Maxicare Aims to Be in Shape Before Sign-Up : Pushes Plan in Hopes of Shedding Ch. 11 Mantle By January Enrollment

Maxicare Health Plans Inc., which is operating under Chapter 11 of the federal bankruptcy code, is attempting to push through a reorganization plan before January, when most employers will allow their workers to switch health insurance plans.

Analysts said the Los Angeles-based health maintenance organization has lost significant membership and is moving with unusual speed in producing a proposal for negotiating a final plan to be approved by the bankruptcy court. “This is remarkable progress,” said Lee Waltzer, an analyst with R. D. Smith & Co. in New York. He said Maxicare appears to be concerned about the marketing disadvantage of operating under Chapter 11 during open enrollment season.

Analysts see the proposal, which Maxicare earlier this week submitted to creditors for comment, as the company’s first marketing move for the fall. Maxicare acknowledged Friday that its membership has shrunk to about 440,000, from about 900,000 when it made the bankruptcy filing.

State Claims Dismissed

“Most of the losses have been in Illinois and California, which were two of our strongest plans. We are looking at marketing this fall to be very important,” a Maxicare spokesman said.

Maxicare got a boost Friday when the U.S. Bankruptcy Court in Santa Ana again dismissed state regulator claims that federal law prohibited Maxicare units in certain states from filing under Chapter 11 because they operated as insurance companies. The ruling was expected, given a June decision in which the court ruled that HMOs are eligible for bankruptcy relief because Congress did not specifically exclude them in writing the 1978 bankruptcy code. Friday’s ruling was on motions filed by Illinois, Indiana and Ohio, similar to the June motions filed by three other states.

Maxicare had feared that rulings favorable to the states would result in states taking control of the plans and liquidating them to pay creditor claims.

Creditors said Friday that they were encouraged that Maxicare has at least made a proposal. The official creditors committee is “pleased” that Maxicare has stated the terms for an economic settlement for satisfying the debts, said David A. Gill, counsel for providers and other creditors excluding bond holders and the banks. Gill wouldn’t comment on creditor reaction to specifics of the plan.

“I think it is a good starting point,” said Dr. Rafael A. Amaro, president of Hawthorne Community Medical Group, a medical provider owed substantial sums by Maxicare. Amaro said providers are particularly encouraged by Maxicare’s stated intent to give “favored treatment” to the claims of health-care providers.

Amaro said he believes that the providers will be cooperative in negotiating a final plan. “The providers I speak to would like to have Maxicare stabilized. I believe it doesn’t do anyone in the industry any good not to have Maxicare survive,” he added.

Chris Street, managing director of Seidler Amdec Securities’ Reorganized Securities Group, said Maxicare has shown some favorable trends since the bankruptcy filing. The group is a holder of some Maxicare bonds. Seidler Amdec’s most recent report on Maxicare pointed to considerable cash the company has been able to generate since the bankruptcy filing and a decline in its medical expense ratio (medical cost as a percent of revenue) to 85% vs. 92% in 1988.

Much of the improvement is because of a rate increase averaging 32% in 1989, the report said. The company is expected to boost rates at least 15% in 1990.

The Maxicare spokesman said the company had generated $55.6 million in unrestricted cash as June 30, up from $6.6 million in cash in March.