JESSICA TOLEDANO Staff Reporter Foundation Health Systems Inc. had been in the midst of major changes for several months, but it wasn’t until two weeks ago that it really caught some attention. That’s when the struggling Woodland Hills-based company unexpectedly announced the resignation of its often combative chairman and chief executive, Dr. Malik Hasan. Hasan was well known in the industry for his cost-cutting demands on doctors and had several major run-ins with state and federal regulators. He was also heavily criticized as a symbol of greed in the industry, pulling down personal compensation of more than $18 million last year, including salary and options. That made Hasan the third highest-paid public company executive in Los Angeles County last year. “We are being innovative and we are helping to solve some difficult and knotty problems. If we are successful, then I think we deserve not only this, but more,” Hasan was once quoted as saying. Trouble is, Foundation had not been successful as of late certainly not on Wall Street. Since May, its stock has fallen from $33 to about $17, due primarily to soaring costs and over-diversification. Critics said the board got restless and pushed Hasan, 60, into early retirement. But the board denied those reports, saying it was Hasan’s decision. Jay Gellert, the company’s new chief executive who also retains his previous title of president, doesn’t blame Hasan for the company’s problems, and considers him a personal friend. “To some degree, Dr. Hasan got a bum rap as an agent of change,” Gellert said last week. “I think some of his quotes were taken out of context and masked what he has done in his life.” Nonetheless, Gellert is setting his own course. “One of my goals is to do whatever is necessary to turn things around,” said Gellert. “We have to focus on the business that makes a difference.” Some of the changes are already underway, with the company’s pending sale of its workers’ compensation business to Superior National Insurance Group Inc. proceeding smoothly and expected to close by the end of October. The other part of the turnaround involves a scaling down of Medicare operations. In California, the company will discontinue offering Medicare benefits in 10 of the 30 counties it now services. Foundation officials said they first spotted an upturn in Medicare HMO costs earlier this year and filed requests in May with the Health Care Financing Administration that would allow the company, when warranted, to significantly raise premiums and lower benefits beginning next year. In addition, operations will be scaled back in places like Texas, Louisiana and Utah, where the company has not been performing well. The idea is to focus on the company’s operations in more profitable places, like California and Arizona. “We will move away from being in a hodgepodge of industries and focus on managed care,” said Gellert. “We will move away from workers’ compensation and from operating hospitals. We want to focus our energy on one area.” Analysts are generally encouraged. “I think it will speed up the process by focusing the company’s resources in a smaller number of markets,” said Edward Keaney, managing director of Volpe Brown Whelan & Co. “They made a decision that if they can’t make a return then they are not going to deal with it.” Joe France, an analyst with Credit Swiss First Boston, also likes the plan. “They got into too many markets,” he said. “This plan is going to help the company turn it around.” Second-quarter results hint that a turnaround may be at hand. Operating profits were strong, though the bottom line suffered from a non-recurring charge of $50 million for ties to the troubled FPA Medical Management Inc. Even with that charge, the company posted second-quarter net income of $956,000 (1 cent a share) compared with a net loss of $200 million ($1.60) for the like period a year ago. Keaney is projecting healthy earnings growth for 1998 and 1999, assuming the company can sell its non-core assets promptly. He projects 1998 net income of $156 million ($1.28 per share) and 1999 net income of $277 million ($2.25 a share). Health care consultants say the change in leadership has been a long time coming. “It came as no surprise to anyone when Jay took over,” said Steve Valentine, a health care consultant for the Camden Group in El Segundo. “He has the industry support and is very well respected. Plus, he has been running the California operations for awhile.” Prior to becoming chief executive, Gellert was Foundation’s president and chief operating officer and was responsible for operations in 16 states. Previously, Gellert had been president of Health Systems International Inc., which merged with Health Net in 1997 to form Foundation Health. Hasan plans to remain as non-executive board chairman of Foundation until sometime between January and May 1999, at which time a new chairman will chosen.