Aetna's Brave Old World

Burned by managed care, it refocuses on insurance

Two years ago, Aetna Inc. seemed to be on the verge of transforming the health-care landscape. It bought U.S. Healthcare Inc. for an eyepopping $8.2 billion. Executives talked of creating the first national, fully integrated managed-health-care insurer. With the industry rapidly consolidating, Aetna would be among the handful of behemoths able to dictate terms to customers and health-care providers alike.

The rhetoric was quite different on Mar. 15, when Aetna agreed to buy New York Life Insurance Co.'s health- insurance business for $1.05 billion. "We've redefined what we are," says Chairman Richard L. Huber, an international banker who joined Aetna in 1995. While Aetna is still acquiring, the insurer has abandoned ambitious plans to expand aggressively into managed care. "We're an insurance company," he says.

NYLCare, which will add only 2.5 million members to Aetna's 13.7 million, lost $30 million last year on $3.2 billion in revenues. Last year, Aetna netted $901 million in revenues of $18.5 billion.

"A CRAPSHOOT." Why the strategy shift? Melding U.S. Healthcare, a brash health-maintenance-organization operator, proved far more difficult and costly than anyone thought, and the process is not finished yet. Computer system snafus, exacerbated by overzealous staffing cuts, have alienated customers and fouled up pricing strategies. Originally, Aetna promised the merger would cut $300 million from costs by the end of 1997, but less than half that has been realized. Says J. Randall MacDonald, senior vice-president for human resources at GTE Corp., an Aetna customer: "One plus one doesn't equal three, and I'm not even sure it equals two."

Meanwhile, the managed-care merger wave Aetna hoped to lead hasn't happened: The balance of power is shifting away from insurers toward employers, doctors, and hospitals. Indeed, while Aetna has been struggling to rationalize two strikingly disparate organizations, doctors and employers have rebelled against its attempts to apply U.S. Healthcare's aggressive pricing and controls to Aetna's sclerotic existing business.

Back in 1996, the U.S. Healthcare deal looked like a winner. But it soon became apparent that Aetna had bought at the height of a market that quickly plummeted. Consolidation of claims-processing centers and 4,950 layoffs helped reduce Aetna's overhead expenses to 19.2% of revenues last year, from 22.3% in 1996. But cuts were too deep and too fast, as Huber now concedes. Corporate customers complained about problems matching employee files with data. Doctors and hospitals got testy about payment delays. Even now, getting paid properly is "a crapshoot," says the office manager for one Connecticut doctor.

HIRING AGAIN. With a huge lag in claims processing, executives didn't realize until the third quarter that medical costs were running as much as 2% higher than forecast. By then, Aetna was negotiating with 40% of its 1998 corporate contracts. Many of the resulting premiums were based on outdated cost information, so Aetna stands to see little profit on a big chunk of its business this year.

To repair the damage, Aetna has hired 550 new full- and part-time operations employees and has slowed the closing of service centers. While it has put the vast majority of its HMO members on one computer system, Aetna still plans to merge the traditional insurance operations into the system as well, a feat that has yet to be performed anywhere in the industry.

In dealing with NYLCare, Huber is taking a tight, cost-effective approach to the deal and promising much less than Aetna did with U.S. Healthcare. That seems appropriate. The only NYLCare plans that make money are the biggest ones--in Dallas, Houston, and the Washington (D.C.) area. And those won't be integrated with Aetna's computer systems for more than two years.

Huber admits that Aetna's marriage to U.S. Healthcare has been messy. "It was a painful way to learn," he admits, but says he'll apply the lessons in the NYLCare merger--even if he has to sacrifice the grand vision that inspired Aetna's original expansion binge.

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