Much-heralded new leadership and a cash infusion for tailspinning Oxford Health Plans got mixed reviews from industry observers last week as the HMO's beleaguered shareholders looked for positive signs.
Healthsource founder and former Chief Executive Officer Norman Payson, M.D., will become the new CEO of the Norwalk, Conn.-based HMO company. Oxford also received a $350 million investment from Fort Worth-based Texas Pacific Group, and at deadline was reportedly in talks with investment banks for a $350 million loan.
Oxford also got a new board chairman, Fred Nazem, who had headed the board's executive committee. Onetime Chairman and CEO Stephen Wiggins, who resigned the top executive post last year, agreed to step down as chairman but will remain on the board.
While some analysts pointed to Payson's experience as a turnaround specialist, others saw some of the same problems in his background that now confront Oxford.
Indeed, Hooksett, N.H.-based Healthsource took nearly $13 million in charges during the third quarter of 1996 to bail out providers and was generally criticized for being too passive about costs and premium increases. After posting several quarters of disappointing earnings, Healthsource was purchased by Cigna Corp. last year for $1.7 billion.
Oxford attributed its own third- and fourth-quarter losses to computer troubles in its claims management, which hid major cash-flow problems, and to lower-than-expected earnings from its Medicare and Medicaid lines of business.
The fourth-quarter loss was double what Oxford anticipated -- $284.7 million, or $3.58 per share, on revenues of $1.1 billion. That loss sent the company's stock falling 7.5% the day of the announcement. Its stock has lost about 80% of its value since early 1997 (See chart).
"(Payson's) not the right guy to turn the company around, in that he's very promotional and top-line oriented," said Lori Price, senior healthcare analyst for Oppenheimer & Co., New York. She added that Payson's tenure at Healthsource wrought a key problem that Oxford is now battling: a gross failure to match premiums to cost trends.
Payson, 49, who pledged to invest $10 million of his own money in Oxford, was praised by analysts for his knowledge of the inner workings of HMO networks. Douglas Sherlock, an HMO analyst based in Gwynedd, Pa., said Payson is "an extremely capable deal man and very knowledgeable about the small-group market that has been central to Oxford's growth."
"He's a proven turnaround specialist...an ideal choice in terms of providing the glue for a company that is loyal to (its previous) management," said Thomas Hodapp, managing director of BancAmerica Robertson Stephens in San Francisco.
But some believe Payson may be too entrepreneurial and not concerned enough with the bottom line to stop Oxford's abrupt and stunning losses.
In addition to the funds from TPG, Oxford was supposed to get another $350 million from Kohlberg Kravis Roberts & Co., but the New York buyout giant bailed out at the last moment, apparently over concerns about Payson's hiring and other management issues, according to Payson and analysts. Payson said an additional $350 million would be raised from other sources.
However, TPG partner Jonathon Coslet said, "we believe we are investing in an excellent turnaround opportunity. Oxford's strong franchise will be the platform for growth and renewed profitability once a turnaround is effected."
TPG will receive four seats on the Oxford board.
While analysts predicted Payson will rein in costs by restricting Oxford's open networks and curbing some of its generous benefit packages, Payson declined to discuss specifics at a lengthy press conference last week.
Payson, who will act as a consultant to Oxford for the next 60 to 90 days, until the financing deal with TPG closes, would say only that he will immediately try to gauge future losses.
For 1997, Oxford lost $291.3 million, or $3.70 per share, on revenues of $4.2 billion. It earned $99.6 million in 1996, or $1.34 per share, on revenues of $3.1 billion.
"We're thinking in terms of finding the bottom of the hole, and we think we have a very good handle at this point of time," Payson told reporters at the press conference. While Oxford is expected to record more near-term losses, he noted that "it was impossible to project them right now."
Oxford's interest in cutting losses was substantiated by its withdrawal last week from the Connecticut Medicaid program.
At the press conference, Payson also deferred questions about how he would fix the computer problems that slowed the processing of patient information, delayed payments to physicians and contributed to the recent staggering losses, noting that it was too early to formulate a response.
Hodapp observed that Payson had a generally good track record with Healthsource's management information systems department. He described Kevin Hickey's recent appointment as executive vice president in charge of operations as a turn in the right direction (Nov. 10, 1997, p. 4).
But the question that most concerned analysts is how the financing package with TPG would affect Oxford's already battered stock. The deal calls for TPG to receive dividend-paying preferred shares, which may convert to 22.5 million common shares at about $2 below what the trading price was before the deal was announced. That raises concerns about dilution.
"(TPG gets) an attractive dividend payment and prior claim in the case of liquidation. It's dilutive for both those reasons, very protective of TPG and not necessarily in the best interest of the shareholders," Price said. "It does provide capital Oxford desperately needed, but it came at a very rich price, even a richer one than I imagined."