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Foundation, in Chapter 11, to Sell HMO

April 12, 2006|Daniel Yi | Time Staff Writer

A nonprofit health plan that has served the poor and elderly of Southern California for more than three decades will be sold to rescue its parent foundation from bankruptcy.

Watts Health Foundation Inc. has decided to sell its UHP Healthcare HMO for $30 million to a for-profit managed health company, foundation officials said Tuesday. The plan's 80,000 members would keep their coverage and should see little change, they said.

Inglewood-based Watts Health, which has faced many financial challenges in its 33-year history, will get out of the HMO business and focus on charitable work, said Johnny Darnell Griggs, chairman of the foundation's board of directors.

"The foundation will survive and will continue to do our work, promoting our community's health" through educational programs and other projects, Griggs said.

The board voted Monday afternoon to sell its HMO business, which provides medical and dental plans, to help it emerge from bankruptcy protection, which the foundation sought last May. The buyer is Care 1st Health Plan, an Alhambra-based HMO.

Most Watts Health members obtain coverage through Medi-Cal, the state-run health plan for low-income residents, and Medicare, the federal program for the elderly. Care 1st serves patients exclusively through contracts with Medi-Cal.

The deal must still win approval from state regulators and the U.S. Bankruptcy Court.

Foundation officials and creditors said Tuesday that the sale of the health plan was the most viable option.

Declining membership and rising costs hurt Watts Health, Griggs said. In the year before it filed for bankruptcy protection, the HMO's membership dropped from 122,152 to 102,625, according to state records. It has been stable at about 80,000 members since.

State regulators and the foundation's creditors, including 20 hospitals in Los Angeles, Orange and San Bernardino counties, had expressed concern about Watts Health's management and ability to survive its latest financial crisis. They struck a hopeful note Monday.

"Any management issues that existed won't be relevant if the sale goes through," said Richard Diamond, an attorney representing the creditors who, he said, welcomed the move.

The purchase of Watts Health's HMO business will allow Care 1st, founded in 1996, to grow and break into Medicare and dental plans, said Walter Gray, the company's vice president of business development.

Under the deal, Care 1st would pay $30 million for Watts Health's HMO contracts with members and providers and donate $500,000 to the foundation's charitable efforts.

The company also hopes to hire many of Watts Health's 160 HMO employees but there will be some layoffs, Gray said.

He said that the companies' network of providers overlapped by more than 90% and that Care 1st would seek contracts with the remaining 10% to allow for a seamless transition.

State regulators said they would reserve judgment until they fully reviewed the proposal, which could take months to be finalized. But "we are pleased that [the buyers] have a presence in Los Angeles County and we see that as a positive sign," said Lynn Randolph, a spokeswoman for the California Department of Managed Health Care.

Gary Klausner, Watts Health's attorney, said the sale and the foundation's existing assets, including cash reserves, would allow it to pay creditors.

He estimated total debt at about $40 million. That number could change before the deal is done, but "the bottom line [is that] all liabilities will be taken care of," he said.

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