Aetna to Cut Customers, Jobs to Shore Up ‘Bottom Line’
Hartford-based Aetna Inc., the nation's largest health insurer, will cut 5,000 jobs, "aggressively" hike premium rates and "shed" about 10% of its customers to boost the company's "bottom line," the Washington Post reports. According to Aetna officials, the firm will cut about 13% of the firm's 40,000 employees through attrition and the elimination of 2,400 positions (Crenshaw, Washington Post, 12/19). Aetna CEO John Rowe said, however, that the restructuring will not affect customer service (Martinez, Wall Street Journal, 12/19). Aetna also will close unprofitable Medicare HMOs, leaving 340,000 seniors without insurance, and sell or shut down additional HMOs that cover 300,000 to 350,000 employees of private companies. In addition, Aetna predicts that many companies insuring employees through the firm's Prudential HealthCare unit will not renew their contracts due to premium increases -- between 11% and 13% next year -- resulting in a loss of 1.5 million customers by the end of 2001. Aetna officials said that premiums next year would increase 11% to 12% for HMO members, 11% to 13% for PPO enrollees and 4% for Medicare HMO members (Freudenheim, New York Times, 12/19). To "improve customer service, strengthen profitability of Aetna and increase [its] competitiveness," the insurer also plans to reorganize its sales force, Aetna Chair William Donaldson said (Washington Post, 12/19). The moves come after a "turbulent year" for Aetna, which sold its financial services division, "ousted" its CEO and "worked to repair relations" with doctors and hospitals. "We're working to create a more profitable, more effective company," Rowe said (Appleby, USA Today, 12/19). The company will incur about $565 million in charges against earnings for the restructuring (Washington Post, 12/19).
What Aetna Says
According to Aetna officials, the cost-cutting measures will likely result in about $200 million in pretax savings in 2001 and an additional $100 million in 2002. The company will see a 10% increase in medical costs, which it says are aligned with hikes faced by competitors, though the Wall Street Journal reports that other major health insurers have only reported increases of about 8% in the third quarter. Officials also said that Aetna has "successfully" renewed and increased health plan contracts for next year despite "significant price increases" (Wall Street Journal, 12/19). Rowe said that the restructuring will help boost Aetna's stock performance, which has "lagged behind" competitors such as UnitedHealth Group, Cigna Corp. and WellPoint Health Networks (Washington Post, 12/19). After Aetna's announcement, the company's stock price jumped 12%, up $3.81 to $36.81. Officials expect Aetna to earn between $1.20 and $1.30 per share next year.
What Analysts Say
Analysts offered mixed reactions to Aetna's restructuring plan. Chase H&Q analyst Lori Price said, "Management is taking the right steps to reposition Aetna," but warned, "The risk is that as they raise premiums, they may be more likely to retain the more unhealthy members who can't go to another health plan. Banc of America analyst Todd Richter added, "Most of the time in the health insurance business, when you aggressively raise premiums, the people who leave you are the people whom you don't want to leave." On the stock price front, Kenneth Abramowitz of ECS Securities predicted Aetna would not "dramatically improve" for another year or two. Lee Cooperman of Omega Advisers added that Aetna's earnings could exceed $4 per share in two years if the company reached even "the low end of industry profitability." According to UBS Warburg analyst William McKeever, however, Aetna's medical costs continue to rise faster than its competitors' expenses, "reflecting the company's change from tight-fisted managed care policies" to a "more collaborative relationship with patients and doctors" (New York Times, 12/19). Carl Mercurio, ed./itor of the Managed Healthcare Market Report also warned that the restructuring "will help Aetna, but they still have to prove that HMOs and the managed care model are still viable long term." McKeever concluded, however, "They tried this before under the old management and cut costs too much. It's one of the big question marks hanging over Aetna" (USA Today, 12/19).