Aetna Life and Casualty Co.'s planned $8.9 billion acquisition of U.S. Healthcare is expected to put more pressure on providers to cut payments and adhere to performance standards.
But no one expects the management systems of U.S. Healthcare, a successful HMO based in Blue Bell, Pa., to transform the merged company overnight.
Hartford, Conn.-based Aetna, a traditional indemnity company with loosely managed provider networks, is merging with an HMO that has one of the most aggressive medical management systems in the industry.
U.S. Healthcare also boasts one of the lowest medical-loss ratios-currently 74.5%, compared with a national average of 79.8%, according to Doug Sherlock, an HMO analyst in Gwynedd, Pa.
The ratio is the percentage of premium dollars spent on medical services, as distinct from administrative costs, salaries and profits.
U.S. Healthcare has a reputation for slashing provider payments to keep medical costs low, although analysts and the HMO's executives point out that its medical management system involves more sophisticated controls.
Those include financial bonuses to doctors and hospitals that meet quality, patient-satisfaction and utilization targets. All the HMO's primary-care physicians receive capitated payments, and their bonus can amount to an additional 29% of their base payment.
U.S. Healthcare also gives physicians a great deal of information, some gathered from member satisfaction surveys, so doctors can compare their performance with their peers', said Neil Schlackman, M.D., a senior medical director at the HMO.
"It's a very medically driven system in that the medical directors are very active clinically, dealing with physicians" to get their cooperation in choosing what to measure and then feeding back the results, he said.
The challenge will be to apply those tight controls throughout the new company, particularly to Aetna's network of 2,300 hospitals and some 200,000 physicians, most of which serve members in indemnity and PPO plans. Only 1.4 million of Aetna's 11.3 million group health members are in HMOs, a spokesman said.
Aetna also has embarked on a plan to acquire physician practices. It now owns and manages primary-care groups in eight markets, including 185 physicians, and is "still looking to grow through acquisition of large groups," said Peter Manley, director of marketing for Aetna Professional Management Corp., a physician-management subsidiary.
The company provides utilization management services to the physician groups. Doctors in that relationship with Aetna also will have to become accustomed to U.S. Healthcare's more intense oversight.
Aetna's "different approach to physician contracting, medical-group development and network management" will clash with U.S. Healthcare's, said Peter Boland, a managed-care industry analyst in Berkeley, Calif.
Overall, analysts are wondering how effectively U.S. Healthcare's systems will prevail. Aetna Chairman Ronald E. Compton will be chairman and chief executive officer of the new company.
After the merger, U.S. Healthcare's founder and chairman, Leonard Abramson, will join Aetna's board. He also will serve as a consultant to Compton. Abramson, U.S. Healthcare's largest stockholder, will receive more than $900 million in cash and stock as a result of the deal, according to published reports.
"The dominant culture in this deal is the Aetna culture. I don't know if it will stay that way, but by size alone, and size counts," Aetna predominates, said Peter Kongstvedt, a partner with the consulting firm of Ernst & Young in Washington.
U.S. Healthcare's systems may not be readily accepted outside of its Northeastern base.
In California, at least, large medical groups likely will resist what they consider U.S. Healthcare's "micromanagement" of healthcare. Some groups in California have contracts with Aetna. Jim Hillman, director of the Unified Medical Group Association, which represents medical groups serving HMOs, says California groups are "too mature to be micromanaged."
California providers, who argue that HMOs are taking far too much of the premium dollar away from medical services, are pushing for full-risk contracts that would leave HMOs with a slim administrative margin (Feb. 5, p. 24).
Even East Coast providers are complaining about HMOs' low medical-loss ratios, said Kenneth E. Raske, president of the Greater New York Hospital Association. To single out U.S. Healthcare would be "unfair," he said.
But "the real issue for us is we see a combination of a very aggressive managed-care company and a very deep-pocketed insurance company combining their resources," Raske said. How, he asked, will hospitals that want to put together integrated delivery systems be able to compete with these well-funded organizations?
The combination of Aetna and U.S. Healthcare is one of the most ambitious moves to create a diversified managed-care company.
The deal, costing Aetna $8.9 billion, would result in the largest for-profit healthcare organization in terms of the companies' healthcare revenues, which were $9.4 billion in 1995.
Aetna, which recently sold its property-casualty business for $4 billion, will merge its healthcare operations with U.S. Healthcare's.
The companies' strategy echoes that of a number of indemnity insurers and HMOs that have merged or announced plans to merge in the past year, following the lead of United HealthCare Corp., which bought MetraHealth Cos. in 1995 for $1.7 billion. Most recently, in January, Woodland Hills, Calif.-based WellPoint Health Networks announced it would buy the group health operations of Massachusetts Mutual Life Insurance Co. for $380 million.
The healthcare companies say they want to offer multistate employers a range of managed plans, from HMOs to indemnity plans as well as specialty services such as workers' compensation and mental health programs. And HMOs don't want to lose the business of employers for which HMOs are not the right choice just yet.
The giant combinations create "mega-managed-care companies whose hallmark is comprehensive benefits management," Boland said.
The challenge is to manage the sprawling concerns themselves.
Aetna's Compton said one of the reasons the insurer chose U.S. Healthcare as a partner is the HMO has "the best medical management in the business." In a written statement, he called it "the best-managed HMO company."
One way U.S. Healthcare has been able to keep its medical costs down is by tough negotiations with providers, resulting in lower payments. Boland said, "One of the real driving factors in their medical-loss ratio is they are very tough on physician contracts, to the point where they have a reputation for beating up on physicians."
The rub is that without a merger with a company like Aetna, U.S. Healthcare could probably not have continued to maintain that low medical-loss ratio, Sherlock said.
"I don't think it's sustainable in this market," he said.
Boland agreed. "Their physicians in participating networks will have other choices. They can even decide to form their own networks, without the HMO involvement," he said.
But for the time being, partnering with Aetna will give U.S. Healthcare more clout.
"When negotiating contracts with Philadelphia providers, it will be easier to blame the decisions on Hartford," Sherlock said.
Shlackman said some Aetna physicians are already familiar with U.S. Healthcare's medical management systems because the companies' networks overlap in some areas.
"It won't happen overnight," he said. "Our goal has been to integrate good data systems and good performance measurements developed by the providers and the members."
Because part of physician compensation is tied to performance measures that doctors helped develop, primary-care physicians who deal with U.S. Healthcare are "generally fairly satisfied," except perhaps for new physicians who have never been in a capitated system, Shlackman said.
Specialists are generally not happy, he conceded, because they say they are underpaid and "they have never had anyone measure their performance, and we're beginning to do that on a large scale."
Hillman said California providers dislike the type of bonus system U.S. Healthcare uses because "you're virtually at their mercy. How do you know they're auditing you correctly?"
Capitation also works differently in California, Hillman said. In general, HMOs give the total capitated payment to the entire medical group. The group then decides how to reimburse its individual physicians. It also chooses and pays specialists out of the amount received from the HMO. U.S. Healthcare's version of capitation, which is pegged to individual performance and separate payments to specialists "is very controlling," Hillman said.
Though the merged company's revenues would be larger than United's, in managed-care enrollment it would run neck-and-neck with United. Aetna/U.S. Healthcare would serve 10.3 million in managed-care plans, while United serves 9.4 million.
In total membership, United would remain the largest for-profit healthcare company, with 40 million receiving care in one of its programs. The new Aetna/U.S. Healthcare company would serve a total of 23 million people.