The Volcano behind Aetna
John W. "Jack" Rowe knew all about Aetna (AET ) Inc.'s stingy, tough reputation when he ran Mount Sinai NYU Health, one of the country's largest private hospital systems. "They had become, for a variety of reasons, almost a poster child for the [insurers'] contentious relationships with physicians," says Rowe, a doctor who specializes in the physiology of aging.
So when the Aetna board tapped Rowe in September, 2000, to head up its Aetna U.S. Healthcare unit -- later spun off to become Aetna Inc. -- the renowned 58-year-old geriatrician saw a chance to help fix what he calls the most broken piece of the health system. With a new management team, significant layoffs, and a deliberate retreat from unprofitable markets, the company went from bleeding money to making it in 2002.
But forging a partnership with the medical community to deliver more efficient, improved care wouldn't be possible while the nation's doctors were still up in arms. As Rowe puts it: "What do you think they would do when you call and say, 'Hi, this is your friend from Aetna'?"
Now, they would probably take his call. On May 22, Aetna broke away from rivals to settle a massive class action brought by representatives of most of the nation's doctors alleging unfair billing practices, among other complaints. The $170 million deal includes payments of $100 million to more than 700,000 doctors, up to $50 million toward their legal fees, and $20 million to set up a foundation aimed at improving health care. Changes in claims handling and other practices should save doctors an additional $300 million over the next four years. "This really raises the bar on the way that managed care does business," says Donald J. Palmisano, incoming president of the American Medical Assn.
For Rowe, it's a welcome chance to end a legal battle over claims stretching back 13 years that was costing the Hartford-based company millions of dollars a month in legal fees. Other insurers named in the case are banking that it will be thrown out by the federal court for the Southern District of Florida. But cost was only one reason to settle, Rowe says; the deal also clears the way to move Aetna to the next stage in its turnaround.
With Rowe in charge, the company is already becoming the picture of health. Lehman Brothers Inc. senior analyst Joshua Raskin argues that "it's gone from being a poorly run company with very few prospects to an intriguing one with very solid growth."
Of course, in this business, what's good for the insurer isn't always so good for the patient. Since Rowe took over, Aetna has raised annual rates more than 16% to keep ahead of medical inflation and expects its margins to grow from 4% last year to 6% by the end of 2003. It has shrunk its customer base from 19 million members to 13 million by jettisoning unprofitable markets, like 22 of the 46 counties in which it handled Medicaid.
Rowe has eliminated 15,000 jobs, strengthened the balance sheet, and wooed industry leaders -- such as Ronald A. Williams of Wellpoint Health Networks (WLP ) Inc., now Aetna's president -- to improve the insurer's prognosis. He even brought in IBM chief Louis V. Gerstner Jr. to give a pep talk. As Rowe told one 25-year Aetna veteran at a town hall meeting: "It's about restoring the pride."
Aetna's stock price, now hovering around $57, is twice what it was two years ago, but Rowe and his team aim to do more than just ratchet up returns. "Jack wants the company to play a leadership role in health care in North America," says Williams. Every company likes to cast itself as working for a greater good. But Aetna has actually taken bold initiatives, from issuing the industry's first guidelines on genetic testing to gathering voluntary data on the race and ethnicity of its members to address widespread disparities in health care.
The former academic and physician came to Aetna with a long-standing interest in the broader issues of medicine. Born in Jersey City to a mother who was a hospital clerk and a father who went from playing professional soccer in Britain to working in a pencil factory, Rowe graduated from Canisius College, a Jesuit institution in Buffalo. He studied medicine at the University of Rochester before taking an internship at Harvard University to specialize in gerontology and the kidney. "The physiology of the kidney is beautiful," says Rowe, who went on to found Harvard's Aging Division, write several books, and publish more than 200 scientific articles.
But Rowe's administrative career has been bumpy. A decade after becoming president of New York's Mount Sinai Hospital & School of Medicine in 1988, his management mettle was tested when he helped forge the contoversial merger of Mount Sinai with NYU Medical Center. Rowe became CEO when it succeeded. But analysts say infighting and a flawed structure have since made it unravel. "Rowe was the architect and the visionary of the system," says M. Craig Kornett of Fitch Ratings. "But once he left, it was clear he hadn't built a consensus with the stakeholders." The messy merger didn't hurt his career. In 2000, he got the call from a headhunter about Aetna, which his group had considered suing over unpaid claims.
Despite Aetna's dire position, or maybe because of it, Rowe couldn't resist. Here was a chance to turn around a once-venerable institution that had come to represent all that was wrong with managed care. The company, then the nation's biggest health insurer, had become a notorious cheapskate. Its dubious policies included forcing doctors to seek permission for basic procedures and to accept its lower-paying clients as a condition of coverage for premium ones.
Rowe walked straight into a company that was suffering its worst financial troubles since its founding in 1853. Aetna, which was stumbling after moving into markets and products where it couldn't make money, racked up a loss of $266.4 million in 2001, compared with a gain of $193.6 million the year before. Rowe's strategic remedies began to take effect last year, and Aetna delivered operating earnings of 44 cents a share in the first quarter of 2002 -- 41 cents above analysts' expectations. In the first quarter of this year, it delivered operating earnings of $2.03 a share, or $316 million.
Now, his challenge is to keep the financial momentum going while trying to establish Aetna as a leading force for health-care reform. Rowe has encouraged the idea of using part of the physicians' litigation settlement to establish a foundation to study issues such as childhood obesity, end-of-life care, racial disparities in health care, and the problem of the uninsured. "Aetna has become the physician-friendliest and user-friendliest company in America," claims Tim Norbeck, executive director of the Connecticut State Medical Society, which had once run full-page ads criticizing it.
Still, Rowe clearly isn't that comfortable with the praise coming his way. "This isn't about me," he says, deriding what he calls the "CEO thing." But others give him plenty of credit for reforming Aetna. Leadership consultant Jon R. Katzenbach, who worked with Rowe at both Mount Sinai and Aetna, calls him a "visionary who knew from the beginning that Aetna could be a very different kind of enterprise." Rowe might shrug off that kind of accolade. But even he would admit that his years of frustration with Aetna and other insurers have left him determined to do more than just boost the bottom line.
By Diane Brady in New York