By Christopher Guadagnino, Ph.D.

Aetna CEO John W. Rowe, M.D.

Published September 2001

• Managed Care Showdown in Texas (February, 1999)
  
• Working to Improve Aetna's Physician Relations (November, 1999)
  
• React to this article in the Discussion Forum.

The nation’s largest managed care company, having become a veritable poster child for the national backlash against managed care abuses, is attempting to transform its image.

Since acquiring and adopting the aggressive business practices of U.S. Healthcare five years ago, Aetna U.S. Healthcare has succeeded in escalating feelings of hostility and mistrust in both patients and physicians as it engaged in a massive growth campaign through other acquisitions.

A public relations war launched by the consumer and provider communities has attacked fundamental tenets of managed care, including gag clauses, all-products clauses, denials of necessary care, late and downcoded reimbursement payments, and consolidation of health plans forming titans such as Aetna.

That attack has produced patient rights legislation, prompt payment legislation, lawsuits by patients and providers, and the willingness by hospitals and large physician groups to sever contracts with managed care plans. Those developments, along with significant losses in market share and profitability, have sent Aetna reeling in an attempt to adapt to the changing landscape. Aetna has recently created a new office of physician relations unit; sold its financial and international units to focus entirely on health care business; named a physician, John W. Rowe, M.D., as its new president and CEO; announced a 12.5 percent reduction in its workforce; and divested unprofitable business, including dropping its Medicare product in 11 markets, adding to the shrinkage of Aetna’s health care enrollment by 1.4 million, or 7.1 percent, in last fiscal year.

The Philadelphia Inquirer reported that Rowe, upon taking Aetna’s helm last September, said that the company would rationalize its referral system to bring it into alignment with best practices, take the hassles out of health insurance and try to establish respect between Aetna and physicians and hospitals.

Aetna’s intentions, if actualized, would signify a remarkable transformation in the managed care industry. Those intentions appear to have been partially realized, although physician experience has been mixed. Nevertheless, Aetna’s changes would seem to be dictated by current marketplace trends and may offer a glimpse of how managed care will be shaped in the years to come.

Aetna’s Market Pressures

The Hartford Courant noted that Aetna has been in poor financial health, with earnings falling short of its own estimates for three straight years. The New York Times reported that Aetna saw a national operating loss of $95.9 million for this year’s second quarter as medical costs jumped 17 to 18 percent in its managed care business, and noted that the company said the losses would continue into next year.

Texas Insurance Department figures indicate that Aetna lost $15.2 million on its Houston operations last year (joining roughly half of the state’s HMOs which also lost money last year). Moody’s Investors Service Analyst Patrick Finnegan notes that Aetna’s Texas HMO operations lost $14.8 million statewide on revenue of $208 million during the first quarter of 2001.

In Pennsylvania, Aetna’s HMO operations lost $18.6 million statewide on revenue of $502 million during the first quarter of 2001, according to Finnegan.

A preliminary market analysis conducted by the Pennsylvania Medical Society (PMS) notes that Aetna also lost two to three percent of its market share in southeastern Pa. last year to Independence Blue Cross, slipping to roughly 20 percent of the commercial HMO market in the five-county region, according to PMS Chief Economist Dennis Olmstead. That loss reverses a trend, he adds, as Aetna had previously been increasing its market share in that region.

Although the PMS analysis is not complete, Olmstead expects Aetna’s market share in the 29-county western Pa. region to have held steady last year at roughly seven percent.

While all health insurance companies face the same challenge of staying ahead of medical cost increases, Aetna was hit harder than other companies because of its massive consolidation and growth campaign without sufficient attention to profitability, especially in small group plans, and without adequately developing the necessary management information systems to capture timely changes in cost trends, according to Finnegan. The result, he says, was a patchwork quilt of different types of products and networks without being managed on a decentralized basis.

Aetna also failed, during its rapid expansion, to keep an eye on what the provider community would accept, only to find that their inflexible all-products and reimbursement policies were causing declining revenues among physicians who found that competitors were less dictatorial on those policies, says Finnegan. Wholesale groups of providers boycotted Aetna, producing headlines and triggering physician negotiating leverage in Aetna’s smaller markets, Finnegan adds. "When you couple that with the mantra to grow to pacify the Wall Street community, you have all the ingredients for a lot of unprofitable business," says Finnegan.

"We have recognized how critical physicians are in providing care to our members," says John T. Kelly, M.D., director of Aetna U.S. Healthcare’s Physician Relations Unit, who acknowledges that policy changes are a response to market pressures.

Aetna Announces Changes in Texas

At the time of Rowe’s installation, and in the hope of improving its accountability, Aetna announced it was decentralizing its medical decision-making by requiring its seven regional medical directors to report directly to nonphysician regional managers instead of its national medical director. Aetna’s changes would not stop there.

In its settlement last year of a lawsuit brought against Aetna U.S. Healthcare and other HMOs by the Texas attorney general, Aetna agreed to a number of changes in its business practices, including no longer penalizing physicians who exceed medical budgets or giving bonuses to those who stay within limits, modifying it’s all-products policy by allowing physicians to opt out of specific products lines (i.e., all Aetna HMO products or all Aetna PPO products) without dropping all Aetna products, and requiring medical necessity determinations to be made on a case-by-case basis by physicians based on state-of-the-art standards.

Aetna’s changes appear to be making an impact on Texas physicians. "It’s been a complete turnaround over the last year or so," says Robert T. Gunby Jr., M.D., an ob/gyn at Baylor University Medical Center in Dallas, and chair of the Texas Medical Association’s Council of Socioeconomics. Gunby notes that Aetna’s past behavior was "openly vicious toward physicians," which led a number of them to drop Aetna contracts.

When Aetna had threatened to bring in the FTC for an antitrust investigation against the Genesis Physicians Practice Association, Gunby, who was then-Dallas County Medical Society president, expressed in a letter-to-the-editor to the Dallas Morning News his view that Aetna’s real intention was to intimidate individual physicians into signing contracts that they do not wish to sign and that might not be in the best interests of their patients.

Since its settlement with the Texas attorney general and the appointment of a physician to Aetna’s top post, says Gunby, Aetna has been more cooperative and understanding of physicians’ concerns. He notes that the company has dropped its all-products policy, which it had previously used in a heavy-handed fashion to prevent physician defection from its panels; modified its "hold harmless" contractual policy to lessen physician liability; and dropped a number of preapproval requirements. The hassle of drug formularies has been reduced considerably, he adds, since Aetna adopted a three-tiered pricing structure for its prescription drug copayments.

Gunby notes that Aetna representatives are not nearly as hostile on the phone and that its medical division managers are noticeably more efficient in seeing approvals through than they were in the past.

He adds that the Texas Medical Association (TMA) this spring joined state medical societies in California and Georgia in a federal lawsuit against several HMOs for payment delays and denials, but excluded Aetna because of its efforts to address physician concerns.

Aetna officials have met with the TMA over the past two months, indicating that they would be willing to observe the provisions of HB 1862, which passed the Texas legislature and would have substantially addressed the problem of health plan reimbursement delays and denials but was vetoed by Texas Gov. Rick Perry, says Richard W. Johnson, Jr., director of TMA’s Division of Medical Economics. Among the bill’s provisions, he notes, was a definition "clean claim" and a mandate that health plans provide clear coding guidelines and fee schedules to enable physicians to minimize inappropriate bundling and downcoding of claims by health plans. As for Aetna following through with their commitment, "We’ll believe it when we see it in practice," says Johnson.

Gunby attributes Aetna’s policy changes to backlash by Texas consumers and physicians, as well as to market pressure. "Physicians dropping Aetna contracts and patients looking to different plans put the hurt on them as they saw their networks drying up," says Gunby. Aetna also has more competition in Texas markets than they did before their Prudential merger, as other health plans have become better positioned, says Johnson.

Experience in Pennsylvania

Since the settlement with Texas, Aetna has announced that it is applying its all-products policy change to all individual and group-contracted physicians nationwide and has met with various state medical societies to discuss applying other changes in the way it does business that would benefit physicians, such as eliminating the need of referrals for laboratory or radiology services, allowing patients with serious illnesses to use specialists as their primary care physicians, allowing ob/gyns to serve as a female patient’s primary physician for gynecological as well as obstetrical services, and allowing physicians who see fewer than 100 HMO members to choose per-visit reimbursement rather than capitation.

As of Feb. 1, 2001 throughout Pennsylvania, Aetna relaxed its HMO referral requirements by no longer requiring specialists to specify codes for office visits or procedures performed, and instead reimbursing them for any covered service when a primary care physician issues a certain electronic referral code.

Aetna’s regional managers are considering whether or not to extend the process to laboratory or radiology services, notes Kelly.

Aetna is also no longer requiring referrals for precertified inpatient or outpatient surgical center procedures, including the related professional and anesthesia services and pre-admission testing.

Kelly adds that Aetna has expanded its E-Pay electronic claims system, which guarantees payment of claims within 15 days of submission, and for which approximately half of Aetna’s physicians in Pa. have signed up.

Kelly notes that Aetna’s E-Pay system and new referral policies are also in effect in Texas.

In an August 2001 letter sent to Pa. physicians, Aetna announced that, effective July 1, 2001, base capitation has been increased by three percent for all primary care physicians. Aetna also announced that, effective Jan. 1, 2002:

• Payment rates for E&M services will be increased in the aggregate by 12.66 percent for all Aetna HMO and PPO plans.

• Aetna’s commercial HMO and PPO 2002 fee schedule will be adjusted in accordance with HCFA’s recent changes in the 2001 RBRVS, with Aetna’s standard fee schedule to be determined using $36.3452 as its RBRVS multiplier for all procedures, except codes Aetna has historically excluded from RBRVS relativity, such as maternity and preventive eye care. Aetna noted that the RBRVS methodology continues to phase in compensation for the additional practice expense when a procedure is performed in a physician office versus a hospital facility location.

• Payment rates for global obstetrical care (CPT codes 59400, 59510, 59610, and 59618) will be revised to a single-rate structure, with the new single payment rate of $1,665.

Aetna noted that it would make copies of the sample fee schedules available to physicians on Jan. 1.

According to Kelly, the changes apply to all physicians in Pa.

"Aetna’s attempts to improve relations with physicians have gone beyond rhetoric and spin," says PMS’s Olmstead, who acknowledges that Aetna is revising and eliminating certain troublesome protocols and that the company’s medical directors have been meeting regularly with the PMS to discuss physician concerns.

Olmstead notes, however, that Aetna has not truly eliminated their all-products policy, since it still forces participation in Aetna products by requiring physicians to remain in an entire product line, e.g., all of Aetna’s HMOs, if they remain in any one of Aetna’s HMOs. Aetna has several HMO plans in a given market, he adds, and uses the same continuity-of-care argument to justify the partial all-products policy that they used to justify the previous, stricter policy.

Despite Aetna’s existing policy changes, several issues remain to be addressed. "We have a list of things we want them to commit to," says Olmstead, including increasing fee schedules at least to Medicare rates; fully disclosing the manner by which the rates are derived, to allow for sound actuarial analysis; and standardizing and clarifying billing protocols such as the definition of clean claims, the use of modifiers, claims bundling, number of consults allowed for an inpatient stay, and a prudent physician definition of medical necessity.

Aetna’s changes have met with mixed reviews by Pa. physicians. Ronald Barg, M.D., senior medical director of the University of Pennsylvania’s Clinical Care Associates, says that Aetna has moved to a single medical director for the entire Penn system and has been more responsive over the past year in resolving claims payment, patient enrollment and physician credentialing issues. Aetna has also been more collaborative in announcing operational changes, Barg adds, noting: "An Aetna medical director frequently calls me before our physicians get new information from Aetna."

Promptness of payments by Aetna to the Penn health system have improved significantly over the last six to 12 months and remains better than that of Independence Blue Cross (IBC), says Barg.

"We’ve not experienced any improvements in provider relations by Aetna whatsoever," counters Ray McLaughlin, billing manager of Orthopedic Surgery and Rehabilitation Associates, an eight-physician multispecialty group in the Philadelphia region. McLaughlin says that Aetna tends to be a lot pickier than other health insurers and tags claims for review more often than does IBC. His group has not found it any easier than in the past to deal with Aetna representatives to resolve claims issues or to learn about policy changes. "We’ve requested, on numerous occasions, Aetna’s policies and fee schedules. We can’t get them," says McLaughlin. He speculates that Aetna is more interested in improving relations with primary care physicians and treats specialists as though they were "a dime a dozen."

In western Pa., Aetna is still not a dominant player, and statewide policy and reimbursement changes announced by Aetna will probably take longer to be noticed.

No change in Aetna’s policies has been noticed by Renaissance Family Practice, which includes 29 physicians at eight sites in the greater Pittsburgh area, says Daniel McCarthy, its practice administrator. He was not aware of Aetna’s all-products policy change and has not seen any improvement in provider relations, noting that it remains difficult to get a hold of Aetna’s provider representatives for claims follow-up or for definitive answers to administrative questions.

When contract negotiations failed between Aetna and UPMC Health System, an Aetna provider representative did not warn Renaissance’s Penn Hills Division office manager Janice Tate that UPMC was terminating its Aetna contacts as of Aug. 1 with three of its hospitals and with the University of Pittsburgh Physicians (UPP) group, says Tate. Having met with the Aetna representative two days prior to receiving an Aetna letter announcing the termination, Tate says it would have been helpful to have those two extra days of preparation to assign new specialist referrals to patients.

On a more positive note, an Aetna representative personally met with Pediatric Alliance—a group of 24 pediatricians in Allegheny, Butler and Washington counties—to tell it that, despite the breakdown in Aetna’s contract with UPP physicians, Pediatric Alliance’s physicians could continue to refer patients to specialists at Children’s Hospital or its satellites, according to Elizabeth Wertz, Pediatric Alliance’s executive director. Wertz has found Aetna’s representatives to be generally receptive and helpful in addressing the group’s questions and concerns.

Aetna’s changes have met with less success elsewhere. Last year, Aetna’s then-Chairman William H. Donaldson spoke at the Connecticut State Medical Society’s (CSMS) House of Delegates meeting and proposed a number of changes in its business practices.

Although the CSMS was impressed at Aetna’s attempt to address physician concerns, its physician members reported that Aetna had not lived up to its commitments, notes CSMS Director Tim Norbeck. Aetna failed to resolve four main physician concerns, Norbeck says: failure to totally eliminate an all-products policy; physicians’ medical necessity decisions were still being overruled by Aetna; financial incentives to limit referrals were still practiced; and a pledge that Aetna would give physicians 90 days notice of any "significant" administrative or payment change hinged on what Aetna deemed was "significant."

The CSMS proceeded to file lawsuits early this year against six HMOs—including Aetna—claiming that the companies breach provider contracts; arbitrarily overrule physicians’ medical necessity decisions; ignore managed care reforms enacted by the state; and arbitrarily downcode, delay, deny and bundle claims, says Norbeck. The lawsuits (to which a seventh HMO has since been added) seek injunctive relief as a medical society, while several physicians are suing as a class for damages, he adds. This August, the Medical Society of the State of New York filed similar lawsuits against six HMOs—including Aetna.

Kelly believes such lawsuits are without merit and is disappointed that some medical societies have chosen litigation against Aetna instead of cooperative dialogue to address mutual concerns and craft solutions, as Kelly says Aetna is successfully doing in Texas, Pennsylvania and elsewhere.

Implications for Future

Norbeck maintains that an investor-owned HMO’s first obligation is to its shareholders, and fears that Aetna may have to squeeze physicians, hospitals and patients further in order to get back to profitability. On the other hand, he says, Aetna may decide that it has to ally itself with physicians to avert any further backlash by the public and by Congress.

According to a 2001 study by Conning & Company, managed care companies and HMOs, under siege by regulators, legislators, physicians and patients, are likely to implement substantial changes in the near future. Because policies that allow more provider autonomy, such as the PPO model, are selling much better than traditional HMO policies, there is a de facto shift towards more physician and provider control, the report notes.

The New York Times reported that Aetna wants to sharply decrease its HMO membership while raising the number of self-insured employers that it serves.

As the consumer and physician marketplace demands fewer managed care constraints placed on health care delivery, it would seem that relaxing utilization oversight and referral policies may help Aetna firm up its patient and physician panel membership. On the other hand, looser control over health care utilization would seem to make it more difficult for Aetna to keep costs in line and return to profitability.

By trying to give the public what it wants, Aetna (and the managed care industry in general) will have to charge higher premiums in return for greater choice, while developing tighter information systems to gather and report health care cost trends for sound pricing, according to Moody’s Finnegan.

The prospect of a federal bill that allows patients to sue their HMOs will likely influence health plan product design to allow more discretion to patients and physicians, relegating managed care intermediaries more to a back-seat function of gathering more comprehensive outcomes data and designing best practices care protocols for physicians, which will in some cases indicate that effective care does not always require the latest drug or technology, Finnegan believes.

Kelly asserts that Aetna’s dual objectives—to restore its financial health and to improve physician relations—are not inconsistent. "In certain instances, reducing administrative requirements does not lead to increased costs. It reduces overhead for physicians and reduces overhead for us," says Kelly, pointing to some of the prior authorization and pharmacy management functions that Aetna has modified.

Aetna has stepped up the frequency with which it provides clinical performance reports to individual physicians and physician groups, to address the significant variation in services provided for diseases such as asthma, diabetes, cardiac care and pharmaceutical use, Kelly says, and the company is now providing clinical performance measures in those areas on a quarterly basis instead of annually, he notes.

Aetna is also engaged in a cooperative effort with the PMS and other health insurance companies in the hope of developing a single set of guidelines across health plans for managing diabetes, Kelly adds.