- The Washington Times - Wednesday, March 12, 2003

Magellan Health Services Inc. filed for Chapter 11 bankruptcy protection yesterday, and announced a restructuring plan to shed about $500 million in debt.
The Columbia, Md.-based company, one of the largest managed providers of mental-health care, said the majority of its creditors agreed to support a restructuring plan, which it expects to complete by the end of October.
Magellan, along with several U.S. health insurers, has struggled financially in the last year, as it was unable to raise rates enough to keep pace with costs. Analysts said Magellan was increasing prices between 4 percent and 6 percent last year, while costs rose between 6 percent and 8 percent.
"They got kind of out of step with pricing," said Tom Shinkle, a health care analyst with Imperial Capital LLC, a Beverly Hills, Calif., investment bank. "I think it caught everyone by surprise, including the company."
In its bankruptcy filing, Magellan reported $998.9 million in assets and $1.47 billion in debt, according to Bloomberg News. The company lost $729 million in the fiscal year ending Sept. 30 and first indicated bankruptcy was likely in a regulatory filing on Jan. 23.
As part of the restructuring, Magellan agreed to renew its contract with Aetna, to which it owes about $60 million. Magellan said it would pay Aetna $15 million after emerging from bankruptcy and deliver the remaining $45 million in the form of an interest-bearing note.
"We support Magellan's efforts to reduce its debt and strengthen its long-term financial position," said Mark Bertolini, Aetna's senior vice president of specialty products. "We have extended our relationship with Magellan, and believe that these efforts to regain momentum are important to our continued collaboration."
Shares of Magellan fell 1.6 cents to close at 4.4 cents per share on Nasdaq over-the-counter trading yesterday. It was delisted from the New York Stock Exchange in October. Shares of Aetna fell $1.73 cents to close at $41.22 on the New York Stock Exchange.
Magellan said the recovery plan would cancel current common stock, and give nearly all shares of the reorganized company to bondholders and other creditors. About 0.5 percent of shares would go to current shareholders, who will have the option to buy another 0.5 percent.
Magellan has contracts with about 2,300 customers, and serves about 68 million people. The company said it has enough cash on hand to operate normally while it restructures.
Some states, including Tennessee, began supervising Magellan-owned companies this year to ensure Magellan's financial problems did not affect patient care. Tennessee had originally tried to seize the assets of TennCare, Magellan's second-largest customer.
For the most part, Magellan has received high marks for customer service. The American Accreditation HealthCare Commission, a nonprofit group that establishes standards for health care providers, gave high marks in January to Magellan's service centers, which have programs serving patients with serious mental illnesses.

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