Back to basics: after experiencing huge losses and court battles, Aetna is rebounding by focusing on customer service, prompt claims payments and mending relationships with physicians.

Four years ago, Aetna Inc. may not have liked what it saw when it looked in the mirror. Faced with a bleeding bottom line, a dramatic decline in membership and its share of bad press, Aetna's once highly recognized slogan, "Aetna, I'm glad I met ya!" wasn't the case for some members and providers who criticized the billing practices and patient-care interference of the company. But now its appearance has changed.

The company's new slogan, "We want you to know Aetna," describes what some call the "new and improved Aetna." The company's refocused commitment to consumerism and access to health-care information, along with its profitable growth, is giving Aetna new stature in health care, dental, pharmacy, group life, disability and long-term care insurance, and employee benefits.

Dawn of a New Day

The early 2000s were a daunting time for Aetna.

Despite being one of the largest health insurers with more than 21 million members in 1999, the company was not profitable. In 2001, it was losing a million dollars a day, due in part to rising medical and administrative costs, overpayment of claims and underpricing.

In the mid-1990s, the company also had entered into a series of acquisitions--something that turned out to be "indigestible in part," Aetna's current chairman and chief executive officer, Dr. John Rowe, said in a 2004 interview with USA Today. In 1996, the company not only sold its property/casualty operations to Travelers Insurance Group for $4.1 billion, thus ending its century-old multiline business era, it also acquired U.S. Healthcare to become a health and financial services company. Three years later, Aetna completed its acquisition of Prudential Healthcare for $1 billion to make it at that time the country's largest provider of health benefits. In 2000,

Aetna completed the sales of its financial services and international business to ING for $7.7 billion and spun off the health businesses to its shareholders.

Aetna's management team knew it needed to make some hard choices to become profitable and regain its place in the market. Last year's completion of a radical turnaround made that a reality.

Rowe, a former practicing geriatrician, played a large role in the restructuring. Since taking the reins as CEO in 2000, he's helped lead Aetna to 13 straight profitable quarters, an upsurge in its stock price and enrollment growth to more than 14.4 million individuals under its health plan, 12.8 million dental plan members and nearly 14 million group insurance members.

Aetna President Ronald Williams, a former WellPoint Health Networks Inc. executive, also helped reshape the company. Together, he and Rowe bring a set of complementary and critical skills to the organization, said Charles Boorady, a Smith Barney Citigroup analyst.

In addition to a new management team and new business processes, the company implemented new strategies in its turnaround efforts. "Our first goal was to focus on the basics--getting back to first-rate customer service, paying claims on time, mending relationships with physicians frustrated with the bureaucracy of a large company," said Fred Laberge, a company spokesman. Rowe's background as a physician helped reshape the medical community's perception of the company, and "it gave us a new opportunity to be a strong competitor in the marketplace."

Aetna also exited unprofitable regions, products and markets. For instance, it trimmed its membership by about 10% by exiting certain Medicare and health maintenance organizations markets. The company changed the compensation structure of its sales force and reduced its medical cost ratio. It also eliminated about 8,500 employees in 2002, according to an A.M. Best Co. special report.

Another strategy was to change the membership focus, shedding the "bigger is better" theme. Prior to 2001, the company was focused on growing its 21 million membership and becoming the largest health-care insurance company. Now it's centered on growing the company profitably, said Christian Miles, an A.M. Best Co. analyst.

This year, Aetna has achieved what Rowe calls an "excellent start." During first-quarter 2005, Aetna posted a net income rise of nearly 16%, boosted by strong gains in medical membership and premium increases. Net medical membership grew to 719,000 in the quarter, exceeding the company's guidance of 675,000 net new members.

The company also continues to increase its shareholder value. By the end of the turnaround, Aetna's market value increased nearly fivefold, to $18 billion. In addition, it's refocused on tighter cost controls and underwriting, and more disciplined pricing, and is concentrating much effort on a newer market to its portfolio--small group.

Another improvement is enhanced data systems. Two years ago, Aetna unveiled its executive management information system to Wall Street, and it has become a "top notch, flexible system" that provides timely market and product-specific information, said Miles.

Consumers: Priority No. 1

In its new commitment to consumerism, Aetna has transformed from being a large HMO with a one-size-fits-all mentality and a "take-it-or-leave-it" proposition, said Laberge. "Now we tailor all our products and services."

In 2003, Aetna was the first national, full-service health insurer to announce a Health Savings Account offering. The Aetna HealthFund line of products provides members with access to tools and information that can help them make smart, effective decisions about their health and financial well-being. HealthFund membership has more than doubled since 2004.

"A primary benefit is that Aetna's broad portfolio of products allows them to offer an HSA or HRA product that can be integrated with other benefits, such as pharmaceutical, long-term care, disability," said A.M. Best's Miles. In addition, the company offers a broad provider network in its plans.

Members are becoming healthier. Nearly 23% of Aetna HealthFund participants said they've increased use of preventive health services, and members have either maintained or increased the frequency with which they receive important tests and screenings for certain chronic conditions.

Technology also is helping on the consumer-directed front. The company recently redesigned its Aetna Navigator Web site to make it easier for members to find information about health-care choices and finances. The company recently added a new feature--En Espanol--that includes links to all features and functions available on the site in Spanish.

Reaching Specific Groups

The company's U.S. Department of Health and Human Services-approved discount drug card is aiding thousands of Medicare beneficiaries. The card is marketed both internally to Aetna's 27,200 employees and externally via various direct mail and advertising campaigns. It includes such services as an open drug list in which all drugs allowed by the Centers for Medicare & Medicaid Services are discounted and money-saving discounts on over-the-counter vitamins and nutritional supplements available by mail order. Cardholders save from 10% to 30% on prescription drug costs.

The company also is trying to take a bite out of the uninsured crisis. Its recent acquisition of Strategic Resource Co. now allows Aetna to provide health coverage to part-time and hourly workers at more than 700 companies, and its acquisition of The Chickering Group provides coverage to more than 320,000 students at more than 130 colleges and universities.

Physician Friendly

Aetna's refocus has reshaped its reputation in the industry from being a hard-nosed negotiator with physicians to a "provider-friendly" organization.

One significant turning point came in 2003 when Aetna settled a large class action brought by representatives of many U.S. physicians and medical societies alleging unfair billing practices and other complaints. The result endorsed a new bond between Aetna and physicians by reducing administrative complexity, streamlining communications and leading to changes in the health-care system to benefit patients. The $170 million deal included payments of $100 million to more than 700,000 doctors, up to $50 million toward their legal fees and $20 million to establish a foundation focused on critical health-care issues.

The company also is striving for better clinical care. Aetna recently implemented a national MedQuery program to improve clinical quality and patient safety and recently acquired ActiveHealth Management, a privately held medical management and data analytic firm that provided MedQuery to Aetna. The program converts member health data into practical, usable information and provides it to treating physicians. Nearly 3.5 million members are enrolled in the program. Data is analyzed and is compared weekly against thousands of evidence-based care guidelines adopted within the medical community as the standard of care. If patients are identified as having care that may not conform with certain best-practice protocol, their clinicians are notified and empowered with information to improve care and avoid adverse events.

In addition, Aetna continues to improve its provider networks. The company recently pioneered its new Aexcel network in which members can select specialists who have demonstrated effectiveness in clinical performance and cost efficiency. Currently, the network option is available in nine geographic locations with 12 medical specialties.

Getting to Know You

Constituents cite various reasons for getting to know Aetna. Many employers are attracted to Aetna's broad network of providers, said Paula Drozdal Connors of insurance and benefits adviser Sapers & Wallack. For example, choice of providers was central to the state of Ohio's selecting Aetna to offer HMO coverage to state employees in 70 counties across the state.

For hospitals, many believe Aetna's strong relationships and administrative efficiency make it a perfect fit. In 2000, N.J.-based Virtua Health began a concerted effort to improve processes with Aetna. "We meet monthly and we made process changes on their side and our side, along with rate structural changes to clean up accounts receivable," said John Graydon, vice president of managed care.

"With our return to profitable membership growth and strong momentum in the marketplace for our products and services, Aetna's turnaround is complete," said Rowe. "We are now prepared to launch the next phase for Aetna: a quest for industry leadership."

Much of that focus will center on Aetna's value proposition of what it calls the "Three I's": innovative product design, information and integrated products.

"The hard part now is for the company to continue to be able to grow--both on the national account side and in the middle market," said Adam L. Miller, senior equity analyst, health-care services, for The Williams Capital Group LP.

Miller believes future merger and acquisition activity will help fuel that growth. "This will allow [Aetna] to round out what they need to do in terms of providing quality care to members, as well as expanding it to access new members," he said.

A step in that direction came in May when the company announced its plans to purchase ActiveHealth Management in a deal worth nearly $400 million. "Management believes that it can leverage ActiveHealth's medical management and technology platform to benefit cost trends on its fully insured book, as well as drive profitable growth across customer segments," said Doug Simpson, a Merrill Lynch equity analyst, in a recent company report. Aetna expects the acquisition to be earnings accretive within 12 months of its close, he added.

A.M. Best's Miles believes Aetna's strong management team, strong brand and viable financial resources will position it as a continued healthcare leader. "The company also will likely continue offering integrated health-care benefit packages, being an innovator in the industry rather than a follower."

SEASON OF CHANGE: The gateway into Aetna's sculptured formal garden at its Hartford, Conn., headquarters paves the way into a company that's made big changes over the past four years.

Aetna's Members
by Product

(as of March 31, 2005)

Medical                    14.4 Million
Dental                       12.8 Million
Pharmacy Benefit Management   9 Million
Behavioral                   10.9 Million
Life                         11.2 Million
Disability                    2.7 Million
Disability                    2.7 Million

Note: table made from bar graph.

Source: Aetna Inc.

Key Points

* Aetna recently completed a four-year strategy to turn the company from not profitable to profitable.

* The company has increased its profits and shareholder value and seen a rise in members since the turnaround.

* In 2003, Aetna was the first national, full-service health insurer to announce a Health Savings Account offering.

Aetna Inc. FACTS

Headquarters: Hartford, Conn.

Chairman and Chief Executive Officer: Dr. John Rowe

President: Ronald Williams

Established: Founded in 1850; incorporated in Pennsylvania on Dec. 20, 1982

Number of members: Approximately 14.4 million medical members; 12.8 million dental members, 9 million pharmacy members and 14 million group insurance members.

Number of employees: 27,200

2004 Financials: $19.9 billion in revenue; $14.8 billion in total premiums

Stock symbol: AET (New York Stock Exchange)

Major products: Health care, dental, pharmacy, group life, disability and long-term care, employee benefits

Web site: www.aetna.com

Source: Aetna Inc.

Aetna's FIRSTS

1922 Created the first insurer-owned rehabilitation clinic, in Syracuse, N.Y.

1944 The first insurer to advertise on television.

1947 Provided group coverage to the United Nations.

1960S Wrote the first individual life policies for the seven Mercury astronauts.

1980 Bonded the restoration of the Statue of Liberty.

Source: Aetna Inc. A History of Change

While Aetna now is known for health care, that market wasn't the company's initial vision. The company began in 1850 when Aetna Insurance Co. was created to organize an annuity fund to sell life insurance. Three years later, the annuity department separated from Aetna Insurance and was incorporated as Aetna Life Insurance Co.

Aetna's name was inspired by the renowned Sicilian volcano, Mt. Etna, which in the early 1850s was the most active volcano in Europe. Company historians say Aetna was awed by the strength of the mountain and thought it was a good fit for the company name.

Since then the company has erupted into a variety of other areas. It wasn't until the turn of the 20th century that Aetna entered the health insurance business. Today, its portfolio also extends into specialty areas, including dental, group life, disability, long-term-care insurance and employee benefits. In 1990, Aetna began concentrating on the group market after it ceased writing individual health policies. It's since re-introduced individual policies in some markets.

The company's headquarters in Hartford, Conn.--Aetna's fifth home during its more than 150-year history--also provides a look into days gone by. The brownstone and red brick building is the largest colonial revival-style building in the world. The total cost of construction was $8 million--a price tag of nearly $82.5 million in today's dollars. But a touch of the old also has a touch of the new, with such amenities as a state-of-the-art cafeteria, a company store, squash and handball courts, a fitness center and a sculptured forreal garden.

Aetna's Turnaround

2000 Aetna U.S. Healthcare's business segment of Aetna Inc., reported a $43 million loss

Becomes a pure health insurer after the sale of its financial services and international businesses

Dr. John Rowe becomes CEO Year-end health membership: 19.3 million

2001 Reported $581 million loss

Withdrew from unprofitable or underperforming markets and changed corporate underwriting practices

Announced plans to eliminate 6,000 jobs, reports 37,000 employees

Year-end health membership: 17.2 million

2002 Announces plans to cut 2,750 jobs

Year-end health membership: 13.7 million

2003 Begins to offer Health Savings Accounts

Year-end health membership: 13 million

2004 Seventh consecutive quarter of improved operating performance due to disciplined underwriting and medical cost management; Year-end health membership: 13.65 million

2005 Number of employees: 27,142 Year-and health membership: 14.4 million

Liability Landmark

A recent courtroom victory for Aetna helped change the face of health insurance. In 2004, two cases were brought independently in a Texas state court against Aetna and Cigna under the state liability act--a patients' rights law enacted in 1997. Juan Davila, a post-polio patient with diabetes and arthritis, said Aetna refused to cover a prescription for Vioxx without first trying a less expensive alternative. After three weeks on the generic, Davila suffered bleeding ulcers and a near heart attack and spent several days in critical care.

Aetna, along with Cigna, had the cases moved from state to federal court on the grounds that the federal Employee Retirement Income Security Act pre-empts any claims regarding employee benefits plans. Under ERISA, patients can sue a health maintenance organization or other health plan for reimbursement of denied benefits but not for damages caused by the denial. On that basis, the federal district court dismissed both claims. The plaintiffs appealed, arguing that their HMOs' treatment denials represented negligent medical decisions and belonged in the state court. The U.S. Supreme Court, however, unanimously ruled that ERISA completely pre-empts the plaintiffs' state law claims, and the high court judges noted that under ERISA if an HMO concludes that a particular treatment isn't covered under the terms of the plan, its "denial of coverage would not be a proximate cause of any injuries arising from the denial."

Aetna, along with many other health plans, breathed a sigh of relief after the ruling. The court rejected the plaintiffs' right to sue their health plans for denied benefits, and thus essentially blocked managed-care liability provisions contained in patients' rights laws already enacted by 10 states.

Learn More

Aetna Health and Life Insurance Co.

A.M. Best Company # 08189

Distribution: Brokers, consultants, retail networks (pharmacy products)

For ratings and other financial strength information about this company, visit www.ambest.com.