Curing Managed Care

By Daniel Eisenberg

It didn't matter that he was in his company's own backyard. When Aetna's new chairman, William H. Donaldson, approached the podium at the annual meeting of the Connecticut State Medical Society last month, he didn't expect a warm welcome. The audience was packed with his firm's sworn enemies, doctors who view the $26 billion-a-year health-care giant as the poster child for all that ails managed care, from draconian cost controls and reams of paperwork to heavy-handed negotiating tactics. Last fall the organization lobbied the state attorney general to investigate Aetna's allegedly abusive practices.

On this day, though, Donaldson, a founder of the investment firm Donaldson, Lufkin & Jenrette and a former chairman of the New York Stock Exchange, was out to present Aetna's new bedside manner. "In response to a real market need, we heartily embraced managed care," he told the crowd. "But there was a price, in terms of too many restrictions and too much process that have grown increasingly unpopular. There are those who say the pendulum has swung too far. I agree."

No longer, he claimed, would Aetna U.S. Healthcare require Connecticut doctors to participate in all its plans, from HMO and Medicare to more flexible preferred-provider organizations (PPO); physicians with 100 or fewer HMO members would now be paid for each patient they saw, rather than with a flat, monthly rate under the hated system known as capitation, which in practice compelled doctors to ration care if they wanted to make any money. And patients with chronic conditions would now be able to use specialists as their primary-care physicians.

For the head of the nation's largest, most reviled managed-care provider, currently serving 19 million customers, this was a genuine peace offering. If Donaldson has his way, it won't be the last; he's already struck a deal with the Texas attorney general making similar concessions. Since taking over a few months ago from Richard Huber, the combative CEO who was forced out, Donaldson has been trying his best to mend the HMO giant's sickly relations with doctors and members, who view it as putting profits ahead of patients.

You wouldn't know that, of course, by looking at the company's balance sheet, which makes Donaldson's job all the more challenging. Last week, just as he was nursing a deal to sell Aetna's financial-services and international units to Dutch firm ING Group for as much as $9 billion, Aetna was being sued for taking its sweet time paying bills to a number of New York hospitals. (Aetna says it is hopeful they can resolve the issue through negotiations.) There are also restless shareholders, who watched the stock fall nearly 60% in the past year before it recovered recently on the prospect of a good premium for its financial-services and international arms. (Aetna closed last week at $68.)

Legal attacks are nothing new for Aetna. From a barrage of class actions to the patients' bill of rights making the rounds in Congress, the company has been caught in an angry offensive against the managed-care industry. "They deny a substantial amount of necessary care and then, to wear you down, make you play the paperwork game," says Dr. Joy Maxey, an Atlanta pediatrician and president of the Medical Association of Georgia, which has filed a suit against Aetna for violating the state's prompt-pay law. (Aetna denies the charges and says other suits are the political attacks of trial lawyers.)

Even if Donaldson can diffuse those issues, he doesn't possess a miracle cure for Aetna's woes. The company needs to increase its profits, but the public backlash against managed care has made it all but impossible to cut costs any more. HMO enrollment is slowing; medicare reimbursements are too low; and hospitals and doctors are fighting back against deep fee discounts--in some cases dropping out of networks altogether. More people are opting for flexible plans, choosing preferred-provider organizations over HMOs (see sidebar). Says Tom Ferguson, a health-care consultant at William M. Mercer: "There's less incentive for providers to ration care."

Indeed, as patients clamor for every new drug that's advertised on TV and every test they learn about on the Net, the price of medicine is getting stiffer, jumping an estimated 10% this year. For the moment, Aetna and others are passing along that added expense to employers and consumers, one of the primary reasons the sector has rebounded a bit on Wall Street. But as Merrill Lynch senior analyst Roberta Goodman points out, "that's like running up the down escalator--the trend is against you." And even though Donaldson produced better-than-expected earnings of $184 million on sales of $7.9 billion for the first quarter, Aetna's profit margins have remained in the sick bay, at around 3%, which lags its competitors.

Aetna may yet wring efficiencies from its acquisitions of the past few years, such as U.S. Healthcare and the money-losing Prudential operation, for which it overpaid. That's if Donaldson can find a management team with the talent and guts to run the troubled health-care division.

From a career standpoint, Donaldson, 68, needs this job like an attack of angina. He's a walking legend on Wall Street and founding dean of Yale University's business school. He's been on Aetna's board since 1977, and insists that he's boss for the long haul: "I want to take a fresh look at this business and not be locked into old thinking."

That means, first and foremost, altering Aetna's aggressive corporate culture, which has felt free to second guess doctors' decisions. "We have the scale and scope to be a really good business. But we should be managing by exception--our presumption should be that 80% to 90% of the medical community is doing a good job." Aetna may follow the lead of United HealthCare, which last fall ended precertification--the infuriating process by which doctors must get approval from a distant voice on the phone for many tests and treatments.

Despite his headaches, Donaldson remains confident that he can get Aetna back on its feet again. By creating a wide range of plan options, charging different rates for the 18-year-old college student and the 55-year-old blue-collar worker, he thinks the company can thrive in the changing health-care environment--where workers may one day use defined-contribution accounts, much like 401(k)s, to spend their medical benefits as they see fit. But if Aetna's actions don't back up Donaldson's words, the reception he gets at his next doctors' gathering may be nastier than a bad night in the E.R.