When Mark Bertolini took the helm of Aetna in November, 2010, the Detroit-born EMT-turned-managed care executive 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 probably are familiar with the ideas of striving for credibility and public image. Not long ago, 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 a 2004 Health Affairs essay.
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Aetna's rise, fall and later rebound poses a cautionary tale in today's consolidating healthcare market. And some of the strategies behind Aetna's $37 billion takeover of Humana invoke themes from the failed 1990s-era HMO empire.
Insurer for everything
Aetna's 160 years before Bertolini actually started in 1819, when merchants in Hartford, Connecticut, founded the Aetna Fire Insurance Company. The corporation, named Aetna Life Insurance Company in 1850, followed the American economy and society with life insurance, property insurance, farm mortgages, war bonds, worker's comp, disability and healthcare coverage--selling insurance that could "protect just about anyone, anywhere, against most anything," as one ad in the 1970s boasted.
In 1973, Aetna created its first health maintenance organization, easing into the new business that later defined the company. By 1985, Aetna was the largest private health insurer, running such deals as a joint venture with Voluntary Hospitals of America selling HMOs and PPO plans nationwide.
"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. The company stopped selling individual health policies, sold off its property-casualty business, and then "bet its balance sheet on the biggest, most expensive, and, in retrospect, most fateful acquisition in the history of the industry."
Size above all else
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." Still, Aetna sought the standardized HMO model and tried to get as big as possible with scale 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, 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. 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. 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.
A second rise and health reform's era
The company sold 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. 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 about 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."
But that model has not been entirely successful for the country as a whole. For one thing, about 40 million Americans were uninsured before the Affordable Care Act.
For another, the financial success of large health insurers relied in large part on 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, who now have ever-higher deductibles, co-pays and coinsurance.
In the deal with Humana, Aetna is going big on government programs in general, especially Medicare Advantage, despite its projected funding declines, along with subsidized exchange plans.
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."
As part of that, 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."
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From the point of view of consumers, a health plan with narrow networks and high cost sharing is just a commodity. 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.
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. That's leaving many with the question: What will companies like Aetna do 10 or 20 years from now?