With Aetna freshly pared down to its healthcare core, medical providers and Wall Street analysts alike are now hoping the embattled insurance giant begins to rebuild both its tattered image and sagging bottom line.
In mid-December, Aetna completed the $7.7 billion sale of its financial and international units to Dutch firm ING Group and spun off its domestic healthcare business to shareholders. With those nuts-and-bolts aspects of its restructuring complete, the Hartford, Conn.-based company has embarked on the far greater task of regaining its financial strength while building a kinder, gentler reputation among physicians and other healthcare providers.
Late last month, Aetna announced an ambitious plan to streamline operations and prop up slumping profit margins by shedding several business lines and almost 13% of its workforce. The insurer also took a major step toward mending fences with the medical community when it vowed to eliminate its much-criticized "all products" policy, allowing doctors to decide which of its health plans to serve and to quit ones they don't like.
"Aetna certainly has its hands full," said Lori Price, an analyst with Chase H&Q in New York. "Management is taking the right steps to reposition the company . . . but their actions aren't without risks or repercussions."
Indeed, Aetna expects to lose as much as 10% of its 19.1 million customers this year as it struggles to streamline its troubled managed-care business. On Dec. 31, Aetna officially dropped 340,000, or 55%, of its Medicare enrollees.
Another 1.5 million of the departing members likely will be from the company's troubled Prudential HealthCare unit as steep rate increases of 11% to 13% prompt employers to switch insurers. Up to 350,000 more members will be forfeited as Aetna sells or shutters several unprofitable HMOs, including plans in Arkansas and South Carolina.
Aetna is making up for years of artificially low premiums designed to build its massive customer base, analysts say. But some worry this year's double-digit rate increases could ultimately boost costs by scaring away Aetna's best customers -- the younger, healthier folks who can look for better buys with other insurers.
"Most of the time, when you aggressively raise premiums, the people who leave you are the ones whom you don't want to leave," said analyst Todd Richter of Banc of America Securities. "You're more likely to be left with the less healthy members who can't go to other plans."
Aetna does foresee medical costs rising about 10% through 2001. Yet the company says it expects to cut its medical-loss ratio -- the amount of every premium dollar it pays for medical costs -- by 1 to 2 percentage points this year.
Aetna's medical-loss ratio has been driven up by its Prudential and Medicare enrollees to 87.4% as of the third quarter of 2000, vs. 83.9% a year before. The Prudential unit alone saw its ratio rise to 93.9% from 87.2% a year earlier, while Aetna's Medicare medical-loss ratio climbed to 99% from 91.8%.
The insurer, which employs 40,000 people nationwide, also plans to rein in ballooning administrative costs by cutting 5,000 jobs in the next 12 months. Half of the cuts will be layoffs; the rest are expected to be voluntary departures based on annual attrition, which averages 13% across the company but is as high as 20% in some divisions, analysts say.
John Rowe, M.D., Aetna's president and chief executive officer, said the cuts should help generate about $200 million in pretax savings this year and $100 million in 2002. The insurer already completed $150 million in cost cuts last year.
Aetna's problems began under the reign of its former chairman and CEO, Richard Huber, known for his abrasive management style and bigger-is-better approach to business.
In 1996, Huber paid top dollar for rival U.S. Healthcare, then added NYLCare Health Plans two years later. To make those investments pay off, Aetna started squeezing patients and doctors, earning a reputation for caring more about profits than its members' health.
Then in 1998, after paying $1 billion for Prudential Insurance Company of America, Aetna found it had bought a business even less profitable than its own. As it struggled to reverse Prudential's losses, profits sank in 1999 for the second year in a row.
Last February, Huber got the hook, and longtime board member William Donaldson took over. By July, he had agreed to split the insurer with ING -- a sale designed to help create value for shareholders who had watched as Aetna's stock price plunged well below the $100 mark it hit in July 1999. The stock was trading at about $40 on Jan. 4.
Curing the new Aetna is now up to Rowe, who took charge in September.
One of his main priorities will be stabilizing the money-losing Prudential, which has been a financial albatross. That will involve nixing overlapping services and reducing Prudential's membership to just more than 2 million by year-end, down from 5.2 million when Aetna bought it.
Although analysts agree that the improvements are long overdue, some wonder whether the acquisition was worth it at all.
"It's caused such distraction for Aetna managers and consumers," said Edmund Kroll, an analyst with New York-based SG Cowen Securities Corp. "In hindsight, I don't think they would have done the deal."
Aetna said it won't acquire any more companies in the near term.
The greatest achievement so far for Rowe, the former CEO of Mount Sinai NYU Health, has been to start the arduous process of repairing Aetna's frayed relations with providers via more flexible treatment options and payment schemes.
On Dec. 19, Aetna earned praise, albeit somewhat tempered, from physicians by dropping its controversial all-products policy.
Aetna has long required doctors to accept members in all of its health plans, arguing that patients shouldn't have to switch doctors if an employer changes coverage. But the all-or-nothing mandate angered doctors, who resented having to treat patients in Aetna's lowest-paying HMOs as a condition of taking part in its PPOs.
"Physicians across America are pleased to see Aetna finally respond to (our) longstanding concerns about the unreasonable, coercive and unfair all-products clause contained in its managed-care contracts," said D. Ted Lewers, M.D., chairman of the American Medical Association's board of trustees. "Physicians, however, will need to see continuing proof of Aetna's commitment in order to be convinced that these reforms are real."
Aetna also announced a deal with the California Medical Association last month, resolving some bones of contention with the state's doctors. It's hammering out similar pacts in New Jersey and Florida.
Under the deal, Aetna committed to paying "actuarially sound" capitation rates from the first day that a patient joins a health plan, reimbursing doctors for both the cost and administration of vaccines, and ceasing to force physicians to carry the risk for the cost of patients' prescription drugs.
But CMA President Marie Kuffner cautioned that the agreement is "preliminary," and major differences between doctors and Aetna remain to be resolved. "The CMA wants to be clear: This is just the first step," Kuffner said at the Dec. 19 press conference announcing the pact. "There are still a lot of problems to solve."
Indeed, the Mayo Clinic terminated its contract with Aetna early last month, suggesting that the insurer's road to reconciliation with providers may be a rocky one.
The prestigious medical center dropped Aetna because the insurer wasn't paying claims accurately or on time, said Mayo spokesman Chris Gade. It was the first time Mayo has scrapped a contract with a major national insurer.
What's more, with Aetna already struggling to fatten its razor-thin profit margins, some analysts worry that the insurer's broad concessions will boost costs and hamper earnings growth. But Rowe said the reforms won't increase medical costs because the company has been factoring the reforms into its premium hikes.
Aetna is now shouldering up to $2.7 billion in debt, which creates a worrisome debt-to-capital ratio of 17% to 20%. It's also taking $565 million in charges that will wipe out its fourth-quarter 2000 net income.
"It will take time for our financial performance to improve to the level of other industry leaders," Rowe said. "But we believe we're on a course to steadily improve our results."