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FHP to Spin Off Medical Group by End of Year

Health care: Move is part of restructuring by the Fountain Valley company. Stock rises in reaction to announcement.


FOUNTAIN VALLEY — FHP International Corp., the Fountain Valley-based health maintenance company, said Wednesday it plans to spin off the medical group that has cared for its members for 35 years.

FHP plans to hand ownership of Talbert Medical Management Corp. to FHP shareholders by year's end. It would be the last step in a major restructuring designed to convert FHP from a health maintenance company that offers its own health services to one that retains outside physicians, hospitals and other providers.

Jack Massimino, Talbert's president and chief executive, says that once the new company is independent, it will have a better chance of building its business beyond the limited market--FHP plan members--that it has traditionally served.

Talbert, which manages medical and dental groups in Southern California, Arizona, Utah, New Mexico and Nevada, lost $55 million last year and has been scrambling to hold onto business since FHP announced its new strategy last summer.

The number of health plan members served by Talbert's various professional groups dropped by 10,000, to 350,000, Massimino said. The unit, which had revenue of about $460 million last year, has so far attracted about $10 million to $12 million in business from outside FHP. Although the amount is modest, Massimino said he's pleased.

"How many [health plans] would want to sign up with us while we're still part of FHP? They don't want to help a competitor," he said.

Investors evidently welcomed the news Wednesday, as FHP's stock rose $2.125 per share, or 9.6%, to close at $24.125 in heavy trading on the Nasdaq market.

Assuming the deal proceeds, Talbert would join numerous medical management companies that have gone public in recent years.

Analysts said many doctors, struggling for professional survival in the era of managed care, have formed sizable companies so they can better compete for contracts with big health plans.

Talbert would become one of the larger publicly held medical management companies, says Brett Manderfeld, an analyst at Piper Jaffray.

Officials said that while terms haven't been worked out yet, FHP stockholders individually would wind up with the same proportion of stock in Talbert that they hold in FHP. Shareholders will be asked to approve the deal at FHP's annual meeting in November.

The transaction, intended to be tax-free, also must be approved by the Internal Revenue Service.

Talbert traces its roots to the 1960s, when Robert Gumbiner, FHP's founder and former chairman, built the company on a philosophy of giving care to members through the HMO's own doctors, hospitals and other service providers.

Massimino said the medical group, which pioneered vision and dental programs as well as managed care programs for people on Medicare and MediCal, accounted for much of the company's growth over the years.

Last summer, FHP did an about-face philosophically. The company, straining to improve profits and boost enrollment, moved to sell its hospitals in Fountain Valley and Salt Lake City and divest itself of its medical group. Gumbiner was ousted as chairman, then resigned from the company's board.

In the last year, Talbert has closed one clinic in Irvine, another in Costa Mesa and two in Los Angeles, reducing its five-state total to 54, Massimino said.

In Orange County, it now operates clinics in Anaheim, Santa Ana, Tustin, Fountain Valley, Huntington Beach and Laguna Hills.

Massimino predicted that Talbert will nearly break even this year.

"Next year, we should start making money as we start bringing in other" business, he said.

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