Regulators in 3 Midwest States Seek Control of Maxicare Units

State regulators in the Midwest said Wednesday that they have formally moved to have Maxicare Health Plans Inc.’s operations in those states dismissed from the company’s Chapter 11 bankruptcy filing.

If the motion filed in U.S. Bankruptcy Court in Santa Ana is successful, Maxicare Health Plans of the Midwest Inc., which operates the company’s health maintenance organizations in Illinois, Indiana and Ohio, could be controlled by those states. The states could force a liquidation of the plans if they decide that is the best way to protect members and ensure payments of debts owed to medical-care providers.

Also Wednesday, Maxicare released a preliminary financial report showing that it lost $267.8 million in 1988. The company said the report reflects operating results only; Maxicare doesn’t yet know how it will treat the effects of the Chapter 11 proceedings. The company reported revenue of $1.67 billion for the year.

Maxicare also said it no longer intends to sell its California HMO, which analysts have said it should retain to rebuild the company as a profitable concern in the future.

Option to Switch

On yet another front, Maxicare was trying to stop employers from allowing Maxicare members to switch to other health-care plans. Some employers have decided to give their employees the option immediately to remain with a Maxicare plan or switch to another medical plan.

The U.S. Office of Personnel Management, which represents federal employees, recently sent a notice to employees in several states explaining Maxicare’s financial problems and saying that employees have the option to switch, said spokesman Dick McGowan. Xerox Corp. also has informed Maxicare members that they have the option of switching to the in-house Xerox Medical Plan.

“Some employees are anxious to move out of Maxicare. Others are not,” said Patricia Nazemetz, Xerox’s director of benefits.

Maxicare spokeswoman Tobi Nyberg said the company believes that the OPM is violating a federal court order obtained shortly after the March 16 bankruptcy filing. The company intends to seek a restraining order against OPM, she said, but not enough is known about the Xerox situation to take action.

The March 16 order bars doctors, hospitals and other health-care providers from refusing to treat Maxicare members solely because of the company’s past-due debts. Such orders are typical in Chapter 11 cases in which companies seek to prevent suppliers of essential goods and services from shutting them down.

Consulting Attorneys

Nyberg said Maxicare believes that the order also prevents employers from changing their normal group insurance enrollment periods to allow employees to leave Maxicare. Typically, employers have open enrollment periods once a year, usually in January, to allow employees to switch plans if they choose to do so. Some employers also hold special open enrollments to accommodate special circumstances. Both Xerox and OPM said their actions can’t be characterized as open enrollments.

Some employers have moved cautiously in advising employees on whether they can switch. But several are known to be consulting with attorneys on whether the court order applies to them.

The issue may end up in court, said Robert F. Atlas, a Washington health-care consultant who advises employers on group health plans. “There is nothing in employers’ contracts with HMOs that says they can’t allow employees to switch. There is nothing that says they have to guarantee a minimum number of members.”

The challenge from state regulators is a serious threat, Atlas said, adding that bankruptcy court control is Maxicare’s best chance for survival as a corporation. If state regulators are in control, the corporation’s survival will be their least concern, he said.

State control might be the best option for “the greater good,” Atlas said. “If the bankruptcy goes through and Maxicare is not able to recover, a lot of members will be left out in the cold. Doctors and hospitals will end up eating a lot of losses if that happens,” he said.

State regulators argue that the plans in Illinois, Ohio and Indiana are insurance companies, which are prohibited by federal bankruptcy law from filing under Chapter 11.

Last week, the three states agreed to delay pressing their case in court while Maxicare attempted to place the members in other plans. Arnold Dutcher, Illinois deputy insurance commissioner, said the motion was filed because Maxicare didn’t seem to be moving quickly enough to sell the plans. “We filed to get in line on what looks like is going to be a very crowded court docket regarding this case,” he said.

Not Trying to Sell

Only Illinois and Indiana officials actually filed the motion, but Ohio also would be governed by the ruling. Ohio Deputy Insurance Commissioner Neil Rector said the department didn’t formally join the motion because it believes that Maxicare is very close to a deal to sell the Ohio membership.

Nyberg said Maxicare isn’t actively trying to sell any of the Midwest plans because it wants to remain in the states. “There was no agreement. This was their idea,” she said. However, she said, Maxicare has been negotiating with Ohio officials and, as a “show of good faith,” agreed to consider bids for the Ohio plan that were solicited by Ohio officials. “We’re not ruling out the possibility that the plan will be sold. Some of the bids may make sense for us,” she said.

Dutcher said Maxicare Midwest, with a membership of about 250,000, lost $12.3 million in 1988. “All of it occurred in the first three quarters. The fourth quarter was a break-even quarter with the profits in Indiana and Illinois equal the losses in Ohio,” he said.

Maxicare’s California plan lost about $4.2 million in the first nine months of 1988, according to the latest available records from the State Department of Corporations. Nyberg said the company decided to keep the unit because the Chapter 11 filing had solved some cash flow problems.

In recent weeks, Maxicare has sold its Tucson, Ariz., plan and shut down the Phoenix operation. About 12,000 Phoenix members were transferred to 11 other HMOs, Nyberg said. Currently, the company has entered into agreements to sell its Seattle and Alabama units. Maxicare now has about 900,000 members nationwide.