HMO Enters Receivership

A proposed $118.9 million revenue bond deal that many hoped would resuscitate Harvard Pilgrim Health Care Inc. (HPHC) was taken off the table late last Tuesday night when Massachusetts officials took the company into state receivership.

The move comes less than one week before the already-priced transaction was set to close.

At the center of this debacle is a internal accounting discovery that HPHC's 1999 losses could be as much as $43 million more than the $134 million loss figure presented to investors in the initial bond offering prospectus.

According to a source familiar with the situation, the egregious error was uncovered after Salomon Smith Barney pressured the state's largest HMO to finalize its disclosure documents in order that the final papers could be printed.

Alan Raymond, spokesman for Harvard Pilgrim, said that the discrepancy was primarily caused by the company's reliance on dual financial accounting systems rather than on a consolidated strategy.

"We were running one system for general ledger and one for general finance and it caused the underestimation's," Raymond said.

Harvard Pilgrim apprised state regulators of its situation last Monday morning and Massachusetts Supreme Court Justice Margaret Marshall subsequently put the HMO under the direction of Insurance Commissioner Linda Ruthardt.

This is not the first time that HPHC has been wrong when it comes to reporting its financial shortfalls. Following a reported $54 million loss in 1998, the company surprised Standard & Poor's analysts last October when it revealed a projected $100 million loss for 1999. That action prompted a credit rating downgrade to single-B and gained HPHC a spot on the agency's negative credit watch list.

Then, Harvard Pilgrim came out with the $134 million figure familiar to investors who had analyzed the bond offering.

According to S&P analyst Jack Reichman, all of this confusion would probably earn the company a triple-C-minus rating if HPHC hadn't been placed into receivership and been automatically accorded an R rating.

"This whole thing reflects the problems the company has had all along with poor information systems... and this despite the fact that they said they had it under control," Reichman said.

However, Janice Hayes-Cha, deputy director of the independent state agency that planned to act as conduit issuer for the bonds, said, "We have absolutely no reason to doubt that Harvard Pilgrim has been completely forthright in terms of immediately revealing their information."

The offering was officially issued by the Massachusetts Health and Educational Facilities Authority (HEFA), a public authority that provides access to the capital markets at low costs to health, educational and cultural institutions.The Insurance Commissioner's office did not return calls requesting comment on this issue.