Maxicare Will Close Big HMO in Orange, Laying Off 500 : Troubled Health-Care Firm Ending Service to 55,000 Members in an Effort to Reduce Losses

Maxicare Health Plans Inc. said Tuesday that it is closing Family Health Services Inc., its 55,000-member health maintenance organization based in Orange, effective at the end of the month.

FHS, which was acquired by Maxicare in 1986 when it bought HealthCare USA, operates 15 medical clinics under the FHS and General Med names in Los Angeles, Riverside, San Bernardino, Orange and San Diego counties. Maxicare said it is notifying members, employers and health-care providers of the planned closing so they can make alternative arrangements.

The greatest impact of the closing will be in Orange County, where seven clinics operate under the General Med name. Of the 500 FHS employees to be laid off with the closing, about 300 work in Orange County, the company said.

Los Angeles-based Maxicare, which is in the midst of a financial restructuring that may be critical to its survival, said the closure of FHS is part of that broad program. The restructuring included selling unprofitable plans. However, the company said it is dismantling FHS because it could not sell the unit, despite nine months of intense effort.

“We talked to a lot of people, but the deals were never consummated,” said Tobi Nyberg, vice president for corporate communications. FHS has some assets, including buildings and medical equipment, that can be sold, but the Maxicare expects the net effect of the closure to be a loss, Nyberg said.

In most cases, Maxicare doesn’t provide medical care directly but contracts with independent health-care providers for services. Since FHS is a self-contained unit providing services directly, its members won’t automatically be covered by other Maxicare plans. Those members will have to enroll in other medical plans offered by their employers.

Maxicare said it is encouraging employers to hold special open enrollments so that FHS members will have access to alternative services immediately after March 31 when FHS’ clinics stop seeing patients.

A handful of FHS employees will remain for a few months to handle administrative tasks, the company said.

“We were concerned that Family Health Services’ financial condition could affect its ability to deliver quality health care for its members,” said Harley Blankenship, Maxicare’s executive vice president and chief operating officer. The closure will also help Maxicare meet its goal “to cut debt and losses so we can pay provider claims on a timely basis,” he added.

The company, which has suffered huge losses over the past two years, has said it must improve its payments schedule for contractors in order to preserve crucial relationships.

In a separate announcement Tuesday, Maxicare said it changed financial advisers for the recapitalization plan. The company said it “concluded its agreement” with Goldman, Sachs & Co., the New York investment banking firm hired last fall to help devise the plan, and instead hired Oppenheimer & Co. for advice.

Maxicare’s board authorized New York-based Oppenheimer to “immediately review strategic alternatives, including financing alternatives and additional asset sales,” the company said in a statement.

Blankenship wouldn’t specify the reasons for changing advisers but said Goldman Sachs’ departure was by “mutual agreement.” Goldman Sachs declined to comment.

Larry Selwitz, an analyst with Cruttenden & Co., a Newport Beach investment banking firm, said the change in advisers was a surprise. “I don’t consider this kind of a deal a great sign. This is especially disturbing when you are talking about a situation where doing something expedient is really critical. This restructuring should have gone ahead before now.”

Analysts expect the recapitalization to involve converting its debt into equity. “The question is whether there is going to be a long haggling over how much equity for debt,” Selwitz said. He said he was surprised that the company hasn’t made an attempt to communicate with its senior creditors and bondholders.

“To get this thing off and running, the company has to take the first step and go to the bondholders. This is a very critical step to the restructuring,” he said.

Company officials said in December that they expected to announce a plan in January.

However, Blankenship said Tuesday that the recapitalization plan is on schedule and no further delays are expected as a result of changing advisers. “I would not be surprised if we may be in a position to make an announcement next week,” although he said the company hasn’t yet approached bondholders.

Maxicare needs to recapitalize because it can’t meet interest payments due its bondholders and a group of banks holding about $150 million in debt. The banks have given Maxicare some “breathing room,” Blankenship said, by agreeing to a 120-day standstill agreement that allowed Maxicare to use funds to pay providers. When the agreement expires on April 1, he said, “we expect continuing our obligations to the banks.”