Just weeks after gobbling up the nation's third-largest investor-owned operator of health maintenance organizations, Maxicare Health Plans on Monday agreed to pay $400 million to acquire No. 2--financially troubled HealthAmerica Corp.
The deal would catapult Los Angeles-based Maxicare to the top ranks of billion-dollar health-care firms with an estimated 2 million members and projected revenue of $1.6 billion in 1986 from operations in 32 states.
Although it would still be dwarfed by Kaiser Permanente Health Care Program, a nonprofit HMO that in 1985 had $4.8 billion in revenue and 4.8 million members, Maxicare would become the undisputed sales and enrollment leader of the fledgling for-profit HMO industry, which is serving a growing share of the 21 million people now enrolled in HMOs.
"It's definitely a bold step," said Larry Selwitz, a health-care analyst at Bateman Eichler, Hill Richards in Los Angeles. "It's almost doubling the size of the company. From now on, I think you'll have to look at the industry as Maxicare--and then everybody else."
However, Maxicare's purchase would also saddle it with a company that on Monday reported a second-quarter loss of $962,000. HealthAmerica said its loss stemmed primarily from writeoffs of management contracts. But several analysts said that Maxicare will have its hands full improving the bottom line at Health-America over the long term.
"There are pitfalls when you buy a company like HealthAmerica," said Joel M. Ray, a vice president at the Nashville, Tenn., investment house J. C. Bradford. HealthAmerica has "not been able to control utilization" of its health-care services by patients.
"The time involved in straightening out the situation is going to entail a great deal of aggravation."
Added Don Duffy, a vice president at Kaiser: "Even though they are a larger company, this won't necessarily strengthen their position in local markets" where market share is the crucial factor in revenues and profitability.
In trading on the over-the-counter market Monday, Maxicare closed at $19.37 1/2, down $3.50.
HealthAmerica, which operates HMOs in 18 states, closed at $15, up $4.50, in trading on the New York Stock Exchange.
In recent months, Maxicare has been among the most aggressive of the nation's HMOs--health-care insurance plans that offer to reduce medical costs by charging patients a prepaid monthly fee and putting doctors and hospitals on a budgets.
Last month, the company received approval to begin operation in the densely populated New York market. Then, on July 7, after more than a year of intermittent merger talks, Maxicare reached agreement to acquire HealthCare USA, the nation's No. 3 for-profit HMO, for about $67 million in cash.
Under the terms of its latest agreement, Maxicare would pay $16 cash for each share of Health-America plus the right to acquire a share of Maxicare common stock at 125% of its value at the closing of the transaction.
Maxicare President Fred W. Wasserman, whose company has now depleted the $300-million fund of cash and securities it had on hand to make acquisitions and fund growth, indicated Monday that Maxicare is now ready to pause and spend time integrating its new components into the 14-year-old HMO.
"We have plenty to do now, our work is cut out for us," Wasserman said. "The combined company will be able to serve more markets than any other HMO in the nation, with the immediate capability to service national employers in 24 of the 30 largest markets in the U.S."
One of the chief weapons that Wasserman said his company will use to control utilization and improve efficiency is Maxicare's vaunted $15-million computer system.
With 1,800 video display terminals that can instantly supply Maxicare executives with membership, cost and utilization data, the computer system has been a key element in Maxicare's financial success story.
HealthAmerica, for example, was just beginning to outfit offices with a new computer system, said Wasserman.
HMOs: GROWTH AND MERGERS
By the end of 1985, membership in health maintenance organizations grew to an estimated 21 million members in 480 HMOs. HMOs provide prepaid health insurance.
The largest HMO operator is Kaiser Permanente, a nonprofit HMO with headquarters in Oakland. It has about 4.8 million members nationwide.
About 50% of HMO plans now operate for profit, and some HMO companies are publicly traded. The largest is Maxicare Health Plans Inc. of Los Angeles, which announced Monday that it has agreed to acquire HealthAmerica Corp. of Nashville, Tenn., for $400 million. Early this month, it also agreed to buy HealthCare USA of Orange for $67 million.
The purchases would make Maxicare the second-largest HMO in the nation and by far the largest investor-owned HMO company. Here is how the largest HMO public companies ranked before and after the Maxicare purchases.
BEFORE RECENT MAXICARE ACQUISITIONS
Company 1985 Revenue Members 1. Maxicare Health Plans Inc. $529 million 690,000 2. HealthAmerica Corp. $458 million 905,300 3. U.S. Healthcare Inc. $351 million 542,000* 4. Healthcare USA $183 million 275,000 5. United HealthCare Corp. $100 million 922,400
AFTER RECENT MAXICARE ACQUISITIONS
Company Revenue Members 1. Maxicare Health Plans Inc. $1.17 billion 870,300 2. U.S. Healthcare Inc. $351 million 542,000* 3. United HealthCare Corp. $100 million 922,000
Source: Standard & Poor's Corp.
*U.S. Healthcare also claims an additional 460,000 members through HealthWin, a joint venture formed with Lincoln National Corp. in December, 1985.