Aetna is positioning itself to ride out the early storms of health reform and end up plying the new waters sustainably.
2014 was a pretty good year for Aetna, as it was for other large insurers.
The Hartford, Connecticut-based insurer posted net income of $2 billion, or $5.68 per share, up 7 percent from 2013. Though medical membership increased a modest 6 percent in 2014, to 23 million, Aetna's revenue surged 23 percent to $57 billion, as it increased participation in the growing government programs for Medicare, Medicaid and exchange health plans.
The company's medical benefit ratio for 2014 was 82.2 percent, down from 82.9 in 2013. The commercial ratio increased one-tenths of a percent to 80.2 percent in 2013, while MBR for government health plans improved by several percentage points, falling from 87.5 percent to 84.9 percent.
"Aetna achieved record annual operating revenue and operating earnings in 2014," said chairman and CEO Mark Bertolini.
The company's chief financial officer, Shawn Guertin, touted several achievements that paid off last year: "accelerating synergies from the Coventry acquisition, pricing or solving for nearly $1 billion in new fees and taxes related to healthcare reform, and closing the meaningful funding gap for 2014 Medicare Advantage rate."
For 2015, Aetna, the nation's third largest insurer, is expecting to bring investors at least $7 a share, on the order of $2.5 billion in total.
To meet those expectations, Aetna will be vying with the likes of other for-profit insurers -- UnitedHealth Group, Anthem, Cigna, among them -- and also the many regional nonprofit insurers, including Blue Cross companies and provider-sponsored plans.
In a conference call discussing the company's earnings, Bertolini, Guertin and the company's new president, Karen Rohan, outlined a strategy to try to differentiate itself in Medicare, Medicaid, exchange and employer-sponsored health plans and help bring sustainable changes to the nation's healthcare system, while still reaping returns.
"The government is trying to partner with the private sector to get more value-based contracting underway," said Bertolini, arguing that Aetna is poised to both attract new membership and change provider business models for the better with its accountable care unit, Healthagen.
Healthagen "was based on promising results in partnerships with health systems and sharing of risk-adjusted capitation revenue," Berolini said. "I think the most important part of value-based insurance is changing the hospital and health system model from one of revenue generation to one of margin generation, and you can only do that by passing some of that risk and helping those health systems manage their risk."
Aetna is also a part of large industry consortium aiming to have 75 percent of revenue under value-based contracts by 2020.
Aetna's public exchange strategy for 2014 was based in part on leveraging value-based and accountable care contracts with hospitals and physicians. The claims experience for the expected 800,000 public exchange members is still "immature" and it is not clear what kind of risk-adjustment payments will be received, but "we expect this business to be modestly profitable in 2015," Guertin said.
In the private exchanges, there are also uncertainties but opportunities, too. After spending an undisclosed amount acquiring the private exchange company bswift, Aetna now has to differentiate itself from other insurers with private exchanges and consultants like Aon Hewitt that are serving large corporate employers.
"The real question is whether we have private exchange enrollment that is stable," Bertolini said, noting that 2014's private exchange enrollment was less than expected, given all the hype and surveys about employers migrating to defined contribution health benefits.
While "there is work that needs to be done to make (bswift's) platform more robust," Bertolini said it has a key differentiation in offering back-end benefit administration that is bundled into the cost of the exchange. With that, Aetna is pursuing multi-insurer models for large employers, where plans from competitors and Aetna might be sold alongside each other, and single-carrier options, particularly for the middle market.
Depending on how health reform evolves under future regulations or a new presidential administration, Bertolini said there is the possibility that private exchanges could be used to sell Medicare, Medicaid, individual and group plans. That would create a "fungibility" across subsidized, government-funded, employer-sponsored and open market plans, which could be beneficial for both consumers and insurers.
And in Medicare Advantage there are both challenges and opportunities, with enrollment approaching 17 million and many thousands of American seniors reaching age 65 everyday.
Amid Affordable Care Act-mandated reimbursement tightening in the program, particularly last year, "our expectation is that we will move margins up again for Medicare Advantage," Bertolini said.
Around 80 percent of the company's 1.1 million Medicare Advantage members are in plans rated at 4 or 5 stars, and the goal is to achieve 100 percent high star enrollment, which would insulate the company from reimbursement penalties.
Value-based and ACO contracts are a big part of Aetna's Medicare strategy, like other insurers, too. But for some patients and providers, the plans can come off as narrow networks -- and even lead to some backlash.
Aetna has found itself in the middle of a dispute with independent pharmacists, after introducing what Bertolini described as an "innovative," preferred pharmacy network in its Medicare Part D prescription drug plans.
"It was all approved, but it got pushback in the marketplace," Bertolini said.
About 400,000 of Aetna's 1.5 million Part D membership have seen changes in access to in-network pharmacies or pharmacies with preferred cost-sharing, and the insurer did temporarily misidentify about 5,000 pharmacies as available in-network on the Medicare Plan Finder and its own website.
At the direction of CMS, the company drafted a corrective action plan and gave all its Part D members in-network access to its broadest network through the end of February and the option to switch plans or find a new pharmacy.
"We have reached out and solved many of the problems," and "expect that to have a limited impact on star ratings," Bertolini said.