California Maxicare Unit Must Halt Loans to Parent

The California Department of Corporations has ordered the profitable California subsidiary of ailing Maxicare Health Plans to stop lending money to its parent, a practice that has swelled the unit’s liabilities beyond its assets in violation of state law.

In addition, Maxicare must develop a plan to improve the California subsidiary’s finances so that assets exceed its liabilities within six months, according to the cease-and-desist order issued Tuesday.

Los Angeles-based Maxicare, the nation’s largest publicly traded health maintenance organization, has been suffering severe financial problems because of an expansion that went sour when the entire industry was beset by soaring medical costs and increased competition. The company is now selling operations in an attempt to return to a profitable core business.

Most Profitable Plan

Maxicare said in a statement Wednesday that it will cooperate with the agency’s order, which “will not cause any reduction in services or benefits to the members of the California plan.”

“It will have no practical impact on operations,” a Maxicare spokesman said.

The California subsidiary, which is Maxicare’s most profitable plan, was acting as a clearinghouse for its parent, receiving revenues from subsidiaries in other states and paying their expenses, said Richard L. Camilli, assistant commissioner of the Department of Corporations. Maxicare California was also making loans to its parent, he said.

Such unsecured loans cannot be carried on the books of Maxicare California as assets and therefore have caused the liabilities of the subsidiary to exceed its assets. California law requires health plans to maintain certain minimum amounts of “tangible net equity,” or an excess of assets over liabilities.

As of June 30, the 415,000-member California plan had a tangible net equity shortfall of $172.4 million, up from $120.4 million on March 31. For the quarter ended June 30, Maxicare California recorded income of $7.5 million while the parent company posted a net loss of $59.5 million.

“Maxicare’s continue use of its funds to finance the losing operations of affiliated entities, including (Maxicare Health Plans), cannot be considered, in any way, as an acceptable and/or prudent investment as required” by state law, the order stated.

Said Camilli: “Hopefully this will solidify the situation by making it clear that California has moved to protect the enrollees and therefore the employers. . . . We know they (Maxicare) have been working hard and they’ve worked with us, so this is not an antagonistic thing.”

Task Forces at Work

The order does not forbid the transfer of funds between the California unit and Maxicare’s health plans in 19 other states, Camilli said, because “we’re also concerned about crumpling up the plans in other states.”

The Maxicare spokesman said the company has begun overhauling its accounting system and has developed five operating task forces within the company to tackle such problems as improving cash flow.

Maxicare noted in its statement that the Department of Corporations’ accounting regulations “were designed for intrastate HMOs, and this is one of the first times the DOC has been faced with complex procedures for multistate HMOs, such as Maxicare.”