HEALTH PLANS: It's a good year for the Rowe(ses)

2003 certainly was kind to Aetna which managed to complete its turnaround started in 2001. Back in the mid-1990s Jack Rowe was running Mount Sinai hospital in New York, and making less than $1 million a year. In my earshot he asked Ian Morrison to kindly not refer to hospital CEOs as overpaid facilities managers as Ian (then my boss) was inclined to do at board presentations! When Aetna was sailing to disaster after its US Healthcare merger and was getting killed in the market by underestimating its costs, and being sued by every physician in America, it went looking for a physician-friendly management team. Rowe was the physician executive the board chose to lead them away from the brink of disaster.

Rowe's strategy was to be friendly to the doctors (and Aetna settled a huge lawsuit with several thousand of them), while figuring out which of Aetna's client groups were unprofitable (and there were many) and getting rid of as many of those groups as possible. In the midst of that brutal turnaround Aetna actually increased its IT spending so it could get a more accurate read on client profitability and do better, more accurate, and faster underwriting. I recently saw a presentation about the turnaround which showed that before that IT investment they were working off cost data that was over 2 years old and were setting their rates essentially blind to the real costs. The same IT strategy finally integrated the numerous companies it had bought in its 1990s expansion binge, although as Jamie Robinson pointed out in a comprehensive article on the turnaround in the most recent Health Affairs, that essentially meant getting rid of huge books of business at a big loss, including virtually the whole of the Prudential business it had bought in the mid-1990s. Aetna also basically gave up the care management activities that in 1996 it had purchased US Healthcare with the then intention of adopting them system-wide. That HMO of course had the goal of actively managing care delivery at the individual provider level and was in a big way responsible for the backlash against managed care on the east coast.

So it's another story of a great corporate turnaround, but of course there's a But. The goal of health insurance companies is supposed to be to deliver increasingly better services at increasingly better price to their clients. While the corporate machinations engineered by Rowe's team (which included lay-offs, culture change, the IT investment, and keeping a management team focused under conditions of great uncertainty in 2001 and 2002) should be applauded, , I'm not sure anyone's much better off other than Aetna's shareholders. For a start, it's very likely that the several thousand laid-off employees aren't.

Aetna earned $966.8 million profit in 2003, compared with a $266 million loss in 2001. And for this in 2003 Rowe got paid $18m. Ex-Blue Cross of California President, and current Aetna President, Ron Williams received $9.1 million, plus stock options that could be worth another $4.3 million. So the "risk" they took leaving secure and well paid employment certainly paid off!

However, all Aetna has really done is accurately mine and understand the information on its client base to figure out which client groups among them were better actuarial risks. So at a system level it's contributed to the increase in health premiums seen over the past few years, both by sticking price increases to its clients and by adding a pool of not-so-good risks to the rest of the market--some of whom probably found themselves unable to get insurance. So either their "greater fool" competitors, or their former clients, or the rest of us taxpayers are footing the bill for those groups that Aetna got rid of. Meanwhile, the taxpayer is paying uninsurance benefits to the employees let go, and the clients who stayed with Aetna didn't exactly see their premiums go down.

So while this is business turnaround success story, because Aetna gave up attempting to manage care and innovate in the face of medical cost increases, it's actually set back the role of health insurers as a potential source for progress in the system. And I don't think Jack Rowe could argue with a straight face that he's not overpaid any more.

Coda: Rowe is of course by no means alone among unbelievably highly paid health insurance executives in either the private sector, in PBMs and among the non-profit Blues, who have all reaped massive rewards for making their companies profitable mostly by being able to stick price increases to their corporate clients. And their clients in their idiocy or their incompetence seem to feel they have no option but to take it in their necks and then to try to pass it on to their employees. As I've said before, this cannot last forever, but it can go on for a while.

Afternote: After writing this I re-read Jamie Robinson's article and realized that great minds think alike (or I subconciously stole his theme--take your pick!). Jamie wrote in his conclusion:

The implications of its turnaround are less unambiguously positive for the health system as a whole, however. The employment-based health insurance system is proving to be less willing and able to perform the redistributive functions of social insurance in addition to the risk-spreading functions of market insurance. The nation appears unenthusiastic about any prospect of pursuing social insurance through explicit taxes and subsidies, continuing to prefer implicit transfers that do not raise the specter of big government (even as an alternative to big business). In the absence of adequate governmental subsidies for less healthy citizens, however, Aetna's improved ability to predict and price risk will expose it to obloquy as a failure at social insurance rather than to praise as a success at market insurance. In the health care sector, where no one agrees on the appropriate division of labor between the public and private sectors, no good deed goes unpunished.