A full year after being christened amid much fanfare, the "new Aetna" is still struggling to reinvent itself.
Once a pillar of the American insurance industry, the company now is awash in red ink and has forfeited its title as the nation's largest health insurer as it continues to unload millions of members in a massive turnaround effort. And for all its talk of building a "kinder, gentler" image, its relationship with providers remains as strained as ever.
"Aetna is a big ship that's proving difficult to turn," says Richard Corlin, M.D., president of the American Medical Association, which represents 290,000 of the nation's physicians.
Determined to slim down its bloated corporate structure and rein in costs, Aetna intentionally has been dropping large chunks of its membership while sharply raising rates. It's also backed away from its traditional HMO business and scrapped half of its Medicare+Choice plans, focusing instead on its "fee-based" roster of companies that assume the risk of paying their own employees' medical bills.
As of Jan. 1, the Hartford, Conn.-based insurer's enrollment had fallen to 15.6 million from a peak of 21 million in 1999, relegating the longtime leader in membership to No. 2 behind Minneapolis-based UnitedHealth Group, now with 16.5 million members. And Aetna is in the midst of slashing a projected 6,000 jobs, or 16% of its workforce, to better align itself with its new, leaner enrollment base.
This aggressive downsizing, however, has yet to buoy Aetna's sagging bottom line.
Losses exceed expectations
The company shocked Wall Street last month when it posted a fourth-quarter operating loss of $84.6 million, or 59 cents per share-far deeper than the worst of analysts' loss projections, which ranged from 28 cents to 56 cents per share. For the full year, it recorded an operating loss of $266.4 million, or $1.86 per share, compared with earnings of $193.6 million, or $1.35 per share, in 2000.
Aetna's profits continue to be eroded by high medical costs, fueled in large part by its efforts to eliminate the most restrictive of its managed-care cost controls. In the fourth quarter of 2001, Aetna's medical-cost ratio, the portion of premium revenue spent on medical care, hit 89.7%, down from 90.1% in the third quarter but still higher than the 87.2% of a year earlier.
Still, the company has had some good news recently. Aetna's stock price hit a 52-week high of $38 per share last week, indicating strengthening investor confidence.
Since taking the helm in September 2000, John Rowe, M.D., Aetna's president, chairman and chief executive officer, has worked diligently to repair the insurer's frayed relationship with providers by, among other things, loosening its much-criticized preapproval requirements. But just how much these concessions actually have improved Aetna's reputation remains a question.
"John Rowe really has an awareness of doctors' needs. But there's a huge gap between what he says and what happens at the local level," says the AMA's Corlin. "His intentions are good, but he's the CEO of a company that's such a bureaucratic mess that it's almost beyond his ability" to create dramatic change.
Rowe was unavailable to comment for this article.
Corlin points out that Aetna has been fined for violating prompt-payment laws by at least four states since January 1999. The fines-the latest of which Texas levied last November-have totaled $2.3 million. "Prompt pay is a major issue for physicians, so that should tell you something," he says.
Hospitals remain skeptical
Many hospitals, too, are discovering that while relaxing its preapproval requirements on the front end, Aetna has simply shifted more of the administrative burden to hospitals' back end, says Patricia Kolodzey, director of insurance and managed care for the 453-member Texas Hospital Association.
Take an emergency heart bypass operation, for example. "Even though Aetna may no longer require preapproval for the initial hospitalization, they expect you to call them or file additional forms 23 hours later to get approval for the patient to be admitted to a recovery room," Kolodzey says. "I mean, where else is the patient going to go-the lobby? The process is so backward that I have to laugh sometimes."
Still other hospitals are finding that Aetna's financial woes have made the company even more guarded at the bargaining table. John Muir/Mount Diablo Health System in Walnut Creek, Calif., for instance, narrowly averted canceling its contract with Aetna last December after the insurer refused to budge on its reimbursement rates for the second straight year.
"Aetna is very concerned about its financial performance right now, and that shows in their negotiations," says Mitchell Zack, vice president of health plan contracting for the two-hospital system. "It was very clear from the hard line they took with us that they were more interested in protecting their bottom line than coming to an agreement that satisfied both sides."
Likewise, hospital operator HCA announced this month that it plans to terminate a contract with Aetna that spans eight of its 10 facilities in the Houston area, effective April 15.
Melissa Paschal, vice president of managed care for HCA's Gulf Coast division, says not only did Aetna refuse to raise its reimbursement rates, it also had an extraordinarily high rate of claim denials. The two sides had been working on resolutions for the denials since 1998 but failed to make much progress, she said.
Industry observers don't blame Rowe for Aetna's financial problems, which they lay at the feet of previous management and longtime directors. But the insurer's predicament has forced some experts to question whether the gerontologist/former hospital administrator was the best choice to turn the company around.
From the beginning, Rowe has been considered a curious choice to run Aetna, a publicly traded insurance company with $27 billion in annual revenue. Previously, the 57-year-old doctor was CEO of not-for-profit Mount Sinai NYU Health in New York, which reported 2000 revenue of $1.8 billion. He once even considered suing Aetna because of its slow reimbursements.
In fact, a key Aetna investor, Providence Investors, is now mounting a proxy challenge against the insurer, claiming that its board was wrong to hire Rowe. The New York-based hedge fund, which owns 1,000 Aetna shares, wants to unseat three Aetna board members, according to a Securities and Exchange Commission filing. Providence helped force the resignation of Aetna's previous CEO, Richard Huber, in February 2000.
Nothing that can't be fixed
One glimmer of hope for Aetna, however, is Rowe's choice of a right-hand man. Analysts and industry observers give the CEO high marks for snagging Ronald Williams, former president for the large-employer group at rival WellPoint Health Networks, Thousand Oaks, Calif., which has been growing at an impressive clip. They say Williams, now Aetna's chief of health operations, is fastidious, detail-oriented and skilled enough to figure out what's wrong with Aetna's broken healthcare business.
Williams, who helped revive an ailing WellPoint 10 years ago, is confident Aetna is not beyond repair. "There is nothing here that I have not seen before," he says. "There is nothing here that I believe cannot be fixed."
Most of Aetna's woes can be blamed on a botched buying spree in the mid- to late '90s. Craving size, the insurer paid $8.9 billion in 1996 for U.S. Healthcare, known to be among the most hard-nosed of insurers. Two years later, it added NYLCare Health Plans and Prudential Healthcare, the latter of which proved to be a financial albatross. All the while, it kept prices artificially low to attract droves of new customers.
Aetna used its newly amassed membership as leverage in getting doctors and hospitals to accept lower fees. It also figured size could improve operating efficiency.
But the strategy went only so far. The company's rigid preapproval requirements, frequent coverage denials and inflexible provider contracts drove away some customers and doctors, while its enormous size made it a lightning rod for attacks on managed care.
In December 2000, Aetna sold its international and financial-services units and spun off its healthcare operations to shareholders. The "new Aetna," however, has remained so saddled with underpriced business that it has been forced to jack up prices in some markets by more than 20% just to cover costs. In the fourth quarter of 2001, its rate increases averaged 19% among renewing members.
The insurer also plans to take a massive $3 billion charge in the current quarter, largely because of the write-down of the value of its past acquisitions. The charge won't affect operating earnings but figures into the bottom line-meaning Aetna will report another huge net loss in 2002.
For now, however, much of Wall Street remains content viewing Aetna's losses as inevitable bumps on the road to recovery. Since Feb. 21, the company's stock has rallied 17% to about $37 per share on optimism that the insurer will make good on its promise to turn a profit, on an operating basis, this year.
"We believe our focus on profitability over growth has been successful," Rowe said during a Feb. 21 conference call. "We have a smaller book of business and a more favorable economic outlook. We now enter 2002 positioned for profitability."
The company also is shooting to match competitors' pretax profit margins of 6% and 7% by the end of 2003-quite a feat considering that Aetna's pretax margins now average a razor-thin 1.1%.
But for all his optimism, Rowe declined to give earnings guidance for 2002 until after the end of the quarter, leaving some analysts skeptical.
Lori Price, senior healthcare analyst with JP Morgan in New York, predicted that Aetna's sales, general and administrative cost ratio will spike this year because of its rapid loss of membership. While the company contends that it will save about $130 million this year through job cuts, that adjustment may not be enough given its lower revenue base, Price says. Aetna's revenue fell 9% in the fourth quarter of 2001 alone, to $6 billion.
"They could end up shooting themselves in the foot if they're not careful," she says.
Analysts have reason to be cautious.
In April 2001, after promising that earnings were on track, Aetna warned that analysts' first-quarter projections of a penny-per-share profit were too high in light of fast-rising medical costs. A month later, the company posted a per-share operating loss of 26 cents, sending its stock price into a tailspin.
Then in June 2001, Aetna again startled the industry by announcing that it mistakenly had been paying millions of dollars in claims for former members whose benefits had expired. The stock plunged once more, triggering a class-action lawsuit that charged the insurer with misleading investors about the effectiveness of its recordkeeping systems. That suit is still pending in U.S. district court in New York.
Now, some analysts are wondering just how much slack to give the once-venerable Aetna.
The company has posted four straight quarters of operating losses even as its competitors have enjoyed robust profit growth, says analyst William McKeever of UBS Warburg in New York. Last month, WellPoint, Humana, Anthem, Oxford Health Plans and Coventry Health Care all posted fourth-quarter earnings growth of 10% to 32%.
"First quarter, they have to show improvement," McKeever says. "If they don't, the whole story falls apart."