Can Aetna Cure Its IT Woes?

By Edward Cone Print this article Print

Aetna jettisoned all its other lines of business to focus on being the nation's largest health insurer. Along the way, it alienated doctors, corporate health benefits managers and patients, and found itself awash in red ink. Here's the treatment Baseli

Aetna Chief Executive John W. Rowe, a gerontologist by training, was hired two years ago to heal one of the nation's oldest companies. The big insurer is showing signs of recovery under his care, reporting second-quarter operating income of $91.3 million after turning its first operating profit since 2000 in the first quarter.

But that is still a slim 1.8% operating return on $5.1 billion in revenue, in the quarter ended June 30. Rowe's target is 6% by the end of 2003. And the company was almost stunningly successful in shrinking its membership, to focus on profitable business. It lost 595,000 members in the quarter, leaving it with 14.4 million.

To regain its footing — and achieve its earnings goal — the M.D. is going to have to prescribe a strong dose of information systems. Rowe says improved technology is part of his regimen for Aetna. "The information technology investments we are making this year will provide us with a competitive advantage," Rowe told an investor conference in early June. Aetna plans to spend $185 million on 192 information systems projects in 2002, plus another $100 million on related activities such as developing requirements for those systems. Overall, Aetna expects to spend 2.5% to 3% of its 2002 revenues on information technology, about level with prior years.

But while Rowe maintains information systems will provide competitive advantage, he has yet to lay out a detailed plan to show shareholders, investors, doctors, patients and corporate benefits managers how Aetna will achieve technology leadership in an information-intensive industry. Aetna cooperated on a limited basis for this article but declined to make executives available for in-depth interviews. Quotes attributed to Rowe in this article come from public statements he has made elsewhere concerning Aetna's initiatives on business and technology. Since Rowe and his team haven't written a prescription they're willing to share, we've come up with our own. Baseline's plan for Aetna would focus on three key areas:

  • Integration. Aetna still has four separate health plan claims systems. After its 1996 acquisition of U.S. Healthcare, it gradually unified all HMO claims on U.S. Healthcare's systems. Aetna's HMO business previously used a hodgepodge of systems from other acquisitions, as well as some developed internally. Outside its HMO business, though, two of the three claims systems are incapable of autoadjudication, or computerized claim approval. The migration to an improved system for non-HMO claims is supposed to be complete in November, but it's been a long time in coming. Prescription No. 1: Keep the non-HMO claims integration project on track and improve analytical tools to extract medical cost trends from claims across all lines of business.

  • Automation. Electronically filed claims cost considerably less to process than paper claims—80% less on average. Two years ago, Aetna set a goal of receiving 85% of claims electronically by the end of 2001. Today, analysts doubt it's much beyond 50%. Autoadjudication also speeds processing and lowers costs. Aetna says it autoadjudicated 62.1% of the claims presented to its health maintenance (HMO) plans in April, up from 53.9% in 2001, but its most capable system for non-HMO claims is only at 34.4%. Prescription No. 2: By 2003, increase electronic filing of claims to 85% and boost autoadjudication to 65% for HMO and at least 40% for non-HMO claims.

  • Relationships. Aetna traditionally courted employers more than the individual consumers who are its members. Now, it's looking to make consumers its allies in controlling costs. The company also is seeking to repair relationships with physicians frustrated with Aetna's aggressive managed care policies. Prescription No. 3: Provide online tools to let consumers make—and feel comfortable making—decisions traditionally made by employers. Use technology to improve communication with providers and treat them like partners, not adversaries.

    Rowe has serious issues to deal with other than just fixing data systems. Last year, UnitedHealth Group displaced Aetna as the largest provider of health plan services to corporations. Aetna lost $187.6 million in the final quarter of last year and $280 million for all of 2001. Sales fell from $26.8 billion in 2000 to $25.2 billion in 2001. They're still falling.

    View the PDF -- Turn off pop-up blockers!

    Frayed relationships with physicians and hospitals, bloated customer rolls and staff, and rising health costs are among Aetna's biggest issues. After its $8.9 billion purchase of U.S. Healthcare in 1996, Aetna grew into the nation's largest health plan, but consumers and physicians also came to identify it with some of the worst aspects of managed care—arbitrary claims denials, meddling with medical decision-making, and poor customer service. While these complaints aren't unique to Aetna, they put it at the top of the list of managed care firms being sued in federal court by a coalition of state medical societies and consumers. The medical societies in Connecticut, New York, South Carolina, Tennessee and New Jersey have brought similar suits in state court. The company has been sued by physicians, hospitals and patients for its payment and treatment policies.

    To cope, Rowe has recruited to Aetna's city-block-sized colonial headquarters in Hartford, Conn., a management team that includes president Ron Williams, who came from tech-savvy WellPoint Health Systems, and CIO Wei-Tih Cheng, a veteran of Memorial Sloan-Kettering Cancer Center.

    In December, Aetna cut 6,000 jobs—about one-sixth of its workforce—and took a $125 million charge against earnings. In June, Aetna confirmed the phased reductions would include about 200 information technology jobs. Most data systems cutbacks will come through attrition and by eliminating contractors, in addition to 50 or 60 layoffs. The job cuts come as Aetna purposefully shrinks its membership to focus on more profitable accounts. Aetna expects to end the year with about 14 million members.

    Yet Aetna needs good information if it is to cull just uneconomic customers, out of all those acquired in an acquisition-fueled growth binge that began in 1996. "You really need sophisticated systems to know what the value of a customer is," says Lori Price, a financial analyst at JP Morgan Securities. "They've been very disciplined on pricing, getting the price increases, but that has to chase away some economic business, too."

    Rowe says the company has been successful at cutting only the least profitable accounts. He hopes to start rebuilding membership next year, taking more care to balance growth with profitability. Aetna also has been demanding increases of as much as 20% for services it believes have been underpriced.

    Aetna's technology investments have already helped it trim administrative costs. The company wants to cut selling, general and administrative expenses by $300 million this year, partly by eliminating frills like a corporate jet, but also through more efficient claims processing and other systems improvements. One example: increased automatic adjudication helped lower real estate costs at a service center in Fort Wayne, Ind., by reducing the space needed for workers, Rowe says. "That's going to save us hundreds of thousands of dollars per year, and it's happening in 35 service centers across the country."

    Rowe has said one reason he took the job was Aetna's huge warehouse of healthcare data—15.5 terabytes of information, updated monthly. He believes the company has only begun to tap its potential. In particular, he wants to identify the sickest (and most expensive) patients, getting them into programs that emphasize prevention and quality care. He admits, "We've been slow in past years with developing some of the applications that are needed.''

    There are signs that what Rowe calls a "performance-driven culture" is emerging. Aetna's First Claim Resolution program now rewards employees for settling claims properly the first time, rather than how quickly they handle calls. Now, Aetna resolves 93.9% of claims on the first call, up from 86.5% a year ago. Rowe also praises a new executive information management system, developed under Williams, that provides "an early warning system" for business trends, such as medical cost increases that need to be reflected in Aetna's pricing. Aetna also has assigned Business Systems Information Managers to keep technology projects aligned with business goals and track return on investment.

    For all this, Aetna's pace of change seems sluggish. Analysts and former employees say the company has often failed to address the systems integration issues created by its history of mergers and has been shortsighted with its technology investments. One former consultant says Aetna talked up initiatives such as using a special model from the Software Engineering Institute to improve systems project management, but adds, "If you look at the project plans, there's nothing to support that."

    "The first thing that gets cut is the long-term vision," the consultant says, such as creating systems that share data. "If you look at the systems to manage the lifecycle of a claim, these are systems built years and years ago and Band-aided together. They're not going to sit down and design a flexible system."

    Another former Aetna employee and consultant says the company's technology managers respond to the short-sighted instincts of their business counterparts. "They will make promises to the business side that are too good to be true, and can't be kept," he says. Those habits are so institutionalized that they won't be easily changed, he says.

    Even if Aetna makes a strong recovery, there is no guarantee it can regain industry leadership. When former CEO Richard Huber was fired in February 2000—following a year of criticism that he had overpaid in the U.S. Healthcare acquisition—Aetna's profits were already turning into losses. Aetna adopted the tough-guy style of U.S. Healthcare just as the backlash against managed care was beginning. Huber was labeled "the poster boy for HMO arrogance" by an industry watch group after he characterized the wife of one Aetna customer who won a judgment against the company as "a weeping widow."

    Huber narrowed the focus of the company, founded in 1853, to just health care. Formerly a full-line insurer, Aetna sold its property and casualty business and bought health plans from New York Life and Prudential, among others. But the ride was bumpy—and Aetna soon faced a $10 billion breakup bid from Dutch insurer ING and healthcare rival WellPoint Health Networks. Aetna ended up selling its financial services business to ING for $7.7 billion.

    Rowe took over in September 2000 from interim leader William H. Donaldson, a board member and one of the three original founders of pioneering Wall Street analytical firm Donaldson, Lufkin & Jenrette. No longer the largest insurer, Aetna is retrenching. Rival UnitedHealth is now as big as Aetna in terms of revenue (about $25 billion apiece in 2001) and, like tech-savvy WellPoint, already has the level of profitability toward which Aetna aspires.

    Aetna's ambitions may already be obsolete. "In general, I think the days of there being successful national health plans may be gone," says Lauri Ingram, an insurance technology analyst at the Meta Group. Centralized systems struggle to achieve economies of scale in an industry heavily influenced by state insurance laws, regional hospitals and local medical practices. "It's why the large players are kind of struggling with who are they or how can they succeed," Ingram says.

    If Aetna is to succeed on the terms it envisions, it must serve customers and process information better—not just by a little, but by an order of magnitude. Following are the three things Baseline believes Aetna must do—our prescription for Aetna's recovery—in more detail.

    Has your company experienced similar troubles to Aetna? What did you do and did it work?baseline@ziffdavis.com

    This article was originally published on 2002-08-09
    Senior Writer and author of the Know It All blog

    Ed Cone has worked as a contributing editor at Wired, a staff writer at Forbes, a senior writer for Ziff Davis with Baseline and Interactive Week, and as a freelancer based in Paris and then North Carolina for a wide variety of magazines and papers including the International Herald Tribune, Texas Monthly, and Playboy. He writes an opinion column in his hometown paper, the Greensboro News & Record, and publishes the semi-popular EdCone.com weblog. He lives in North Carolina with his wife, Lisa, two kids, and a dog.
    eWeek eWeek

    Have the latest technology news and resources emailed to you everyday.