Troubles at Aetna reflect an uncertain future for HMOs Company vows to improve its relations with doctors, hospitals Monday, March 20, 2000 By MILT FREUDENHEIM THE NEW YORK TIMES Maybe they should call it unmanageable care. In just four frenetic years, the respected if somewhat stodgy insurance company once affectionately nicknamed Mother Aetna transformed itself into a colossal force in a much-criticized business, health plans. At the end of the rainbow there was supposed to be a gold mine of profits wrung from managing away the inefficiencies and excesses of modern medicine. Instead, Aetna found itself the biggest target in an industry under siege. Its woes raise questions about whether the traditional HMO approach to paying for health care has a viable future. Last week, under intense pressure from investors who had sent the company's stock spinning downward and brought on the resignation of its chief executive, Richard L. Huber, the company adopted a new candor about its shortcomings and the powerful backlash against its specialty, tightly controlled managed care. Rejecting a takeover bid by WellPoint Health Networks of California and ING Group, a Dutch financial services company, Aetna's new chief executive, William H. Donaldson, pointed to growing demand by customers and patients for "choice and empowerment." Donaldson, an Aetna board member who spent most of his career on Wall Street, vowed to improve relations with doctors and hospitals and "do a better job of meeting the expectations of customers and patients." To that end, Aetna said it would split itself into two separate companies, one for managed health care and one for financial services. Some analysts said Aetna's troubles portended the demise of stringently controlled health maintenance organizations of the type that Huber bought from U.S. Healthcare in 1996 to begin Aetna's transformation. "HMOs are in a very precarious position," said Larry Feinberg, a partner at Oracle Partners, a New York-based health care hedge fund. "The model we all love to hate will become extinct in the next five years." Managed care companies like Aetna have come under heavy attack in Congress, the states and the courts. Aetna alone is fending off at least nine class-action challenges to such fundamentals of managed care as the use of financial incentives for doctors who keep costs down. HMOs have also found their efforts to contain costs outfoxed by drug companies, whose direct-to-consumer advertising stokes demand for expensive prescription drugs, driving up the health plans' drug costs. And patients are empowering themselves by clicking on an estimated 100,000 health care Web sites (who's counting?) offering everything from solid science to nostrums, and then bombarding doctors with questions that can stretch office visits and spur more tests and prescriptions. For these and other reasons, health care inflation is returning to double-digit territory after several years of restraint. Meanwhile, enrollees have been voting with their feet for less restrictive types of managed care, which are now growing faster than HMOs. Empire Blue Cross and Blue Shield of New York said enrollment in its more flexible preferred provider plans rose 16 percent, to 2.6 million in the year ending last January, while membership in its HMOs fell 10 percent, to 230,000. The crucial distinction between the two types of plans involves patient freedom. In a traditional HMO, tests, treatments and access to specialists are not covered unless authorized by a designated primary-care physician, a plan administrator or, in many cases, both. Preferred provider networks have none of those restrictions, and offer more freedom to choose out-of-network providers for patients willing to shoulder more of the cost themselves. Many analysts predict a comeback for HMOs if the economy cools down and taming of the health cost spiral becomes a priority again, because HMOs are cheaper than other types of plans. According to Kenneth S. Abramowitz, an analyst at Sanford C. Bernstein, the annual cost of coverage for a typical family in an HMO is $7,000; in a network of preferred physicians and hospitals, $9,000; and in traditional unmanaged health insurance, known as indemnity plans, $12,000. Those differences are usually mirrored in the amounts workers contribute from their paychecks toward the cost of coverage. But while the economy is strong and labor markets remain tight, large employers, which still pick up most of the tab for their employees' care, try to please their staffs by offering a range of health plans of all types. "In boom times, an engineer won't put up with managed care restrictions," said Uwe E. Reinhardt, a health care economist at Princeton, though easily replaceable workers often have no choice, and young, healthy workers who are low on the pay scale still sign up for HMOs. Liz Rossman, vice president for benefits at Sears, Roebuck and Co., said 87 percent of employees remained in HMOs even with a preferred provider network that offered direct access to more doctors. One discouraging feature of the network plan for low- income workers is a deductible for hospitalization or surgery of $300 for single employees and $900 for families. Employers and health plans are emphasizing choice. Honeywell offers workers a menu of health plans, plus access to an Internet database describing the credentials and health plan affiliations for nearly every doctor in the country, said Brian Marcotte, vice president for benefits at the company. After buying U.S. Healthcare and the health plans run by New York Life and Prudential Insurance, Aetna became the nation's largest health insurer, covering 22 million people. This includes 7.8 million in commercial HMOs, 6.2 million in point of service plans -- essentially, HMOs that also offer access to out-of-network doctors -- and 4 million in preferred provider networks. There are also 700,000 members in its Medicare HMOs and millions in the dwindling group that still takes part in unmanaged indemnity or fee-for-service plans. Like its national competitors, Cigna Corp. and UnitedHealth Group, Aetna can meet the widespread demand for choices. But when it bought U.S. Healthcare for a high price of $2,500 a member, it acquired a hard-driving culture that transformed many doctors into adversaries in lawsuits and in lobbying battles in state legislatures and in Congress. Doctors were especially incensed by a take-it-or-leave-it rule that required them to treat low-paying Aetna HMO members or give up Aetna members in the more lucrative preferred provider networks. "Too many of America's patients and physicians are already at the mercy of powerful health insurance giants who offer only 'take-it-or-leave-it' contract provisions," said Dr. Thomas R. Reardon, president of the American Medical Association, in a statement after the WellPoint offer was announced early this month. He said the association was concerned that merging insurance companies would have "too much leverage in their dealings with patients and physicians." Without naming the medical association, Aetna's Donaldson told Wall Street analysts last week that the critical "reactions of many groups around the world" were on Aetna's list of reasons for rejecting WellPoint -- along with antitrust and market share problems, WellPoint's smaller size, and the "tentative nature" of the offer, which was conditioned on giving WellPoint a chance to delve into Aetna's books. The challenge for Aetna, if it is to regain the confidence of investors and secure an independent future, is to discover a way to hold down costs and run its health plans economically without incurring so much wrath from doctors and patients alike -- if such a way exists. © 2000 The New York Times. All rights reserved.