It is beginning to look like Harvard Pilgrim Health Care Inc. might be issuing bonds after all.

Just one month after Massachusetts officials put the failing HMO into state receivership, a possible plan has surfaced that would have HPHC deferring some, or all, of its estimated $265 million hospital debt through a private placement of distressed subordinated notes. It has also been reported that the transaction could contain some sort of lease-backed feature similar to the structure of the company's failed $119 million offering earlier in the year.

Under such an arrangement, the securities would be sold directly to participating hospitals that would then collect interest payments from HPHC until the notes mature. Such a procedure would be followed even if the HMO remains in receivership since, like bankruptcy, such a condition only shields a debtor from the obligations it incurred prior to being put into receivership.

Of course, there is still a question as to whether or not Bay State hospitals will be willing to trade receivables for additional debt considering that the issuer has proven legendary for its accounting mishaps. Such a question is especially salient given that HPHC's total 1999 operating loss estimate was raised again last week, this time from $177 million to $197 million.

Despite such uncertainty, though, the bond offering might prove a more attractive solution to the hospitals' dilemmas than the two other proposed alternatives: total liquidation or selling HPHC off to a successful for-profit HMO. The former would cause a disruptive reduction in consumer health care options while the latter could lead to hospitals getting paid less than they might with the bond deal.

It is important to note, however, that no course of action has been decided on as of yet. Indeed, Massachusetts hospital executives have spent the past few weeks trying to come up with a creative solution that will be amenable to all involved parties. Massachusetts Attorney General Thomas Reilly has set a deadline of this Friday for said executives to submit a detailed list of solutions to fix the situation.

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