Much Ado About Aetna

But as the insurance giant wrestles with lawyers and doctors intent on changing the way it does business, experts in the field wonder just how far Aetna can really go in reforming its hardball business practices. We'll know more when it reports fourth-quarter earnings early Tuesday morning, but given the company's financial condition, it isn't at all clear how it can stop squeezing doctors and please Wall Street all at the same time.

Of course, there's no harm in dreaming.

We've written extensively about the pressure HMOs and traditional insurers bring to bear on both doctors and their patients. Now, according to The Wall Street Journal, the threat of a class-action lawsuit has pressured Aetna to enter negotiations that could lead to some sweeping changes in the way it approaches managed care.

Some of the modifications affecting consumers could include increased access to preventative care such as mammograms, colorectal examinations and vaccines for children. And the talks may ease the financial burden put upon physicians — incentives that doctors say discourage proper care. One major change would be limiting the use of capitation, a form of payment in which the doctors receive a set fee per patient rather than a fee for each service they perform. Under capitation systems, the providers say they risk losing up to 15% of their annual fee if they go over budget by ordering too many tests or referring too many patients to specialists.

There's also talk of Aetna re-evaluating and increasing how much it pays its providers for the services they perform. Plaintiffs' attorneys and doctors complain the insurer doesn't pay a fair and reasonable rate. It's a common practice, they allege, for the company to only pay part of the fee based on actuarial tables the plaintiffs call unsound. That means the doctor — or the patient — ends up paying the rest.

Should Aetna actually reach such a settlement, industry insiders believe other insurers may feel pressure to follow suit. After all, the company is the nation's largest health-care insurer with 19 million members. "Aetna is big enough and visible enough that the things they do will be looked at by the competition," says Joseph France, an analyst with Credit Suisse First Boston. We've already seen small examples of its influence in California. After Aetna voluntarily reached an agreement with the California Medical Association to alter some of its behavior, two other insurers — Blue Cross of California and Blue Shield of California — stepped forward to initiate their own discussions.

The real question, however, is how will Aetna pay for it? "All of this costs money," France warns. "I don't know how you control costs if you have no incentives." Kim Ross, vice president for public policy for the Texas Medical Association, agrees. While the plaintiffs will push for all they can get in a settlement, he says, they also understand that Aetna is "an investor driven" company. "A settlement would be very risky," he concedes.

Already, Aetna has had to lower the Street's expectations for the coming year. In a mid-2000 restructuring, it split itself into several different companies and set an earnings target for the health insurer of $1.40 a share for 2001. But then, back in December, Aetna warned that it would likely earn $1.20 to $1.30 a share, instead. To achieve even that revised goal, analysts say the company will have to raise prices, exit unprofitable businesses and shrink its overall membership. The danger there is that Aetna will end up with a higher-risk (read more expensive) customer base than it has right now.

Consider that the company is already expected to raise premiums up to 16% this year. "If they have to raise premiums 20% to 30% over the next few years, will more of their membership than they like go to Oxford (OXHP) or United (UNH)?" asks analyst John Szabo of CIBC World Markets. Add on a settlement that increases the payouts the company makes to its doctors and it's easy to see why Aetna may be caught between a rock and a hard place.

After seven months, Aetna did manage to replace its chief executive in September with Dr. John Rowe, a former head of a New York hospital system. And once he came on board Rowe said improving the company's relationship with its doctors was his No. 1 priority. He pushed for the agreement in California and similar ones in Texas, Florida and New Jersey. Those agreements have produced some benefits for consumers. In Florida, for instance, Aetna agreed to end capitation for doctors. And in California, doctors will no longer have to pay for their patients' prescriptions — a conflict that led to doctors keeping prescriptions to a minimum.

The trouble is, execution is more difficult than just sending out a press release.

A big complaint of doctors and hospitals, for instance, is that Aetna in the past required them to participate in all of its insurance plans if they wanted to participate in any of them. That meant that if they accepted patients under, say, a traditional Aetna fee-for-service plan they also had to join the HMO network, subjecting themselves to capitation and other unprofitable evils. In December, the company said it would stop requiring its providers to sign so-called all-products contracts. But since the announcement went into effect some new contracts with all-products clauses have mistakenly popped up in California, says Peter Warren of the California Medical Association.

All-products contracts are also being sent out in Rochester, N.Y. Aetna is just now entering the region and has yet to receive a license to sell its HMO product. But it still insists physicians sign up for all of its remaining plans. The company told Dr. William Dolan, the president of the Medical Association of the State of New York, that the all-products issue doesn't apply in Rochester since the HMO isn't available. But Dolan fears that once Aetna gets its license, it will be able to force the HMO onto its providers.

Officials in both California and Texas told us they aren't completely satisfied with the limited concessions they've been able to negotiate with Aetna. While the California Medical Association is taking a wait and see approach before asking for more changes, according to Warren, the docs in Texas are already trying to amend their deal, says Ross of the Texas Medical Association.

The real problem gets back to making money. Both sides recognize the pressure Aetna is under and yet neither doctors nor the insurance companies can figure out a way to keep up with rising medical costs. Meanwhile, the vague language of the settlement talks and the previous agreements does little to stamp out the financial pressure doctors face to limit care.

We've got our fingers crossed that a meaningful settlement will emerge from the current talks. But Larry Levitt, a director with the nonprofit Kaiser Family Foundation, suggests that nobody hold their breath. He expects just "one more chink in the armor of managed care." That's better than nothing, but it probably won't get you a pass to the dermatologist