TRENTON, N.J. -- New Jersey regulators will go to court next week seeking to take control of one of the state's largest health maintenance organizations and place it in rehabilitation.

That action follows state supervision of Health Insurance Plan of New Jersey, after the HMO's financial condition deteriorated. At the end of June, the not-for-profit HMO reported a deficit of $9.5 million, an amount that had risen to more than $20 million at the end of August.

"Based on what we have learned, we have determined that the next appropriate step to protect members and health care providers is to seek legal action to keep the HIP health care network operating while we take control of the finances of the company," New Jersey Department of Banking and Insurance Commissioner Jaynee LaVecchia said in a statement.

State officials said providers cannot seek recovery from employers or enrollees of any claims HIP has not paid. Employers with contracts with HIP can continue to offer HIP, but new enrollment is frozen for now. HIP has about 194,000 enrollees.

A spokeswoman for the department said it was premature to say what has caused HIP's financial problems.

Some observers say HIP's financial woes are a reflection of failing to keep rates up with expenses.

"They did not charge enough premium commensurate with expenses," said Paul Bonsee, a senior vp with Sedgwick Noble Lowndes in Roseland, N.J.

"Their rates tended to be low compared to others, though perhaps their overhead was lower, too," added Eileen Settineri, a consultant with Watson Wyatt Worldwide in New York.

Others note that HIP's problems are a reflection of an environment that was, until recently, highly competitive, with HMOs holding down their rates to win market share.

"For the last couple of years, not many of the plans in the state have made money. Medical loss ratios have gone up, but premiums have been stable," said Paul Langevin, president of the New Jersey Assn. of Health Plans, a state HMO trade group in Trenton.

HIP's financial problems came in the wake of significant change for the HMO. Last year, HIP sold 23 health care centers to Pinnacle Health Enterprises, a subsidiary of PHP Healthcare Corp. in Res-ton, Va. As part of that deal, Pinnacle agreed to provide health care services to HIP enrollees in exchange for capitated payments equal to a percentage of premiums collected by HIP.

According to the Department of Banking and Insurance, Pinnacle significantly reduced staffing at the health centers without proper authorization from the state and did not pay HIP providers on time.

To the extent that Pinnacle was not paying providers, the state was requiring HIP to post reserves, which may have been a factor behind HIP's growing deficit, speculated Joseph Kemka, vp and director of health care provider consulting at ASA Inc. in Somerset, N.J.

Last week, in a an unusual twist, Pinnacle President Paul Frankel, 50, was found dead in his Somerset, N.J., home. Police were investigating the possibility of suicide. A spokeswoman for PHP said the company had no further information.

In a statement, PHP President and Chief Executive Officer Jack Mazur said the company would evaluate all of its options, including the steps necessary to restore HIP to financial stability.

The Banking and Insurance Department spokeswoman said the department's goal is to rehabilitate the company.

Whether that is possible will depend on the loyalty of its customers and whether service, which many say has deteriorated over the past few months, can be improved.

"If I were an employer, I would want assurance that quality and continuity of care be maintained during this interim period," said Michael Thompson, a managing director with PricewaterhouseCoopers L.L.P. in New York.

If HIP cannot be rehabilitated, a likely move would be for the state to find a buyer for the HMO, said Rich Stover, a consultant with Buck Consultants Inc. in Secaucus, N.J.

Traditionally, HIP's strength has been in the public entity and multiemployer market, in which another HMO, through acquiring HIP, could gain a toehold.

Aetna USHealthcare dominates the New Jersey HMO market, with about 845,000 enrollees. Other major HMOs in the state are HMO Blue, with 327,000 enrollees, and Oxford Health Plan of New Jersey, with 250,000 enrollees.

While fierce rate competition has hurt HMO results, the condition of the industry is improving as the underwriting cycle has turned and rates are starting to climb.

"Overall, the health of the industry is good. Underwriters are firmly in charge now, and the period of market share underwriting is over," said Sedgwick Noble Lowndes' Mr. Bonsee.