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Aetna: A Long Way to the Recovery Room


Even as Congress mulls over ways to protect patients against health maintenance organizations, one of the most criticized insurers is itself stretched out in the intensive-care ward. Aetna Inc. (APPAX) was nearly wiped out by a disastrous five-year foray to gobble up other health insurers. Having overpaid for its acquisitions and managed them badly, the Hartford insurer expects to trail the industry in profitability for years to come. Its costs are far higher than those of rivals, its premiums often far cheaper, and it faces increasing employer resistance to raising them. And healing the company's image may be hardest of all: Aetna alienated consumers and doctors by sticking with the unsavory cost-control tactics of early HMOs long after more nimble rivals were offering greater choices of doctors and services.

Now, it's up to an outsider to stanch the bleeding. Last September, Aetna brought in John W. Rowe, a 57-year-old gerontologist, to run its health-care businesses. He became CEO in December and chairman of the entire operation in April. It was a curious choice to run a publicly traded health insurer with 18.3 million members and $27 billion in revenues. Rowe has never run such a large organization. Previously, he was CEO of Mount Sinai NYU Health, where he oversaw the merger of the Mt. Sinai and New York University medical complexes in New York City and helped improve its finances. He once even considered suing Aetna because of its chronically slow reimbursements. Aetna now hopes that Rowe can repair its frayed relationship with his fellow doctors.

Still, no one in Rowe's top executive team has been with the company more than four months. Considering Aetna's recent history, Rowe counts that as a plus: "We're not legacies. A lot of people in the company need the kind of leadership that says: `Don't tell me where you're from, tell me where you're going."'

The answer, at least for the next several months, is not encouraging. Last December, after promising that earnings were on track for 2001, Aetna announced unexpectedly large losses in the first quarter. Its stock price has declined 38% since January, to about $25. Now, the company says that it won't be able to match industry levels of profitability--operating margins of at least 4%--until the end of 2003. Profits for 2001? Forget about it. For 2002? Only a possibility, says Aetna.

PARING DOWN. The one glimmer of hope that Rowe has provided Wall Street so far is his choice of a No. 2. Analysts and industry officials give him high marks for snagging Ronald A. Williams, former president for the large-employer group at Wall Street darling WellPoint Health Networks Inc. (WLP) Industry insiders say Williams, Aetna's chief of health operations, is fastidious, a nut for detail, and skilled enough to analyze what's wrong with Aetna's broken health business. Rowe has also brought on board a well-regarded new medical chief, Dr. William C. Popik, who comes from CIGNA Corp.

The company plans to unveil a detailed recovery strategy in late summer. But one thing is already certain: Aetna must shrink. Says Banc of America Securities analyst Todd Richter: "It's like a bad infection on your toe that has developed gangrene. You may have to cut this company in half." Rowe has promised to let 10% of Aetna's members go this year by not renewing their plans or raising premiums in hopes they will leave. Aetna has quit HMO businesses in St. Louis, Georgia, Louisiana, and California's Central Valley region, all areas where it lacks the heft to negotiate profitable contracts with providers. Instead, it seems to be concentrating on keeping more lucrative preferred-provider-organization (PPO) and point-of-service (POS) business nationwide. "Right now, in the markets where we compete, it seems Aetna is spread too thin," says David W. Olson, a spokesman for rival Health Net Inc., one of the nation's top five health insurers. Rival Trigon Healthcare (TGH), for instance, is one-ninth Aetna's size, with 2 million members, but its tight focus on the Virginia area gives it a market value of $2.3 billion compared with Aetna's $3.6 billion.

Most of the company's woes can be blamed on its botched acquisition strategy. In 1996, Aetna paid $8.9 billion for U.S. Healthcare, widely considered one of the most hard-nosed HMOs. U.S. Healthcare forced doctors to take all patients, whether they were in PPOs, POSs, or HMOs. It also strictly limited doctor fees. As a result, many doctors stopped working with Aetna. A $1 billion purchase of Prudential Healthcare in 1999 was also a mistake. Aetna gained 6.6 million members nationwide, but many of them weren't paying enough to cover costs. "What matters is how big you are locally," says James C. Robinson, professor of health economics at the University of California at Berkeley.

Rowe doesn't sugarcoat the work that's ahead of him. "There are 150 things that have been going wrong, and we're going to fix these things one at a time," he says. Among his first changes was the incentives Aetna pays salespeople for signing up new business. They now get the biggest rewards for keeping profitable accounts, not just enrolling new members. Meanwhile, customer-service reps' incentives are linked to solving problems the first time a member calls. Aetna recently stopped forcing doctors to participate in every plan it offers and is reevaluating its fee policy. Aetna plans to reexamine every medical contract, employer by employer, and study every benefit it offers and every price it charges. Williams, who helped turn around an ailing WellPoint 10 years ago, is confident: "There is nothing here that I have not seen before. There is nothing here that I believe cannot be fixed."

HEAVY BAGGAGE. But it won't be easy to squeeze more out of existing corporate customers. Last year, they had to swallow premium increases of 10% to 12%, and increases up to 15% are likely in the coming year, says Standard & Poor's Corp. analyst John Massey. Most insurers will have trouble getting those increases to stick. For Aetna, it will be even tougher. It inherited so much underpriced business from its mergers that it needs to jack up prices in some markets by more than 20% just to cover costs. Its medical costs, including doctors' salaries and prescription-drug costs, are climbing at a 15% annual rate, up from 12% several months ago. Those costs now eat up 90% of every dollar, vs. an industry average of 84.6%.

Aetna isn't in immediate danger of a liquidity crunch. Its bonds are still rated investment-grade, although Standard & Poor's downgraded them in June because of Aetna's uncertain financial future. Rowe promises a turnaround by the end of 2003. But some big investors say the process will take longer because Aetna lacks enough managerial talent. Rowe is looking for a chief financial officer, and Aetna has to add scads of actuaries and other professionals to implement his plans. With so many ailments to treat all at once, Rowe will need all the help he can to nurse this company back to health. By Pamela L. Moore in New York


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