With a progressive CEO and culture and a huge merger in the works, Aetna is promising to help reinvent healthcare. Yet it is still up against the long-term unknowns about what will constitute truly sustainable healthcare.
When Mark Bertolini took the helm of Aetna in November, 2010, he had three objectives. "One was to set Aetna on a course for the next 160 years," as he recounted recently. "Our purpose should be to become a consumer company. The second was to make healthcare reform actually work. The third was to reestablish the credibility of corporate leadership in the eyes of the American public."
Longtime employees at the Hartford-based health insurer should know something about credibility and public image. At the turn of the century, Aetna was on the brink of financial ruin and synonymous with all that was wrong in healthcare.
"Throughout the turbulent 1990s Aetna was the poster child for the aspirations and failures of managed care, channeling patients and physicians into health maintenance organizations...and then floundering in adverse publicity, economic shortfalls, and investor disenchantment," wrote James Robinson, a University of California, Berkeley, health economics professor.
In the early 2000s, under the leadership of gerontologist John Rowe, MD, Aetna reinvented itself into a "smaller but more profitable multi-product insurer," with a "consumer-driven" focus, as Robinson detailed in a 2004 Health Affairs essay.
While the post-Rowe Aetna was arguably among the more successful in adapting out of the aggressive HMO model, the company's past reinvention doesn't guarantee success in the new, post-health reform economy. Likewise, Aetna's bets on scale, health system partnerships and government insurance programs via the $37 billion Humana acquisition, are being cast amid uncertainty, the rise of provider-sponsored insurance and an at-best mediocre track record for Medicare Advantage and Medicaid managed care.
Fire, farms, life and diversified benefits
Aetna's 160 years predating the start of Bertolini's tenure actually started in 1819, when merchants in Hartford, Connecticut, led by led by Thomas Brace, founded the Aetna Fire Insurance Company, a corporation that would follow the American economy and society with insurance for the new, next and profitable.
By 1850, the life insurance industry beckoned and a new Aetna Life Insurance Company was formed from the fire protection company. That same decade, Aetna sold insurance to Southern businessmen for their slaves (for which the company apologized in 2000). Then amid the economic growth of the Civil War, the company capitalized on a surge in life insurance sales and soon switched from the "half-note" premium to the all-cash payment system. (Photo via Connecticut History.)
By 1872, Aetna was earning a quarter of its revenue selling farm mortgages, and during the rest of the 19th century, Aetna helped build Hartford into a world insurance capital, thanks to executives like Morgan Bulkeley, also a Hartford mayor and Connecticut governor.
In 1899, Aetna started selling health insurance, though only to its life or accident policy customers, and in 1902 entered the market for employers' liability and worker's collective insurance, amid the rise of unions and the nascent middle class. That decade also brought the rise of the automobile, prompting Aetna to sell insurance for car owners, collision and damage.
In 1913, Aetna developed a life insurance product for businesses to buy for their employees--the predecessor to a huge group health insurance industry that continues to this day--and not long after started selling disability coverage.
When the stock market crashed in 1929 and the Great Depression hit, Aetna responded by "withholding dividend payments to shareholders from late 1932 to early 1934, reducing the workforce through attrition and cutting salaries by 10 percent," according to the company's official history.
The 1940s turned out of be a boon for Aetna and others, thanks to the the golden age of the war economy. Aetna partnered with other insurers to sell bonds for the construction of seven U.S. Navy aircraft carriers, and it later helped underwrite insurance for the Manhattan Project. Group life insurance sales grew during the 1940s, and in 1951, Aetna introduced major medical coverage, helping employers avoid wage controls and attract workers through tax-exempt health benefits.
Aetna went international in life insurance in 1960s and continued growing in health insurance; it was listed on the New York Stock Exchange in 1968. In 1973, Aetna created its first health maintenance organization, but its HMO business wouldn't rise until two decades later, as the diversified insurance model continued through the 1970s. The company pitched itself as helping "protect just about anyone, anywhere, against most anything."
An inorganic giant 'worth less than the sum'
After a reorganization in the early 1980s, Aetna was the largest private health insurer by 1985, though still not fully invested in HMOs. In 1991, Aetna stopped selling individual health policies, after 91 years in the segment, and it soon sold off its property-casualty unit in an attempt to go even bigger in healthcare--a quest that almost tanked the company.
"Through the early 1990s Aetna was a venerable and profitable commercial carrier, providing indemnity services for employees and retirees of large, self-insured corporations," according to UC Berkeley's Robinson. "It avoided the individual insurance market, Medicare and Medicaid, capitation, utilization management, primary care gatekeeping, and network-based managed care products. It watched with dismay as diminutive HMOs converted to for-profit ownership; loaded up on equity capital; and launched into a self-reinforcing cycle of enrollment growth, better provider contracts, lower premiums, and further growth."
After only dipping its toes into managed care, Aetna wanted to go all in. Under Richard Huber, CEO from 1997 to 2000, the company "bet its balance sheet on the biggest, most expensive, and, in retrospect, most fateful acquisition in the history of the industry."
In 1996, depending on the version of the story, Aetna "acquired, merged with, or was acquired by U.S. Healthcare," in pursuit of "complementarities, synergies, and economies of scale"--the same goals Bertolini and Humana CEO Bruce Broussard are citing in favor of consolidation today.
But, as Robinson recounted, the "reality quickly turned out to be one of incompatible product designs, operating systems, sales forces, brand images, and corporate cultures." Nonetheless, Aetna sought the standardized HMO model and tried to get as big as possible--with scale and above all. In part, the company had to justify the U.S. Healthcare deal, which at $3,300 per member was the most expensive per capita deal in the industry's history.
"The firm took the HMO product to places it had never been before, aggressively pursued the small-group market, took on Medicare risk contracts, and committed itself to being not only the largest health plan nationally but a dominant plan in the most populous regions, including New York, the mid-Atlantic states, Florida, Texas, and California," Robinson wrote.
With 21 million enrollees at its peak, Aetna "was the biggest player in an industry committed to decreasing costs for purchasers and increasing earnings for shareholders," as Robinson wrote.
By then, though, there was a consensus among everyone from "Wall Street to the White House" that "the future of health insurance would be everything Aetna was not," Robinson wrote. "The consumer backlash against network restrictions and utilization review was reaching a fever pitch."
In 1999, for instance, a California jury awarded $116 million in damages to the widow of stomach cancer patient whose bone marrow transplant was delayed for six months by an Aetna subsidiary health plan. (This was the rare case where a large group member could sue; the patient was a prosecutor, a government employee not covered by the ERISA law.) In 2001, the case was settled for an undisclosed sum.
Aetna "offered a perfect target for a populist culture that distrusts big business as much as big government," Robinson wrote. "Providers were in full revolt, consolidating their local markets and demanding rate increases, litigating over delays in payment and denials in authorization, and, in some instances, simply walking away from HMO networks."
Aetna's aggressive HMO model, dependent on a costly administration and utilization management overhead, wasn't even profitable for Wall Street. Investors wanted to sell off the company's assets, arguing "that the whole of an overbuilt conglomerate is worth less than the sum of its parts," according to Robinson.
Consumer-driven era, still waiting for consumer benefits
The company sold off its international and financial services units to focus on and redesign its healthcare business. A new CEO came in with new sensibilities and a sense of how to make money outside of the giant HMO--John Rowe, MD, the former president of Mount Sinai Hospital and the Mount Sinai School of Medicine and the founding director of the Harvard Medical School's Division on Aging.
Rowe and a new c-suite threw away all use of the U.S. Healthcare brand and renamed the whole company as Aetna Inc. They also abandoned the idea that profitability could only come with large market share. (The strategy is still used in part today in the group plan businesses, by avoiding high risk if possible and "keeping the business that we want to keep," as Aetna president Karen Rohan said recently.)
In 2002, Aetna reduced its workforce by 9 percent, as markets were abandoned, plans we eliminated and membership decreased to 13 million.
At the same time, under Rowe, the company tried to mend its relationship with physicians. In 2003, Aetna settled with some 700,000 doctors represented by numerous medical societies and agreed to improve its communications and payment policies.
The company also tried to reduce medical utilization costs through less-intense, community-based health services, rather than just denying care. In 2001, the company started a pilot project "that encouraged doctors to send home patients with simple pneumonia, dehydration or gastroenteritis," as the Wall Street Journal recounted. "An Aetna nurse would visit the patient's home to set up intravenous hydration, antibiotics, oxygen and 24-hour monitoring devices. Doctors could keep in contact over the phone and still get paid for services."
By 2004, Aetna was trying to pitch itself as a resource, "helping clients make informed, cost-conscious choices," as Robinson wrote. "The new Aetna and the industry of which it again is a bellwether now offer customers more choices at higher prices, more information on quality, more responsibility for cost, and a range of insured and self-insured funding mechanisms that further erode the social pooling of risk and the implicit subsidies from perennially healthy to chronically ill citizens."
Yet, as the last decade shows, that model has been far from successful for the country as a whole. For one thing, some 40 million Americans were uninsured, despite the country's enormous healthcare industry with per capita healthcare spending of $8,000 (now $9,000).
For another, the financial success of large health insurers may have had less to do with sustainable underwriting and efficient businesses practices and more to do with cost-shifting. As early as 2000, Aetna "allowed a considerable amount of risk to be shifted from itself onto purchasers, by facilitating a transfer from insured products to self-insured health benefits," Robinson wrote. In turn, employers shifted costs onto their employees. For a while, this was in the form of would-be wages, going towards the employer share of healthcare premiums that individuals aren't always cognizant of. More recently, this has come in the form of higher deductibles, co-pays and coinsurance.
The creation of a subsidized individual health insurance market with standardized benefits and consumer protections has brought new customers for health insurers like Aetna--a trade off in which they offer a quasi-public good instead of the government running a "public option" health plan. But in keeping the tax-exemption for employer-sponsored insurance and mandating employer coverage, the ACA has maintained a key driver of fragmentation and complexity that is difficult for all involved, including insurers.
Which may be one reason why Aetna is going big on government programs in general, especially Medicare Advantage, despite its projected funding declines.
Since the ACA, Aetna has managed to be quite profitable on a mix of new and old business models, while still pursuing what Bertolini calls "strategic disruption."
Nowadays, the company acknowledges its own potential irrelevance. "The Affordable Care Act cracked open the black box of underwriting and insurance," Bertolini said recently in an interview with Institutional Investor. "Whenever you expose the rules and the way things run, you have a tendency to move towards commoditization."
From the point of view of consumers, a health plan with narrow networks and high cost sharing is just a commodity, and not one they particularly want to buy. And why wouldn't a health system just start a health plan if they have to take on financial risk anyway?
"We said to the hospital systems, 'Why don't we partner? You get into our old business. Why don't you manage the risk because you're taking care of the patients?'" Berolini recalled. "What we become is less of a go-between and we become a facilitator of the relationship between the provider and patient."
This, while starting what Bertolini believes is a trend in corporate America towards raising minimum wages to a livable wage and generating billions in profits ($2 billion in income last year).
It remains to be seen, though, whether Aetna and its peers can continue being profitable while shifting risk to providers and generating revenue from management and technology services and administration of publicly-funded programs. Certainly, in the latter business, providers are taking a second or third try, decades later, at integration and this time it looks promising.
In the end, if healthcare is a consumer-driven commodity that has to be affordable and comprehensive, it's an open question whether consumers need large managed care companies like Aetna administering premiums and claims when providers can do it themselves. The question is, what will companies like Aetna do, exactly, 10 or 20 years from now?