Interesting Times at Aetna

[Guest guest]

From WSJ 7/29/98

Some Doctors, Employers Recoil

As Aetna Copies 'U.S.H.C.' Style

By LUCETTE LAGNADO

Staff Reporter of THE WALL STREET JOURNAL

Aetna Inc. was the class of insurers for the better part of 150 years, a

gracious company that doted on corporate clients and so coddled its own

employees that they called it Mother Aetna.

But its style came to seem quaint and passe as HMOs gained sway in the

1990s. The old-line company needed to toughen up and embrace managed

care, and so two years ago Huber, then its No. 2 official and now

chairman and chief executive, went shopping for a new corporate

personality. He found it -- at a price of nearly $9 billion -- in U.S.

Healthcare, one of the largest and most dynamic health-maintenance

organizations.

Aetna completed the acquisition in July 1996, and Mr. Huber moved swiftly

to graft U.S. Healthcare's aggressive style onto the old Aetna. He

ushered out much of his own team and handed half a dozen top jobs to the

HMO's senior executives, letting them draft the blueprint for the new

Aetna. He and the new team ordered the shutdown of dozens of offices and

the dismissal of thousands of employees. They swiftly nullified hundreds

of contracts with doctors and hospitals, offering new deals with far

stingier terms.

A Different Company

Two years later, the merger, while invigorating Aetna in some ways, has

cost it dearly in others. Numerous patients, employers and doctors have

been unnerved by the company's sharp shifts. Aetna once paid claims

promptly and with little question; now it is prone to mishandling

charges, pays far less for the same services and sometimes keeps doctors

waiting for months before settling their bills. Legions of seasoned

customer-service people have been replaced by newcomers in remote

locations who at times seem overwhelmed, rude or simply clueless. The

difficulties of meshing disparate computer systems add to the

problems.

In the ensuing backlash, hundreds of doctors have dropped out. Aetna says

that overall, its doctor ranks are growing steadily. But in certain

areas, many have defected. In affluent Westchester County north of New

York City, 37% of doctors declined to renew contracts with what is now

called Aetna/U.S. Healthcare. A cluster of more than 200 doctors quit the

network in the Westchester community of White Plains and its tony

neighbor Scarsdale. In Dallas, Aetna faced the loss of a group of 500

physicians; it is trying to woo them back one by one.

Patient membership in the Aetna/U.S Healthcare HMO continues to grow

nationwide, but has slipped in the lucrative New York and mid-Atlantic

region. A few hospitals have refused to sign provider contracts. And a

few corporate clients have been so upset by poor service that they have

diverted business to rivals or dropped Aetna entirely.

Long Island, N.Y., oncologist Feinstein quit the network after

nearly a year of frustrating exchanges. For cancer patient

Wallace, that means she can see her doctors only " out of

network, " and thus can't get more than 70% of the bill reimbursed.

" Every time I start a new chemo drug, I have to wonder what they

will allow, and I have to lay out money upfront, " she says.

" It's been very upsetting. "

None of this has been good for Aetna's bottom line. First-quarter

operating earnings were down 40%. At the time of the acquisition, Aetna

envisioned 1998 operating earnings of $7.50 a share, but securities

analysts now expect just half that. " They have not delivered, "

says Frazier of Bear, Stearns & Co.

All of which brings a rather disarming mea culpa from Mr. Huber. " I

am the first one to admit it: We had some serious service degradation. We

suffered more pain than we expected, and some of it was

self-inflicted, " the CEO says. In cutting loose so many skilled

people so soon, he says, " We screwed up. "

The U.S. Healthcare hotshots he promoted displayed " a bit of

arrogance " in overhauling the Aetna of old, he says, though he adds

that " that was one of their strengths. " The worst growing pains

are almost over, Mr. Huber says, vowing that Aetna's service will return

to industry standards by the end of the summer and improve to

" superior " by year end.

Aetna tried to do too much too fast and placed too much faith in

technology -- two object lessons for any corporate acquisitor. Another

one: Get the timing right. Aetna bought into the HMO industry when it was

hot, only to see the business cool.

U.S. Healthcare had 2.8 million members in 1996, and Aetna paid top

dollar of about $3,200 per member. The aggressive ways of the HMO seemed

purely a plus in those days. But now, HMOs are taking a public-relations

beating, doctors are getting feistier about payment levels, and HMO

profits are under pressure. In a more recent acquisition of an HMO,

United HealthCare Corp. is paying only $1,200 a member to buy Humana Inc.

Meanwhile, for Aetna, the high price it paid forces the company to write

off " goodwill " of $300 million a year, hurting earnings.

But Aetna felt it needed to do something bold. It had excelled in the

fee-for-service era, when insurers essentially processed claims for

employers and tacked on a fee, not challenging claims aggressively or

bargaining hard upfront over payment levels. The company fumbled in the

early 1990s when HMOs emerged and blue-chip clients began clamoring for

the cost-control scrutiny of managed care. It was in " genteel

decline, " Mr. Huber says.

Aetna tried to enter the new era gently, buying several small HMOs, but

it lacked the skills that managed care requires: cutthroat negotiating

tactics and brash salesmanship. " We didn't have the cutting-edge

expertise to manage managed care, " Mr. Huber says. " It was an

orphan in our house. "

The solution was to buy U.S. Healthcare, an HMO so tough that its

nickname was U.S.H.C. -- as in U.S.M.C., the U.S. Marine Corps. " One

of my intentions in doing the deal, " Mr. Huber says, " was to

inject the entrepreneurial spirit of U.S. Healthcare -- to graft a young,

vigorous branch into a good, solid trunk. "

They seemed like different species. Aetna was bureaucratic, given to

consensus-building and lots of meetings; it even held

" pre-meetings " to map out the formal meetings. Its client base

tilted heavily toward big corporate accounts. The brass wore conservative

suits, some made by a tailor who came to the office to take measurements.

The company's culture was known as " Aetna Nice. "

It struck the folks at U.S.H.C. as kind of wimpy. They prided themselves

on crisp decision-making and all but banned meetings during business

hours. They had built the managed-care company on small and midsize

employers, and the salespeople on the front lines were revered. Every day

was casual Friday at the HMO. " Aetna was Old Ivy; U.S. Healthcare

was more Ohio State, " Mr. Huber says.

U.S. Healthcare officials got key posts at Aetna/U.S. Healthcare Inc.,

which encompasses all health-care insurance and provides 70% of parent

Aetna Inc.'s revenue. They included two co-presidents, the chief

financial officer, general counsel, head of sales and chief medical

director. The six set out to reinvent Aetna.

First up: technology. Aetna's two workhorse computer systems were about

25 years old. And it had 14 smaller computer systems for HMO coverage

that couldn't talk to one another, depriving it of a big-picture view of

care and costs. The new team would merge the data mishmash into the HMO's

sophisticated system, which adjudicated claims largely electronically:

Punch in the proper codes and the system dictated whether to pay and what

was reasonable.

The technology makeover was key to delivering on the promise of $300

million in " synergies. " Counting on the new system, officials

immediately started cutting the jobs it was supposed to make obsolete,

with a target of 7,500. They slashed to 11 their 57 medical-management

offices, where doctors and nurses approve and reject services. And they

set out to whittle the 44 claims-processing centers to a dozen, though

the downsizing is now on hold at 25 offices.

" We had a wonderful set of service centers, set up back in the 1950s

and 1960s when the telephone still had dials, but now they can be on the

moon, " the CEO says.

Even jazzy technology needs the right people to run it, though. By last

fall, about 4,000 Aetna veterans had quit or been dismissed, and many of

their replacements were untrained. Rookie claims processors handled just

three to five claims an hour, compared with up to 17 for seasoned

processors. Almost 400 nurses and doctors who had staffed the

medical-management centers as " gatekeepers " also left,

weakening the company's hold on costs.

Costs Rise

Thus, even though the new Aetna became a bare-knuckle bargainer on

reimbursement rates, its health-care costs rose. They were up 14% last

year, outstripping a 10% rise in Aetna's HMO membership. Costs per member

rose 18% in the New York area. In the 1997 third quarter, Aetna took a

$160 million charge for unanticipated medical costs.

Rising costs industrywide have been part of the problem, the company

says, and another has been patients' increased visits to doctors. But

Aetna concedes that a big factor was that it simply lost track of what it

was shelling out. Bear Stearns' Mr. Frazier says, " As a result of

losing more people than expected, they could no longer monitor their

costs. "

Unpaid doctor and hospital bills mounted, and corporate accounts began to

complain. Willamette Industries Inc., the Oregon timber company, bowed

out of Aetna. So did Princeton University. Drug maker Hoechst n

Roussel Inc. polled its employees, realized they were unhappy and moved

almost all of its Aetna business to rival Cigna Corp.

J.P. & Co. gave part of its Aetna business to another Aetna

rival, United HealthCare, after incidents involving lost forms and other

problems. resorted to gathering its employees' claims together and

shipping them to Aetna itself, by Federal Express. When Aetna executives

briefed customers recently on how good things will be once the snags are

fixed, 's benefits manager, Jane Lassner, fired a public broadside:

" It seems to me Aetna will be fabulous once you get this done; my

concern is you won't have any customers left by the time you get

there. " A spokesman says, " We decline to

comment. "

DuPont's Reaction

The old network of local processing centers, sprawling and inefficient

though it was, provided good service. It wasn't uncommon for an Aetna

person to know the individual customer on the line. Aetna had a site

serving DuPont Co. near its Delaware headquarters plus a

claims-processing staff devoted to DuPont business in Greensboro,

N.C.

Post-merger Aetna closed the Delaware office, and dozens of staffers left

the Greensboro office in the cutbacks. " Bills weren't being paid on

time, " says DuPont's benefits manager, , and the new

handlers " weren't able to answer questions when employees

called. " DuPont employees in several states began complaining about

upheaval in their doctor networks. It " affected the productivity of

our employees, " Mr. says.

Top Aetna executives descended upon DuPont and have improved the

situation since then. But " we're still monitoring " Aetna, Mr.

says.

Mr. Huber says he and his team have lodged face-to-face pleas at dozens

of unhappy corporate clients. " I've been beaten up by

customers, " he says.

Also by some providers. After the new Aetna/U.S. Healthcare declared most

contracts with providers null and void, it began negotiating new ones in

the tough style of U.S. Healthcare. Four hospitals in and around

Pennsylvania's Amish country refused to sign contracts with the big

insurer. Young, who oversees Lancaster General, rebelled after

being told his doctors were having to plead for 45 minutes on the phone

to get Aetna approval for common procedures. In Chicago, Northwestern

Memorial quit the network for nearly a year, until Aetna raised

reimbursement levels and won the prestigious hospital back.

Doctors Balk

Hundreds of doctors have left Aetna's network rather than accept its

price-slashing. In the New York metropolitan area, about 10% of doctors

who were associated with the old Aetna -- more than 800 physicians --

have quit; among specialists in Manhattan, the dropout rate is 30%.

After the merger " it was 'here is the door if you don't like it,'

" says Walczuk, controller for East River Medical Imaging

Associates in Manhattan. Aetna offered East River Medical just $425 for

MRI scans, 40% less than the old Aetna. The imaging clinic bailed out.

Patients with Aetna insurance now must pay $1,100 up front and fend for

themselves.

Aetna's medical director for the New York market, Bernstein, says

the old reimbursement system invited overtesting and other abuses. Citing

the amount Medicare pays for a complicated scan, Mr. Bernstein says,

" The days of the $1,400 MRI are going the way of indemnity

insurance, namely, into the sunset. "

For a child's tetanus shot, pediatrician Glenn Kaplan in White Plains

charges $40. He says some health plans pay up to $32 for it, but Aetna

offered about $20. (That is " well above their cost, " Aetna's

Dr. Bernstein says.)

Aetna also imposed a " capitation " plan that, instead of paying

a doctor $50 or so for each visit, offered a monthly fee of $15 per child

for caring for a five-year-old. In a community with many doting parents,

" I can see one kid four times in a single month for a little

cold, " Dr. Kaplan says. Although Aetna says it offered income

guarantees for several months, he and his partners said goodbye to the

network.

The new Aetna also annoyed some doctors by ordering them to stop using

their own clinics to do X-rays, blood tests and other clinical work and

to refer patients to Aetna-approved centers.

The Cost of Chemo

Dr. Feinstein, the Long Island oncologist who quit Aetna, says the

company didn't pay nearly $20,000 in bills his practice had run up

treating Ms. Wallace for cancer. About $16,000 was for chemotherapy given

last August through December. " When we tried to recoup money, it was

an internal labyrinth, " he says. " How can doctors stay in

business when they are owed this kind of money? "

He bills for one chemotherapy drug, Hycamtin, at $695, including $415 for

the drug and more than $200 for the oncology nurse who administers it.

But Aetna consistently has paid Dr. Feinstein only $148 a pop. Aetna says

it typically reimburses at higher rates, and the Wallace case was a

" mistake. " After a reporter's inquiry, Aetna dispatched a

medical director to review the matter, and Tuesday said it was sending

out a check for an additional $7,500.

Too late: Dr. Feinstein's five-doctor practice dropped out of the

Aetna/U.S. Healthcare plan earlier this year.

Aetna's spokeswoman, Joyce Oberdorf, says the doctor defections represent

only " a pocket of anti-managed-care, anti-capitation "

physicians, adding that Aetna has re-signed 90% of its doctors in the New

York area.

The company says it has 50% or more of U.S. doctors under contract and is

adding from 1,000 to 2,000 a month. This hardly represents disaffection,

it says. As for the dropouts in White Plains, Aetna's Dr. Bernstein says,

" You're seeing the last of the holdouts -- they are conservative

emotionally and very risk-averse. " You could show them numbers

" till you're blue in the face " and it would do no good, he

adds. " They've been kicking and hollering and saying 'no way.' Which

means we will call them in six months. "

Mr. Huber, the CEO, says that despite all the turmoil since the HMO

acquisition, he has no regrets: " We learned from the stumbles and

came out a much more vibrant, dynamic company. "

When doubters persist, he invokes a figurative " graveyard in

Hartford " filled with the remains of companies whose markets passed

them by -- typewriter makers, the first auto makers, the first bicycle

companies. " They are all gone. " Had Aetna not pursued its

painful merger, Mr. Huber says, " We would have been

history. "

R. Kovacek, MSA, PT

KovacekManagementServices, Inc.

The FOCUS Group, Inc.

20225 Danbury Lane

Harper Woods, MI 48225

Fax

Email Pkovacek@...

<http://www.theFOCUSgroup.net>

Join PT Manager-- The Electronic Rehab Leadership Community

To subscribe, send an empty message to

ptmanager-subscribe@...

---- Read this list on the Web at http://www.FindMail.com/list/ptmanager/ To unsubscribe, email to ptmanager-unsubscribe@...

To subscribe, email to ptmanager-subscribe@...

--

Start a FREE E-Mail List at http://makelist.com !