Aetna's Painful Recovery

Jack Rowe fixed the insurer's finances -- but are his methods good for health care?

At its low point in the 1990s, Aetna (AET ) Inc. had become a national symbol of everything that was wrong with managed care. At one stage, the insurer took to issuing defensive press releases, such as one to reiterate that it did not require mastectomies to be performed as outpatient procedures. Then doctors nationwide, claiming unfair billing practices and patient-care interference, began to hit Aetna and several other insurers with a series of class actions in late 1999. "Aetna is playing doctor with our patients," read one newspaper ad taken out by the Connecticut State Medical Society.

Financially, the insurer was just as unhealthy, seemingly bent on increasing membership at any cost. It embarked on a series of overpriced and poorly digested acquisitions, such as an $8.9 billion merger with U.S. Healthcare in 1996 and the $1 billion purchase of Prudential HealthCare in 1999. Aetna's problems culminated in a net loss of $279.6 million in 2001. "Aetna came close to blowing itself up," recalls analyst Patrick Hojlo of Credit Suisse First Boston (CSR ).

John W. "Jack" Rowe, 59, knows all about the old Aetna. A renowned geriatrician, Rowe considered suing the company and several other health plans when he ran Mount Sinai NYU Health, one of the country's largest private hospital systems. Instead, Rowe became chairman and CEO of Aetna three years ago with a dream of helping transform the U.S. health-care system. As he puts it: "We needed to extend the capacity of physicians to provide high-quality, cost-effective care." Earlier this year, Aetna broke with rivals to settle the doctors' massive class action for $170 million. It has also been a pioneer in grouping doctors by quality and placing more health-care decisions firmly in the hands of patients.


But, in the world of health insurance, how you define success depends on whether you're a shareholder or a customer. Along with President Ronald A. Williams, who is widely regarded as one of the top minds in the industry, Rowe has posted seven consecutive quarters of profit growth. Aetna's stock price is up 173% since May, 2001, to $63.40. But to fix Aetna, Rowe has hiked annual rates by more than 16% and slashed its customer base from 21 million members when he came on board to 13 million today. He also cut 15,000 jobs. The company abandoned Rhode Island and jettisoned almost half the counties nationwide in which it offered Medicare products. Sales this year, projected by analysts to be $17.8 billion, will be lower than the $19.9 billion recorded in 2002 -- although profits will be up. With historic legislation just passed extending drug benefits to seniors and giving health plans more financial incentive to cover Medicare patients, Aetna expects to lead the charge back in now that reimbursement rates will cover costs.

For an illustration of how hard it is to transform consumer health care, look no further than Aetna's metamorphosis from America's largest and one of its most troubled health insurers to a smaller, more profitable innovator. As Daniel T. McGowan, president of rival HIP Health Plan of New York, says: "In some ways, Aetna has turned the corner, but there's always some concern when you do it by dropping membership."

Rowe argues that the best way to fix the system -- and Aetna -- is to punish lesser performers in the medical community while forcing Americans to wake up to the realities of health costs. "It's unrestrained choice in the American health-care system that has contributed to rising costs," says Rowe, who laments low deductibles and copayments that protect "the individual from any insight into the actual cost."

A network of intriguing but sometimes controversial new offerings reflects Rowe's world view. The rapidly expanding Aetna HealthFund line was the first from a national carrier to combine the elements of a traditional preferred provider organization plan with an employer-funded account for routine health care that can be rolled over. The fund, which will have 150,000 members in January, puts people on the hook for their own health-care decisions and costs. At employers' behest, Aetna has also increased both the deductibles and the co-payments in its traditional service plans. In this, Aetna is not alone. According to a study co-sponsored by the Kaiser Family Foundation, annual worker premiums rose this year to $508 for individuals and $2,412 for a family of four, up from $334 and $1,619 in 2000. And prescription-drug co-payments rose as much as 71% in the same period. Aetna, to protect its own bottom line against rising costs, is phasing out coverage for retirees by 2005.

Rowe is putting his medical colleagues on the hook, too. Aetna is again risking physicians' wrath by rolling out an elite "Aexcel" network of what it considers to be the top-performing and most efficient medical specialists in a region, usually giving members a discount to use it. The concept will be launched in Seattle, Dallas, and Jacksonville, Fla., early next year. Robert S. Galvin, director of global health care at General Electric Co. (GE ) and a leader in pushing for performance measures in medicine, calls the move courageous. "In managed care, everybody hated them," jokes Galvin. "In this, only 30% or 40% [of doctors] may hate them." That said, GE just gave Aetna its business in Connecticut because of such innovations. As Galvin puts it: "Instead of hunkering down, they're boldly creating a vision."

That vision starts with an acknowledgement that old-style managed care doesn't work. Since coming into existence 30 years ago, health-maintenance organizations have been too rigid and too limited for the tastes of most Americans. Care is rationed. Basic services often have to be pre-authorized. Bureaucracy can be rampant. For Linda Peeno, a doctor who served as medical director for insurers before becoming an activist, the process is dehumanizing, dangerous, and sometimes lethal. "You begin to act like you're handling warranties at Circuit City (CC )," says Peeno. "You're removed from the bedside and just passing files around."

One of the worst offenders during the 1990s was Aetna. After a spate of poor results and high-profile flubs, CEO Richard L. Huber was replaced in early 2000 by board member William H. Donaldson, now chairman of the Securities & Exchange Commission. Along with vowing an end to some of Aetna's more egregious policies and selling its financial and international services arm to ING Group (ING ) for $7.7 billion in 2000, Donaldson recruited Rowe. The academic was surprised but excited, noting the need for "a next phase for health insurance in America."

Wall Street, of course, was less concerned about the next phase of health care than the next quarter for Aetna. It soon became clear that, because of poor pricing and runaway costs, the company was heading toward a net loss of $48.2 million in the first quarter of 2000. Anxious to get on with his revolution, Rowe brought in William C. Popik from CIGNA HealthCare (CI ) as the new chief medical officer and Wei-Tih Cheng from Memorial Sloan-Kettering Cancer Center as chief information officer. His biggest move, though, was to hire Williams, a senior executive of Wellpoint Health Networks Inc. (WLP ), as head of Aetna's health operations.


Under Williams, 54, Aetna began making aggressive moves to boost its bottom line. He overhauled everything from benefit structures to how salespeople were compensated, making them more directly accountable for profits. Williams built an executive management information system that made it easier to mine data and reduced the time it took to settle accounts from 20 days to seven. While he shared Rowe's zest for new products, he helped the company get rid of money-losing accounts by exiting markets, culling clients, or hiking rates to the point that clients walked away. "Our strategy was to charge customers the fair cost of the coverage they purchased," says Williams. To avoid the risk that clients with higher medical costs would stay on, Aetna dropped entire counties or product lines.

One of the most difficult and controversial exits was in Medicare. Like many insurers, Aetna's client roster includes Medicare patients covered under so-called Medicare+Choice plans. Because Medicare pays doctors and hospitals a set rate, insurers have found it tough to cover costs in certain markets. And, Rowe notes, it's almost impossible to offer extra services without higher payment. "If they're only going to give us a rate that's the same or even less than what they pay under Medicare, how do I make money?" asks Rowe. Under the new bill, which provides $12 billion to lure insurers back into Medicare, the company expects to pick up more business.

For Rowe and other insurance leaders, it's challenging to practice both good medicine and good business. While Aetna may have used its huge amount of data to exit markets, the insurer also uses it to cut costs, improve health, and reduce medical mistakes. One example is MedQuery, a new program in which Aetna monitors the prescription drug use of members and, among other things, alerts doctors to possible problem interactions. The logic: Aetna is the only one that knows the myriad of treatments each person may take, because it handles all the bills.

Deciding who is fit to be in an elite physician network is another matter altogether. Aetna uses its own quality and cost-effectiveness measures to channel more business to top specialists through Aexcel. Rowe anticipates the network will save Aetna money because the best doctors tend to be the most efficient. With medical mistakes costing up to 98,000 lives in hospitals alone each year, according to the Institute of Medicine of the National Academies, he also wants to disabuse people of the notion that quality is consistent between doctors. The question is how Aetna decides who is considered high-quality. "A lot of measures of efficiency are measures of costs and not linked to patient output," says Suzanne F. Delbanco, executive director of The Leapfrog Group, an employer coalition pushing for quality care.

Critics also worry about how certain information might be used, such as in Aetna's initiative to collect racial and ethnic data. Members volunteer the information, which is kept private and used to target maladies unique to each group. Given the high incidence of cervical cancer among Vietnamese women, for example, Rowe feels it's important to pay for more frequent pap smears in that group.

The belief is that spending more money now will help patients and save on health-care costs down the road. Aetna's disease-management programs, for example, identify members with conditions that could benefit from regular care and lifestyle changes. Kenneth Mollineau, who has coronary artery disease and plays drums in a steel band, even rearranged his drum kit after being counseled by Aetna nurses. "They said it's not good for me to have my hands up in the air," says Mollineau, who gets regular nutritional counseling and follow-up calls.

After years of being the bad guy, these initiatives are helping Aetna win back fans. Rowe says it has already added 250,000 new members for January. Thanks to better cost controls and underwriting, Aetna is now a lot more competitive on price. It's even pursuing the often ignored small-group market. John Stanley, chief financial officer of Continental Motors Group Co., a car dealership based in Countryside, Ill., says Aetna was the most competitive among the few plans willing to take on his 420-employee company. His people no longer gripe about payment denials or doctors dropping out. "Aetna felt it could throw its weight around," says Stanley. "Now, we have a lot more value for the money."

Rowe has shown he knows how to keep shareholders happy. And clearly he's making progress in his relations with some patients and doctors. What's not yet clear is whether repairing Aetna will get him any closer to his dream of fixing health care in America.

Corrections and Clarifications "A painful recovery for Aetna" (People, Dec. 8) noted that the insurer was phasing out coverage for its retirees by 2005. To clarify, Aetna says the subsidy for future retirees will diminish at that point and disappear in 2007. It will not affect existing retirees.

By Diane Brady in New York

    Before it's here, it's on the Bloomberg Terminal.