MEDICAL CARE: THE SOUL OF AN HMO

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Christy petitioned her medical group, Rancho Canyon, for a different oncologist. By now the deMeurerses had decided to get the treatment any way they could. They made plans to begin raising money through appeals to friends and the public. "As grateful as we were," Alan says, "it was absolutely humiliating to have to ask for it."

Roger Greaves, Health Net's chief executive, was fighting a battle of his own against what he calls the "cancer" of a tactical lawsuit. His company had drawn the attention of Dr. Malik M. Hasan, founder and chief executive officer of QualMed, a Pueblo, Colorado, managed-care company that owned an HMO that competed against Health Net in Northern California. To best grasp Hasan's delight in bold business maneuvers, one need only know that as a young medical student in Pakistan in the late 1950s he made roughly $10 million selling land along the anticipated rights of way of new highways revealed to him by a patient who happened to be a public-works surveyor. Dr. Hasan, a neurologist, says he was once "rabidly anti-managed care." He built his first HMO to counter a health plan that moved into Pueblo and sapped revenue from the city's specialists. But suddenly he saw opportunity in the new medicine. Over the next few years he created a robust managed-care empire by acquiring ailing health plans--one company paid him $2.5 million to take a plan off its hands--and, through tightfisted management, quickly turning them into cash machines.

Dr. Hasan offered to acquire Health Net, but Greaves wasn't interested. He was about to convert Health Net into a for-profit company, a process that under California law required Health Net to establish an independent, nonprofit foundation and fund it with an amount equal to the company's fair market value--a way of paying back the state for all the taxes the company had avoided as a nonprofit. Conversion would pave the way for going public. In a tactical maneuver, Dr. Hasan filed a lawsuit to block the conversion, charging that Greaves had undervalued the company's net worth and cheated the people of California. After all, Dr. Hasan himself was willing to bid far more.

Dr. Hasan, in his Pueblo office--a cavern of polished wood, purple curtains and gleaming chandeliers--concedes that his primary motivation was to force Greaves into a merger, but second, if Greaves still refused, to force Health Net to pay far more into its shadow foundation and thereby reduce the capital it could deploy against QualMed's own California operations. As long as Dr. Hasan pressed the lawsuit, Greaves knew, Health Net had no hope of going public. "It was devastating to us," Greaves says. "My name was in the paper every day as a bad guy, a villain."

Figuring he at least should hear Dr. Hasan's pitch, Greaves met him in April 1993. Health Net was thriving. The year before, Greaves had made a base salary of $658,713 and a bonus of $815,000. Additional pay, including nearly $300,000 from a long-term incentive plan, boosted his total compensation to $1.9 million.

Yet Greaves began to like Hasan's plan. For one thing, it would allow Health Net to go public instantly, using the already public QualMed as a vehicle. The merger would also create an eight-state network and give both companies an edge in the rush toward consolidation, a fundamental imperative of the new medicine.