Magellan eliminates half its debt by filing for bankruptcy

By Susan Bowman
May 1, 2003



Recommendations cited for psychologists, other mental health providers

Magellan Health Services, the nation’s largest managed behavioral mental health company, eliminated half its $1 billion debt when it filed for Chapter 11 bankruptcy in March.

Magellan’s reorganization plan calls for holders of half of the company’s debt to trade it for nearly all the stock in the restructured company, which in effect reduces the firm’s debt from $1 billion to $500 million.

The company’s stock is virtually worthless, selling for less than a nickel a share on the over-the-counter market most days. Magellan was delisted last year when its stock prices fell on word that the firm would seek bankruptcy protection.

At the same time, Aetna, Inc., agreed to extend its contract with Magellan through 2005 to provide mental health services to its 13.7 million members. Magellan, which purchased Aetna’s mental health unit, owed the company $60 million. Aetna agreed to accept $15 million when Magellan emerges from bankruptcy later this year, with Magellan promising to pay the balance within two years.

In all, Magellan provides managed behavioral health care and employee assistance program services to 68 million Americans through more than 3,000 health plans, government agencies, unions and businesses.

Magellan said the services it provides will not be affected and that providers will continue to receive payment for their services.

The Columbia, MD.-based company, with 5,200 employees nationally, was originally an operator of mental hospitals and entered the managed behavioral health field in the late 1990s by buying three of the largest firms.

The purchase of the three companies, however, required a huge debt service. The demand for mental health and employee assistance services grew rapidly following the Sept. 11, 2001 terrorist attacks which added to Magellan’s financial woes.

The company was paying out more than $260 million a year with less than $2 billion in annual revenue. With Magellan’s cash flow at an estimated $140 million to $180 million a year, it is expected that Magellan can handle the $500 million debt it will still have when it emerges from bankruptcy.

While it appears Magellan will emerge a stronger, more financially stable company later this year, some uncertainty remains, and psychologists are being urged to be both cautious and alert in the months ahead in their dealings with Magellan.

Advice being given psychologists and other mental health care providers include:

  • File insurance claims paperwork without delay and demand prompt payment of all claims.
  • Review participation agreements with Magellan to determine whether they prohibit providers from seeking payments directly from patients, the patients’ employer, or the insurance company that contracts with Magellan, in the event Magellan is unable to pay.
  • Ascertain what type of Magellan benefit plan their patients are enrolled in since the company contacts with multiple insurance companies, such as Blue Cross and Blue Shield.
  • Reassess how much risk or increased financial exposure to incur through continued involvement with Magellan.
  • Check with state psychological associations to see how state insurance directors are planning to deal with any deterioration of Magellan’s financial situation.
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