Health Care Economics
Magellan’s Financial Crisis Causes Widespread Worry
Psychiatric News
Volume 37 Number 21 page 16-39

Recent deterioration in the financial stability of Magellan Health Services Inc., the country’s largest behavioral health care company, could raise serious issues for psychiatrists and their patients.

James Pyles, counsel of the American Psychoanalytic Association, speculated to Psychiatric News about the impact of further financial disintegration or a Magellan bankruptcy.

"The contractual relationship is between the insurer and the patient," he said, "not between Magellan and the patient. Therefore, the insurance company is responsible for providing the benefits stipulated in the insurance policy."

However, he warned, a looming "meltdown" of Magellan might encourage that company to deny claims inappropriately and to delay payment.

In addition, an acceleration of Magellan’s financial distress could lead to layoffs and the departure of qualified staff members, further exacerbating the difficulties of claims management.

An article in the October 14 Washington Post lends support to Pyles’s contention that insurance companies that had contracted with Magellan to provide mental health services would be responsible for providing benefits in the event of Magellan’s bankruptcy.

According to the article, regulatory officials in Maryland, Virginia, and the District of Columbia said that Magellan’s patients would be treated and providers paid even if the company’s problems worsen.

Steven B. Larsen, Maryland’s insurance commissioner, told the Post that the insurance companies that contract with Magellan would have the ultimate responsibility to make payments to providers and ensure continuity of care.

He said, "If Magellan got to the point where it couldn’t pay doctors’ bills, for example, the HMOs would be required to pay the physicians, and the HMOs would have to take whatever steps are necessary to ensure continuity of care."

Magellan is viewed as a third-party administrator for insurance companies. As such, it is not regulated by the agencies that have authority over the insurance business in the Washington metropolitan area.


Lawrence Lurie, M.D., chair of APA’s Managed Care Committee, told Psychiatric News that a Magellan spokesperson assured him that, in the event of a bankruptcy, paying providers would be of "highest priority" to the company.

"APA is verifying with state insurance commissioners and insurance companies that contract with Magellan that those companies would be responsible for paying legitimate claims if Magellan does not honor its commitment," he said.

Lurie added, "Psychiatrists would also have an obligation to their patients to help preserve the continuity of care if those patients become covered by another carrier."

Karen Sanders, director of APA’s Managed Care Help Line, encourages anyone with a payment problem to call the Help Line at (800) 343-4671.

"We’ve developed a good system for ensuring that complaints about Magellan are resolved quickly, and we advise members to stay current in terms of payments they are owed," she said.

In a letter dated October 11 to Lurie, Jon Book, M.D., Magellan’s chief medical officer, noted that "of claims paid by Magellan in August 2002, 98 percent were paid within 30 days, compared with 97 percent for claims paid in the same period in 2001."

Catherine May, M.D., president of the Washington Psychiatric Society (WPS), appointed a task force to monitor the situation and develop a plan to deal with future problems. Magellan officials had agreed to a meeting with the task force members, according to May.

Former WPS president Eliot Sorel, M.D., met with the federal Office of Personnel Management (OPM) to alert its staff to potential problems if Magellan declares bankruptcy. Many federal employees are insured by Blue Cross/Blue Shield or Aetna, which contract with Magellan for mental health services.

He told Psychiatric News that OPM officials were receptive to the idea of partnering with WPS and other relevant organizations to develop a contingency plan that would ensure continuity of care for patients.

Those officials also agreed that insurers that had contracted with Magellan would be held responsible for the delivery of mental health benefits specified in insurance contracts, if Magellan declares bankruptcy.


Magellan chronicled its own financial decline in a series of press releases.

On September 30 the company issued a press release stating that it believed that the company would not be able to comply with one or more of the financial agreements with bank lenders for the quarter and fiscal year ending that date.

In that case, the banks would have the right to accelerate debt maturity. If Magellan could not receive a waiver from that acceleration, "the company would not have the liquidity necessary to repay debt."

According to the press release, Magellan was continuing negotiations with Aetna, its largest customer, regarding renewal of its contract on January 1, 2004.

In a press release dated October 8, Magellan announced that it had been notified by the New York Stock Exchange that its stock price and market capitalization were not sufficient for continued listing. At the time of the announcement, Magellan had a capitalization of $5.3 million, well below the required $15 million for listing.

In October 2001 the stock had traded as high as $12.58, according to the Dow Jones Newswires. Immediately before being delisted, the stock was selling at $.28 a share. As of October 16, it was selling at $.03 a share.

The October 14 Washington Post article quoted a Standard and Poor’s analyst as saying that the current financing structure needs to be addressed because it is saddling the company with too much debt.

According to the Post, another analyst predicted that if Aetna does not renew its contract, Magellan would be forced to file for Chapter 11 bankruptcy.

According to Magellan’s Web site, the company serves more than 70 million members and is responsible for 32.5 percent of all behavioral health care and employee assistance program enrollees.

Related information is posted on Magellan’s Web site at www.magellanhealth.com/corporate/spotlight/index.html.

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