Magellan Health Services sails into rough financial waters

The behavioral health giant's ship is sinking, and physicians don't need to read stock tables to notice it.

By Mike Norbut, amednews staff. Oct. 28, 2002.

Magellan Health Services Inc. spent big money to become the nation's largest behavioral health insurer, but that growth spurt has come back to haunt the company.

Columbia, Md.-based Magellan -- which manages mental health benefits for such plans as Aetna and TennCare, the state of Tennessee's Medicaid plan -- is struggling under declining membership and a $1 billion debt load that had investors pushing its stock price so low, the company got kicked off the New York Stock Exchange. These days, 75 cents can buy you either a candy bar or more than 10 shares of Magellan stock.

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Magellan recently announced it wouldn't have the funds to be in compliance with bank agreements when it files financial results in January 2003. That would give lenders the right to demand accelerated debt payments, the company said. Some financial analysts say that could force Magellan to file for bankruptcy, although the company said it had no plans to do so.

Magellan's financial troubles are apparent to physicians. Some say they've noticed that in recent months Magellan is slower to reimburse and quicker to deny coverage. But even in its best days, Magellan had a reputation among many for being penurious.

Reimbursement "has historically been difficult, but it has worsened since [Magellan's] financial problems started," said Maria Ruiza Yee, MD, a psychiatrist in Wyomissing, Pa., outside Philadelphia, a market Magellan dominates.

"It's become ridiculous," said Dr. Yee, who is vice president of the Pennsylvania Psychiatric Society.

Magellan controls one-third of the behavioral health market.

On the other hand, at least in one state, Magellan is reacting to its troubles by trying to make up for any past sins against physicians.

"They're eager to demonstrate a renewed commitment to their provider base," said Philip Dvoskin, MD, a Glen Burnie, Md., psychiatrist and chair of the Maryland Psychiatric Society's managed care committee. In the past, Magellan showed "a significant disregard for the need of a provider panel, but now, it's significant that the panel not get frightened off" by Magellan's financial problems, he said.

For example, the society has even set up a mechanism, with Magellan's cooperation, that will enable psychiatrists to download a complaint form off the society's Web site and e-mail or fax it to Dr. Dvoskin, who in turn collects and forwards the forms to a Magellan representative. The complainant should get a response in three to 10 days, Dr. Dvoskin said.

Magellan's straits

From 1969 to 1995, Magellan was Charter Medical Corp., and it ran psychiatric hospitals. But the company decided to focus on managing care instead of providing it, so it bought a Florida company called Magellan and took its name, dumped the hospitals and borrowed money to buy the behavioral health competition.

While the deals helped Magellan grow to control one-third of the $4 billion behavioral health market, being big didn't guarantee staying strong. Part of the problem is that utilization costs are going up 6% to 8% per year while its member rolls are dropping -- the company reported 68.7 million insured lives as of June 30, down from 69.4 million in the same period last year. Magellan says it expects this year to lose about 2 million members alone from Aetna Inc., which has cut back its membership rolls in order to focus on more profitable markets.

While analysts suggest that Magellan may declare bankruptcy, in a prepared statement the company said its cash flow "continues to be positive," and even though it has hired a firm to help it reduce its debt, it has not yet revealed a future financial plan.

There is a $4 billion annual market for behavioral health services.

"The goal is to put into place a long-term solution," Magellan spokeswoman Erin Somers said. "We have such a range of alternatives, and it's so early, that I don't think it's appropriate to say what we're considering or not considering."

Considering Magellan's current financial status, insurance companies that contract with the insurer would be wise to have a backup plan in place for patient referral, said Paul Williams, DO, a family physician in Harrisburg, Pa.

Many primary care physicians who work with mental health patients do not deal with Magellan directly. Instead, they tell their patients to call their primary insurance company to receive the mental health care they need.

"Hypothetically, let's say they go into bankruptcy, and the patient gets a message when they call that says, 'No longer in business,' " said Dr. Williams, president of the Pennsylvania Academy of Family Physicians. "If they come back to us, we would probably be in the same quandary as they are. [Managed care companies] need to line up a secondary provider."

Magellan holds contracts with several managed care companies, including one with Aetna that expires at the end of 2003. Aetna spokesman David Carter said the company was looking at several behavioral health options for the future, but according to the data it tracks, it has not noticed a change in Magellan's service.

Carter said Aetna "always has contingency plans for how we service our members, but I wouldn't want that to reflect on our view of Magellan."

Dr. Yee, however, has a different view, and she has a suspicion of what might happen if Magellan declares bankruptcy.

"I won't get paid," she said. "It's as simple as that. I don't think I have any recourse."