Change has been the only constant in the executive suites of the nation's managed-care companies lately.
In the past 12 months alone, nearly 25 chief executive officers have resigned from such prominent health plans as Aetna, Anthem, Harvard Pilgrim Health Care and Humana. Stepping into their shoes has been a new generation of leaders with skills and qualities unheard of in boardrooms just a decade ago.
To be sure, the managed-care field has reached a critical juncture. The industry's profit margins have slimmed to a skimpy 1% to 3%, while prescription drug costs have continued to climb 18% per year. In 1998, 52% of the nation's HMOs lost money-a total of $1.45 billion, to be exact, according to a report from Standard & Poor's.
Now, faced with cutthroat competition, near-daily regulatory changes, fast-advancing technologies and increasingly antsy investors, HMOs are feeling the heat more than ever before, says Robert Go, national managing director of healthcare at Deloitte & Touche.
"Managed care has reached the end of one evolutionary cycle and is headed into the next. The industry has reached a point now where it has successfully penetrated the American economy and has put in place new infrastructures for delivering care," Go says. "But the promise of better quality and cost control is still only partially met. The next stage in the evolution will require leaders with new skills that allow them to pick up where the last generation left off."
While qualities such as integrity, strategic thinking and the ability to make tough decisions remain essential, HMOs are seeking leaders who can also foster optimism and community dialogue, inspire teamwork, cope with constant change and balance a strong, long-term vision with short-term results.
It's a tall order, and many a good CEO has bowed out gracefully or been shown the door. Those taking up the mantle will need increasingly thick skin.
Bulletproof. While the HMOs of the early 1990s were praised as an improvement over traditional fee-for-service models, today's health plans face a barrage of public criticism, says Peter Kongstvedt, M.D., a partner in the Washington office of Ernst & Young, a national accounting and consulting firm.
"The ability to get in and out of Kevlar has certainly become important," he says. "I may joke, but the pressure on the industry's senior-most executives is very real. If you're in an industry (at which) every newspaper and radio station are pointing their fingers-if you're constantly accused of denying people the care they need-it starts to wear on you. People want to feel proud of what they do. If they're unable to deflect the bullets, they're going to burn out."
Philip Nudelman, chairman of Seattle-based Kaiser/Group Health, acknowledges that the public scrutiny, onerous legislation and class-action lawsuits now plaguing the industry played a role in his decision to retire from the 1.1 million-member HMO at year's end.
"It's been challenging, satisfying, stimulating and fun," the 64-year-old healthcare veteran says of his 40 years in the business. "It's still challenging, but due to a myriad of environmental, governmental and political influences, the satisfying, stimulating and fun parts get fewer every day."
David Lawrence, M.D., CEO of Oakland, Calif.-based Kaiser Permanente, is no stranger to the frustrations and disillusionment many industry leaders now grapple with. But the 10 tumultuous years he's spent at the helm of the nation's largest HMO have taught him that maintaining a clear, long-term vision is the key to staying motivated in turbulent times.
Today's managed-care leaders "have to be aware of the fact that, in the short-term, you almost can't win. Someone's ox is always going to get gored by any decision that gets made," Lawrence says. "But if your actions and decisions are rooted in a broader vision, if you're genuinely concerned with building a trusted and respected organization for the long term, the daily perturbations become a little easier to take."
CEOs, consultants say, should know where they plan to be six to eight quarters out. They should also have a clear mental snapshot of what their companies will look like a decade from now.
Where leaders often go astray is in becoming too committed to a set strategy, says Jay Gellert, who became CEO of Woodland Hills, Calif.-based Foundation Health Systems 16 months ago. Long-term vision must involve changing, not just maintaining, the organization, he says.
"We're fundamentally in the reinvention business. The only way we can survive is if we continually re-create ourselves to better respond to the public's concerns," Gellert says. "Any CEO in this field who's trying to rely on old formulas to meet these incredible new challenges is on a quixotic journey."
Take cost controls. The techniques that managed care initially employed to keep costs in check worked well for about five years. But HMOs can't continue to rely on the same methods, because they will no longer work in today's environment.
Eyes wide shut. Complacency can sneak up on anyone, but it happens most often to CEOs who have spent a career with one company, especially a successful one.
Such was the case for Stephen Wiggins, who in 1998 was eased out as chairman and CEO of Oxford Health Plans, the HMO he founded as a newly minted Harvard Business School graduate 14 years earlier.
With an impressive vision and innovative ideas for delivering healthcare, Wiggins put Oxford at the vanguard of the managed-care industry. But after 10 years of record growth, the Trumbull, Conn.-based HMO stunned the industry in October 1997 by posting its first-ever quarterly loss, of $78.2 million. Wiggins blamed snags in a new computer system that caused officials to lose track of costs, delay reimbursements and undercharge for services.
Soon afterward, investment firm Texas Pacific Group agreed to pump $350 million into the foundering HMO-in exchange for being allowed to install a new chief, Norman Payson, M.D. Although Wiggins, then 41, had retained the confidence of Oxford's board, the directors ultimately agreed to the new management as the price for a capital infusion.
A physician and former Healthsource CEO, Payson, 51, has proved to be a sound bet. His decisiveness, quick action and in-depth understanding of healthcare operations broke the company's gridlock.
After a year of administrative and workforce cuts as well as a new focus on raising premiums and shedding unprofitable product lines, Oxford announced 1999 earnings of $319.9 million, or $3.26 per share, compared with a loss of $596.8 million, or $7.79 per share, in 1998. The goal was to position the company for "multiyear top- and bottom-line growth," Payson said in a recent conference call with Wall Street analysts.
Effective CEOs stay productive by constantly getting involved, shaking things up and pushing to make change happen, consultants say. They're hungry for information from the battlefield and crave details of what's happening in their markets.
Take Bruce Bodaken, who was recently named Blue Shield of California's CEO. His first order of business was to handpick a new, 10-member team of executives to keep him connected with the outside world.
"It takes a little extra time and effort to get engaged in all of these processes, but I'm finding that I learn an awful lot more about what our customers genuinely want and need," Bodaken says.
Blue Shield, for instance, has found that traditional ways of communicating often fall flat. "We've learned that (customers) often don't read much of the materials we send them and that some of our services . . . are not specific enough for them to get much out of. These are all opportunities for improvement," Bodaken says.
The health plan is now taking innovative steps to personalize its service. Through its MyLifePath.com Web site, for instance, Californians can receive customized e-mail about the health topics that interest them most.
Diplomatic relations. Successful CEOs must also be diplomatic mediators who can create collaborative rather than adversarial relationships with constituents and competitors, says Thomas Dolan, CEO of the American College of Healthcare Executives.
"What ultimately separates success from failure is the ability to work with various groups whose goals may be in conflict, to listen to opinions that don't necessarily jibe with your own, and to look beyond your company's immediate interests . . . to find common ground and deliver the kinds of service society wants," Dolan says.
Cheryl Scott, president and CEO of Seattle-based Group Health Cooperative of Puget Sound, does that by meeting regularly with citizens, hospital administrators, physicians and other healthcare leaders to address tough issues. And she hangs in there, even when it gets uncomfortable.
"We have to constantly challenge our common beliefs," Scott says. "The fundamental structures of our business are changing so dramatically that if we're not willing and able to reframe our most-underlying approaches and practices, we will fail."
Need for speed. Of course, maintaining such a flexible, far-reaching perspective is getting tougher to do in an increasingly impatient industry. Top executive jobs, once seen as long-term, stable positions, have become precarious under the weight of mounting financial pressures.
With drug costs and hospitalization rates soaring, HMOs can no longer afford to sit back and wait for long-term strategies to pan out, says Rick Cobb, vice president and national director of Chicago-based executive search firm Challenger, Gray & Christmas.
"Strategy is only half the equation; execution is the other," Cobb says.
Even not-for-profits are expected to show positive bottom lines. For instance, Allan Greenberg, former chief of Brookline, Mass.-based Harvard Pilgrim Health Care, was ousted last May amid mounting losses.
"You have to attain some level of financial stability, because at the end of the day stability translates into better quality for consumers," Scott says. "If you don't have that predictability, then you get a lot of zigzags in behavior while trying to right the ship." And it's those zigzags-like scrapping services or exiting coverage areas-that lead to consumer distrust.
Now or never. But the pressure to perform is all the more intense for leaders of publicly traded health plans, which must answer not only to patients but restless investors. Humana's plummeting stock price and inability to rein in rising medical expenses, for example, cost Gregory Wolf his job after only 20 months as president and CEO of the Louisville, Ky.-based health insurer.
The then-42-year-old executive had been hailed for breathing new life into Humana after the company made several ill-advised moves in 1996. Wolf, who was named chief operating officer in July 1996 and CEO in December 1997, helped spearhead a major restructuring, which led to seven straight quarters of solid earnings and membership growth. But after a calamitous second-quarter report in 1999, the whiz kid was gone.
Humana has since found new business savvy in the form of Michael McCallister, named the HMO's chief on Feb. 3. The 47-year-old executive joined Humana in 1974 as a finance specialist. Before taking over the top spot, McCallister worked closely with Chairman and interim CEO David Jones on the company's recovery plan.
"The requirement for business acumen is becoming more and more stringent," Go, of Deloitte & Touche, says. "So when business acumen is lacking, you can see it much more quickly than you would in the past. The CEOs who don't possess the necessary business instincts are simply not able to keep up."
Even executives at HMOs that are posting steady profits aren't getting a break. Alan Hoops, president and CEO of Santa Ana, Calif.-based PacifiCare Health Systems, announced his upcoming resignation last month-the same day the company, the nation's largest Medicare HMO, recorded a 42% jump in 1999 profits to $6.23 per share.
Despite its healthy bottom line, PacifiCare's growth has been overshadowed by its low stock valuation. Although the entire managed-care industry is out of favor, PacifiCare's shares trade at one of the lowest multiples to projected 2000 earnings, reflecting the risk associated with the company's capitated business model.
Hoops has borne the brunt. The 52-year-old executive, who helped build PacifiCare during the past 23 years, was stripped of his chairmanship in a management shake-up last September.
In a January interview with the Wall Street Journal that portended his resignation, Hoops said the managed-care industry needed people "with different skill sets." He added, "The last two years haven't been nearly as much fun as the last 10."
In the search for this anomalous new "skill set," many HMOs have begun taking pointers from other service industries, such as banking.
"There's a greater emphasis on applying to healthcare the lessons learned in other industries-such as creating efficiencies through better uses of technology or focusing more on the quality of one's investments," Bodaken, of Blue Shield, says. "It makes sense to bring these financial and operational skills into our industry as it matures."
But it's not simply a matter of becoming better bean counters. Every business decision should ultimately be based on one thing: how it will benefit the patient, Bodaken says. "We can't lose sight of the fact that we're healthcare organizations, first and foremost, and that our primary responsibility is to provide people with support and sensitivity when they're most vulnerable."
Indeed, sensitivity may be far more important than it seems. Hartford, Conn.-based Aetna, for instance, ousted Chairman, President and CEO Richard Huber last month amid rising costs and legal woes. Some, however, say the capper was Huber's tendency toward unfeeling remarks.
Last year, a day after a California woman won a $120.5 million judgment against Aetna for denying care to her husband before he died of cancer, Huber called the award the work of "a skillful, ambulance-chasing lawyer, a politically motivated judge and a weeping widow." Although he later apologized, the damage may well have been done.
"With such ambiguity and uncertainty in the industry, there has to be a level of leadership that people can trust. When that trust isn't there, that's when (CEO) transitions usually occur," Group Health Cooperative's Scott says.
Superman's pals. So how does a good CEO build trust? Through communication and the fulfillment of commitments, consultants say. Leaders are advised to communicate clearly, personally, frequently and early in the decisionmaking process. And their messages must be matched by what's seen and felt by employees and customers.
Good interpersonal skills have never been more important, the ACHE's Dolan says. "This is a people business, after all. (Leaders) have to be able to talk to people one-on-one, listen to them, engage them, encourage them, write them notes when they do well."
Such efforts need not be elaborate. Scott, for example, finds e-mail a quick, personal way to keep in touch with individual employees.
Vision, execution, people skills, business sense and sensitivity-it's a lot to expect of one person. Perhaps that's why so many CEOs are swapping their old command-and-control ways for a more consultative style.
Though Bodaken likes to bat around issues with a broad team of executives, Humana's McCallister relies on a tight corporate junta made up of Chairman Jones and senior executives Kenneth Fasola and James Murray. Others rely on a single right-hand man to "balance them out." A bold visionary type, for instance, would do well to have a discreet nuts-and-bolts operator at his side, consultants say.
"(A CEO) isn't Superman. No individual embodies everything," Kaiser Permanente's Lawrence says. "So the true test for CEOs is their ability to surround themselves with the right people. Even superheroes need sidekicks."