amount of money, trying to stifle competition by bidding up the buy-out.”

73 Conversions This Year

So far this year, 73 nonprofit HMOs have converted to profit-making concerns, according to the Department of Health and Human Services’ Office of Health Maintenance Organizations. However, most conversions have involved purchases by third parties, experts say, not by the directors or founders of the nonprofit HMO.

Nevertheless, many experts believe that Friday’s ruling will preserve low health-care costs for consumers by maintaining competition in the HMO industry. That’s because, they say, large investor-owned HMO chains won’t simply be able to gobble up their nonprofit competition through bidding wars.

Since federal funds to establish and maintain nonprofit HMOs ran dry 18 months ago, all but the strongest nonprofit HMOs have become acquisition targets by their for-profit brethren, since it is cheaper to buy an existing HMO rather than build one from scratch.

“Other states look to California as to (legal) precedent, so this case is going to preserve a certain process under which HMOs are converted,” said Joanne B. Stern, a law professor at the Whittier College School of Law, who writes about antitrust issues in the health-care field.

“It would have been a disaster if it had turned out the other way. There would have been a pubic bidding war for HMOs in every state.”