Aetna purchases financial navigator U.S. Healthcare shows how to contain costs

April 07, 1996|By M. William Salganik | M. William Salganik,The Sherlock Co. SUN STAFF

What does U.S. Healthcare know that's worth $8.9 billion?

Aetna Casualty and Life Co., the 143-year-old insurance giant, announced last week that it was spending that much to acquire the aggressive health maintenance organization -- helping position Aetna to navigate a rapidly-changing health market.

"What Aetna, I think, is trying to get is managed care expertise, and the information systems U.S. Healthcare has," says Eleanor H. Kerns, a health industry analyst in the Boston office of Alex. Brown Inc.

"What Aetna is buying is a company that knows how to do it, that has a medical infrastructure as well as a management infrastructure," says Ira Gottlieb, president and CEO of Creative Health Concepts, a New York consulting firm.

The expertise Aetna is buying -- most of the U.S. Healthcare management team will be running the merged managed care business -- is known in the industry for keeping medical costs down, both by controlling use of health resources and by paying rock-bottom rates to doctors and hospitals.

It also has raised eyebrows and the ire of critics by making fat profits and paying hefty salaries to its top executives. Leonard Abramson, U.S. User.Event 7 was not expected here! Healthcare's chief executive and biggest stockholder, has been collecting more than $3 million a year -- and stands to reap some $900 million in cash and stock from the Aetna deal. (The exact amount will depend on the price of Aetna stock when the deal closes.)

"In my view, when one health insurance executive is being paid $1 billion while tens of millions of Americans are seeing cuts in their health coverage, we must examine the way we allocate our resources in the health care market," complains U.S. Rep. Bernie Sanders, and independent from Vermont.

Yet, while U.S. Healthcare has been a target for criticism about profits and compensation packages, it has not been a particular target of complaints about care.

Its plans have a strong record in winning accreditation, and analysts say the company is among the leaders in HMOs in attempting to monitor quality and patient satisfaction.

Aetna and other old-line insurers have been rushing to catch up with hard-charging HMOs like U.S. Healthcare, which have won the loyalty of employers who buy health plans by keeping costs down. In the past four years, Aetna's own business has gone from two-thirds indemnity insurance and one-third managed care the reverse. But Aetna has not been able to operate its managed-care business nearly as profitably as U.S. Healthcare, one of the pioneers in the managed care business.

Aetna earned $293 million on health-plan premiums of nearly $6 billion, a profit margin of just under 5 percent, according to

figures from the Sherlock Co., while U.S. Healthcare earned $527 million on premiums of about $3.5 billion, a margin of more than 15 percent.

"Within the indemnity world, it's fairly typical for an insurance company to view a health care claim as identical to a property-casualty claim -- something you have to pay and can't do anything about," says Douglas B. Sherlock, senior health care analyst at Sherlock, an investment adviser in Gwynedd, Pa., serving institutional investors and managed care companies.

Companies like U.S. Healthcare, however, clip costs in two ways -- controlling the fees paid to providers and controlling use of the health system.

They're known for tough negotiations with doctors.

"I tell my clients that making your first contract with U.S. Healthcare is like making your first motorcycle the one Evel Knievel jumps with," says Jon Pearce, a principal with Dan Grauman Associates, Inc., a firm in Bala Cynwyd, Pa., that advises doctors and hospitals on negotiating managed care contracts.

Compared to other HMOs, "their grinder works better and they squeeze more dollars out," says Dr. Robert Weinmann, an Oakland, Calif., physician who is president of the Union of American Physicians and Dentists.

"They're paying less than Aetna. They're paying less than Blue Cross," Mr. Pearce says. "They were among the first to pay less than Medicare."

They understand nuances of the marketplace. For example, Mr. Pearce continues, U.S. Healthcare provider rates tend to be lower in the Philadelphia area -- where the company, based in suburban Blue Bell, dominates the market and doctors need to participate to get and keep patients -- than in areas where their market share is small. (In Maryland, U.S. Healthcare has about a 1 percent market share, Aetna about 5 percent.)

And, he says, they are particularly tough on specialists: "U.S. Healthcare realizes there are more cardiologists than there are drugstores, so if they only have one in five in their network, that's OK."

U.S. Healthcare was among the pioneers in contracts that shift the risk to providers, paying a fixed monthly "capitation" fee per member no matter how much care they might require.

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