This article, from July 1997, was selected by longtime editor Charles Monagan as one of his favorites from his time at the helm of Connecticut Magazine: "This piece told the story of the merger of old-school Aetna Life & Casualty with upstart U.S. Healthcare and the damage the move inflicted on the former’s 150-year-old corporate culture. The story won the national Gold Medal for Reporting from the City and Regional Magazine Association. I had the byline but the story owed everything to inner-circle sources at Aetna."
This article is being posted to the web in September 2021 as part of Connecticut Magazine's 50th anniversary celebration.
WHEN INSURANCE GIANT AETNA BOUGHT U.S. HEALTHCARE LAST YEAR, DID IT SELL ITS SOUL IN RETURN FOR PROFITS?
By Charles Monagan
When Aetna Life and Casualty Co. announced on March 30, 1996 that it had signed an $8.9 billion deal to purchase U.S. Healthcare, a growing regional HMO with healthy profit margins, there was widespread jubilation in the hallways of Aetna’s offices in Hartford and its health-benefits headquarters in Middletown. The 6 o’clock news in Connecticut that night trumpeted the deal as a “takeover” of U.S. Healthcare that would instantly create the nation’s largest health-benefits company, serving 23 million people. The next night, the news team at Hartford’s WFSB-3 characterized it as a transaction that would mean “more jobs for Connecticut.”
A little over a year later, profits are rising but morale has plummeted at Aetna, and many employees in Connecticut and at field offices around the country are quietly looking for other, non- Aetna, jobs. For others, the search is more urgent, since the company is in the middle of several layoff programs that together will eliminate 9,400 jobs nationally and 2,600 in Connecticut. Perhaps as a result, the second-most- often prescribed drug among Aetna employees, after birth-control pills, is Prozac. A number of corporate officers, including the president of Aetna’s health-benefits operation, James McLane, the head of its pharmacy division, Curtis Thorne, Aetna’s general counsel, Zoe Baird, and her deputy general counsel for health law, Bruce Wolff, among many others, have departed since the deal was announced.
Aetna employees who thought a year or so ago that their employer was in the driver's seat insofar as the merger was concerned have learned to their chagrin that Aetna, a venerable 143-year-old corporate giant with nearly 30,000 employees, is actually in the back seat. Instead, it is U.S. Healthcare, a 20- year-old company less than one-sixth the size of Aetna, with only 4.900 employees, that has taken the dominant role in deciding who goes, who stays, and what direction the new, combined company—now known as Aetna Inc.—will take in the health-benefits market.
The events of the past 15 months shed a revealing light on the men at the helm of each company: chairmen Ronald E. Compton, 64, at Aetna and Leonard Abramson, 63, at US. Healthcare. The events also illustrate the unsettled nature of the health-care industry. Buffeted on the one hand by rising health-care costs and on the other by the threat of a complete takeover of the industry by the federal government—if voter dissatisfaction regarding the cost and delivery of health care in America ever becomes great enough—Aetna plainly felt it had to act. The company admitted in comments to the press that it feared being left on the sidelines while smaller companies nimbly capitalized on the evolving marketplace in which health insurance is sold. “We're bigger, therefore we’re somewhat more bureaucratic,” Compton told Time magazine about Aetna’s relationship with U.S. Healthcare. “They’re smaller ... which makes them a little quicker. I’d like to be a little quicker.”
To understand how such a monumental deal, the largest ever for the health-insurance industry, came about in the first place, it is necessary to picture Aetna as it existed about 10 years ago. Behind the solid facade of the massive Georgian headquarters building at 151 Farmington Ave. in Hartford, Aetna's “policy wonks” in its Corporate Planning and Effectiveness Department were feverishly writing position papers and holding internal debates about the future of the health-insurance industry. These planners foresaw the possibility of increasing customer dissatisfaction with the high cost of traditional indemnity insurance and, as a result, more government regulation and a general move toward forms of health insurance, such as managed care, that were thought to be better equipped to hold down costs.
The vast majority of Aetna’s health-insurance business at the time, over 4 million covered lives, consisted of indemnity insurance. Under an indemnity insurance plan, an individual is not restricted in his or her choice of doctors. However, premiums for coverage under such health plans have historically been the highest of any form of private health insurance. This is because care is not actively “managed” by a third party. Instead, the insurance company passively pays for whatever tests and treatments have been prescribed by the patient’s doctor. Since indemnity plans reflexively pay for virtually everything a doctor orders, patients have no incentive to ask about the cheapest treatment options, and doctors have no incentive to prescribe less expensive tests and treatments. Because of this, and a few other factors such as the public’s malpractice litigiousness, medical costs—and health insurance premiums—rose throughout the 1960s, 70s and '80s.
In contrast, under various forms of managed care, the insurer places limits on the cost and amount of medical care that can be delivered to the patient, and the fees doctors can charge are fixed. By scrutinizing levels of care, managed-care companies have been able to offer health-insurance coverage at a cheaper price than traditional indemnity companies. In recent years, many of the established multiline insurance companies like Aetna, Prudential and CIGNA have recognized the cost advantages of managed care and begun offering such options to their customers.
Managed care is hardly without flaws, of course. Many individual HMO members have balked at the restrictions on what doctor they can see and complained about the elaborate precertification procedures and other hurdles that stand in the way of their quickly receiving care. Seriously ill patients have complained about the refusal of HMOs and PPOs to cover experimental or very expensive treatments prescribed by their doctors in an attempt to save the patient’s life. So why does the managed-care industry continue to grow? The answer is simple: money.
So Aetna began moving to convert its indemnity business to managed care. This was a gargantuan task, but given the difference in price between the two forms of insurance, many customers proved receptive to the company’s pitch that they start buying Aetna’s HMO and PPO products. Aetna augmented its managed-care sales capability in the spring of 1990, with the purchase of Texas-based PARTNERS National Health Plans. PARTNERS owned 28 HMOs nationwide. This allowed Aetna to immediately begin selling its managed-care wares all across America. Unfortunately, Aetna was still rather new to the managed-care business, and its costs per managed-care member were still fairly high. It required a change in the corporate culture for Aetna’s health-benefits division, Aetna Health Plans, to move aggressively to ratchet down costs. Within several years, however, under the leadership first of Ted Kelly (now CEO of Liberty Mutual in Boston) and later James McLane, Aetna Health Plans was seeing several encouraging trends. These included declining operating costs in its health business, the continued conversion of indemnity business to managed- care business (by year-end 1995, Aetna had 7.5 million managed-care members and only 3.8 million indemnity members), and increasing managed-care sales and memberships.
It wasn’t enough, though. Aetna was still being bested by newer managed-care companies that did not share Aetna’s “conversion problem” because they’d been selling managed-care products from the very beginning. These younger, nimbler companies also did not have any "indemnity culture” to overcome. They simply began their existence as HMOs or PPOs and kept on expanding as managed care became ever more popular. U.S. Healthcare Inc., based in Blue Bell, Pa., was just such a company. U.S. Healthcare had 2.8 million members by the end of 1995, all of them in managed care, and was adding to its membership at a vigorous 20 percent a year. And its profit margin was stunning. When Ronald Compton looked at U.S. Healthcare, he saw a company that had racked up $380 million in earnings in 1995 on $3.6 billion in revenues, a far better profit-to-revenue ratio than Aetna’s $474 million earned on over $13 billion in revenues.
By the second quarter of 1995, Aetna knew that if it was going to win the race to obtain significant managed-care business, it needed to do so through the acquisition of another managed-care company rather than by trying to make firsttime sales of its own products. Later that year, according to Aetna sources, the company convened a team of senior-level officers to look at possible acquisition candidates. Naming potential acquisition candidates after different birds to preserve the secrecy of their deliberations, Aetna analyzed a variety of companies. All but one dropped out of consideration for one reason or another.
By the end of 1995, Aetna was in active negotiations with US. Healthcare, and two investment banks—Wasserstein Perella and J.P. Morgan—had been retained by Aetna to help evaluate and finance a possible deal. Aetna’s serious interest in US. Healthcare had perhaps been foreshadowed by the noble code name that Aetna's senior managers had given US. Healthcare in internal memos and discussions: Eagle. Even before the accountants and investment bankers had churned through the earnings numbers, it was obvious to at least some who were working to arrange financing that “Eagle" was fated to beat the feathers out of “Cormorant," “Seagull," “Peacock” and all the other companies under consideration. Curiously, Aetna referred to itself in these same deliberations not as a predator but as “Antelope." This was an ironic choice for a powerful corporate giant that presumably would be the eater, not the eaten, in any deal that might ultimately transpire.
(Those familiar with the negotiations say that in its own internal documents and discussion about a possible merger or buyout, U.S. Healthcare referred to itself as “Adonis" after the handsome young mortal in Greek mythology with whom the goddess Aphrodite fell hopelessly in love. Given Aetna’s sudden infatuation with U.S. Healthcare, the nickname seemed remarkably apt.)
U.S. Healthcare had been going through the same exercise as Aetna, but for entirely different reasons. It was a successful regional company that wanted to go national. Present in 13 states up and down the Eastern Seaboard plus the District of Columbia, the company was ready to expand its winning managed-care strategy, but it didn't have enough people or resources to do so on its own. Of course, it could continue to add employees and grow over the course of years into a nationwide presence, but the only way to “go national” overnight was to be bought out by a company that was already there.
U.S. Healthcare was also trying to address another issue: What would become of the company after its founder and current chairman Leonard Abramson decided to call it quits? Several company executives were at that time jockeying for the position of designated successor. But the succession issue could also be solved in one fell swoop by merging the company with another organization that would run U.S. Healthcare as a division of its own. larger operation. U.S. Healthcare was getting far too much media attention to remain independent for much longer anyway. Its size and its earnings would probably make it the target of a hostile takeover before long. It could either make arrangements to be bought out on its own terms or it could face the hostile advances of a corporation it didn’t particularly care for. Accordingly, when Aetna Chairman Compton called U.S. Healthcare Chairman Abramson, the latter was willing to listen.
The deal itself was negotiated and signed in New York City after several months of marathon discussions. Battalions of lawyers, accountants, actuaries and bankers were involved in the insurance industry's version of “shuttle diplomacy" before Abramson felt comfortable enough to cash in his chips and leave his “baby" to someone else.
Most observers agree that Abramson and his team got pretty much just what they wanted from the deal, and that becomes clear in the documents that were signed and eventually announced to the media. The deal itself involved merging U.S. Healthcare with Aetna's health-care subsidiary to create a new parent company, Aetna Inc., to encompass both the newly combined health operation and Aetna’s financial-services operation, which had not been affected by the deal. Intermittently throughout the negotiations, sources say, just when the Aetna people thought they finally had an agreement, Abramson would inevitably return to the conference room to announce yet another new demand as a condition to signing. Some of his demands were shrewd and perfectly understandable to Aetna officials; others seemed rather bizarre.
In the former category belong Abramson's efforts to protect his employees after he was out of the picture. Abramson was nothing if not loyal to those who had given their all for him and U.S. Healthcare. He demanded that the names of his chief subordinates be written into the sale agreement itself, with appointments to specific senior-level positions within Aetna upon consummation of the deal. This meant that once the agreement was concluded. Aetna’s chairman and board of directors would have no discretion to appoint whoever they believed would best do the job. Those positions would now be officially reserved for Abramson’s management team.
Aetna acceded to this demand and agreed to appoint U.S. Healthcare’s management team to head up Aetna’s giant health-care organization after the merger. As a result, U.S. Healthcare’s copresidents, Michael Cardillo and Joseph Sebastianelli, would become co-presidents of Aetna Health Plans. Similarly, it was agreed that U.S. Healthcare’s general counsel, David Simon, would become general counsel of Aetna’s health-law department, which would be removed from Aetna General Counsel Zoe Baird’s supervision and control. (The deal ultimately triggered Baird’s severance agreement, which included cash and stock options of nearly $2.6 million. After hauling down a $900,000 bonus payment from Compton for staying through the completion of the merger, she left Aetna on Dec. 31, 1996.) Jim Dickerson, chief financial officer for U.S. Healthcare, would be automatically appointed CFO of Aetna Health Plans, and Dr. Arthur “Abbie” Leibowitz, chief medical officer for U.S. Healthcare, would displace Aetna’s medical director and fill the same role at Aetna. The all-important sales department at Aetna was also reserved for a U.S. Healthcare appointee.
Other high-level appointments of U.S. Healthcare officers soon followed. Len Abramson’s son-in-law, Richard Wolfson, for example, displaced a division president at Aetna, Curtis Thorne, to become head of the combined pharmacy operation after completion of the merger. And Abramson’s daughter, Nancy Wolfson, was given assurances that she would retain her high-paying position of vice president of health education at Aetna- U.S. Healthcare after the merger.
But that wasn’t all. According to Aetna sources, Abramson also demanded that a paragraph be inserted in the merger and sale agreement which expressly stated that all of U.S. Healthcare’s employees, regardless of seniority or lack thereof, would be guaranteed a two-year job contract and could not be fired for any reason, even if it was “for cause,” or have their compensation reduced or even their office location moved, without the personal authorization and approval of the two U.S. Healthcare (later Aetna) copresidents, Cardillo and Sebastianelli. This meant, for all practical purposes, that while Aetna employees would be at risk of losing their jobs (or at the very least having their responsibilities and/or work locations altered) during the postmerger upheaval, every single one of U.S. Healthcare’s nearly 5,000 employees had a virtual two-year job guarantee. There was no similar provision protecting Aetna’s 30,000 employees.
Other demands put forth by Abramson as a condition of signing the deal were, by comparison, a little strange. The most notable involved his stubborn demand that Aetna give him U.S. Healthcare’s $25 million jet airplane for his own personal use upon his retirement. A source familiar with the negotiations says the company fretted over the appearance of such an extravagant gift. What would the media and public think if they saw Abramson on the tarmac posing next to the jet and telling everyone that Aetna had given it to him as a “gift” in order to coax him into signing over his company? Such a story wouldn’t go over very well with employees about to lose their jobs because of postmerger consolidations.
So, the source says, Aetna’s negotiating team returned with a counter offer: How about converting the passenger aircraft Abramson had in mind into a dollar figure—he could name his price—and then Aetna would simply give him that sum in cash so he could go out and buy his own airplane? Instead of handing over a giant and, in the eyes of many, unnecessary bauble, Aetna would simply be throwing in some extra millions of dollars on top of the $920 million Abramson and his family were already being paid for selling their shares in the company, not to mention Abramson’s $10 million consulting fee and the $25 million he was getting for promising not to compete with the newly formed combine. But Abramson was adamant. The money wasn’t good enough. He wanted Aetna to give him the actual plane, damnit! And the $25 million jet airplane is what he got.
The merger negotiations and resulting agreement provide insight into the personalities of the two men at the helm of Aetna and U.S. Healthcare. Abramson’s demands reflected his own stubborn and idiosyncratic management style. His willingness to walk away from the table if Aetna did not accede to his demands evidenced his well-known determination to get his own way at whatever the cost. Abramson was a quirky, tenacious, self- made multimillionaire, and it showed in his negotiating style.
If Abramson was a scrappy streetfight- er of humble urban origin, Ron Compton in many ways cultivated the opposite image. Whereas Abramson ultimately relied on his instincts to tell him what to do, Compton had a penchant for spread sheets containing all sorts of actuarial statistics, trends in stock prices, probable returns on investment over various time frames and the like. Compton headed a much larger company that employed a larger number of experts who, in many instances, were better trained and possessed more impressive professional and educational credentials than their U.S. Healthcare counterparts. Compton made full use of these professionals in evaluating the pros and cons of doing a deal with Abramson.
Compton, according to some familiar with him, also liked to think of himself as the sophisticated diplomat—a man of the world whose polish and vast managerial expertise would see him through what was for him, after all, but the latest of many business deals he had engineered or worked on over the years. Compton approached business deals much like FDR approached foreign relations, relying on “the personal touch” to successfully conclude negotiations with the other side. If FDR believed that all world problems and rivalries between nations could ultimately be solved by a face-to-face meeting between the principals, Compton thought of a personal meeting between Len Abramson and himself as the capstone of negotiations between their two companies.
And so it is very likely that Compton and Abramson had dinner and spent a long evening together at a secluded site—possibly even on Compton’s boat in the Caribbean—to talk about life, family and the future of their two companies. In such an intimate setting the two men might have been able to sit together in the moonlight, drinks in hand, and speak freely about the loneliness and responsibility involved in being a captain of industry. This would have been vintage Compton, and, according to company sources, it was something he tried to do sooner or later with his counterpart on every major deal he ever worked on.
But this highly personal approach also has its pitfalls and limitations. In a one- on-one negotiation, Aetna’s future and the job security of its thousands of employees were only as safe and secure as the negotiating talents of Ron Compton allowed.
Insurance professionals inside and outside Aetna had questioned in the past Compton’s ability to secure a fair price in major business transactions. Approximately four years earlier, when Aetna’s chairman had negotiated with the investment banking firm of Kohlberg, Kravis, Roberts & Co. for the sale of Aetna’s reinsurance subsidiary, American Reinsurance, the accusation was made that Compton sold Aetna’s “crown jewel” for far too low a price. This contention was seemingly borne out when KKR, which had bought AmRe from Aetna for $10 a share, turned around and the next year sold a good chunk of the company for $30 a share. In 1996, KKR sold the rest to Munich Re for $65 a share. This demonstrated to some that Compton was out of his depth and had been thoroughly out- maneuvered by Henry Kravis and his cohorts at KKR Was Compton being outfoxed again? Did he pay too much, at $8.9 billion, for U.S. Healthcare?
Right after the deal, Wall Street investors seemed somewhat uncertain about Aetna’s prospects. The company’s stock price initially dropped $3.50 per share to $75, and by July ’96 fell to $60. In contrast, US. Healthcare’s stock quickly went up $6 per share on news of the sale, a significant 13 percent rise, seemingly indicating that Abramson had been very smart to sell at the price he did. The stock of the newly combined company quickly regained its footing, however, and by early June this year was riding high at around $100 a share. Not surprisingly, Aetna had gone into debt after paying the steep purchase price; even considering that, its year-end earnings for 1996 were below Wall Street’s expectations3 In the first quarter of 1997, however, earnings rose higher than anticipated and the stock price soared. “The market sees that the merger with U.S. Healthcare is going to pay dividends in the form of better earnings,” commented one analyst.
If Wall Street seems satisfied, at least for now, such is not the case on Main Street, where thousands of Aetna employees fret about their jobs and wonder if the “efficiencies” necessary for a successful merger might at some point include the elimination of their own livelihoods. Although Aetna was the acquiring company, not the company being bought out, many workers in the health-benefits operation relate that they now feel like the hunted, not the hunter, in their own workplace. They watch with a kind of morbid fascination as a new mentality—aggressive, brash, ruthless—sweeps through the corridors, and a profit of $474 million in a year is deemed not enough. In essence, they watch as U S Healthcare takes over what was once their company.
“You can stand out in front of the Aetna building and talk to workers as they come out, and they all have the same story,” says Phil Wheeler, president of Citizens for Economic Opportunity, a labor coalition that opposed the merger. “They tell you they don’t know if they'll have their job tomorrow, or they’ll have a different job in the company with more hours and less pay, or that their benefits have been cut, their wages cut, or their hours increased with no overtime. They are insecure, depressed and fearful. I’ve been working on labor issues for a long time, but I’ve never experienced the sort of fear I see at Aetna these days.”
Ronald Compton declined to be interviewed for this article, but Aetna did issue a statement, which said in part:
“For Aetna, the status quo was not an option. In order for Aetna to survive and prosper in the health-care business, we needed to accelerate our transformation into a leading-edge managed health-care benefits provider. The merger enabled us to create an entirely new company, where we do things not the Aetna way or the US. Healthcare way, but the best way, with leadership drawn from both sides. That new company is more entrepreneurial, more competitive and better able to respond to our customers’ desire for high quality health-care benefits at an affordable cost.”
At the time of the merger, Compton’s office also spoke of several other benefits arising from the deal. U S. Healthcare had strong sales in the small-employer market but little if any experience managing the needs of large employers with plants and offices at multiple sites across the country. That was where Aetna came in. The ability to handle multisite sales was a strength of Aetna’s, as was its brand name.
For its part, U.S. Healthcare offered expertise in instituting rigid controls on medical costs. In its last year of independent existence, the company had spent only $40.28 per member per month on doctor visits compared to Aetna’s $56.84. U.S. Healthcare was also successful in contracting at very cheap prices with physicians and hospitals, and knew- how to run a lean and mean operation with low overhead requirements. It could teach Aetna how to further pare its operating costs.
But there were less diplomatic explanations, too, sometimes even knocking Aetna’s personnel and its way of doing business. First there was Aetna Vice Chairman Richard L. Huber’s brash comment, released to the media and to employees, characterizing the deal with U.S. Healthcare as the front office's attempt to “teach this elephant to dance” (meaning Aetna’s health-benefits operation). Then in the spring and summer of 1996, Compton spoke at several open meetings with employees about the need to replace Aetna’s current health-benefits management team with US. Healthcare managers who, in Compton’s phraseology, represented “the best of the breed," Compton’s evolving rationale for consummating the merger now expressly included this stated need of Aetna’s to purchase “management expertise." This was taken as a slap in the face by Aetna’s own managers.
Compton spoke at one particularly well-attended—and well-remembered — employee forum in June 1996 at the company’s health-benefits headquarters in Middletown. The chairman's presentation was broadcast live on closed-circuit television to Aetna field offices across the country. Compton appeared on stage with the co-presidents-to-be Sebastianelli and Cardillo, as well as the health-benefits manager he had just jettisoned, James McLane. When asked by an employee during the “open microphone” questioning how he had determined who would fill the top management slots in the new organization, the chairman answered that he had looked at everyone’s background and résumé and had put “the best people in the top jobs." McLane and some other Aetna Health Plans officers sitting on or near the stage were said to have visibly blanched at the remark.
Perhaps taking their cue from Aetna's own front office, U.S. Healthcare executives who arrived in Middletown and elsewhere to take the reins from their Aetna counterparts began treating many Aetna employees with no respect at all, claim people at Aetna.
Apart from the cultural and philosophical differences between the two organizations that both parties needed to overcome if the merger was going to work, U S. Healthcare executives seemed to add willfully to the existing friction between themselves and their Aetna counterparts. During June 1996, Aetna was in the midst of seeking approval for the merger from the state Department of Insurance. The department held public hearings and listened to prepared testimony from both Aetna and U.S. Healthcare executives about the benefits of the merger for the citizens of Connecticut, Under such circumstances, the senior management of both organizations typically coordinated their prepared remarks with one another prior to delivering them publicly to the media or to any government agency.
In this case, however, it was discovered that U.S. Healthcare’s general counsel,
David Simon, planned to make several abrasive and inflammatory comments about Aetna during his portion of the testimony. Simon’s prepared remarks contained a passage in which he derisively asked which company Connecticut residents would rather work for. He then proceeded to answer his own rhetorical question by comparing Aetna derogatorily to a dying retail chain on the verge of economic collapse, and U.S. Healthcare lo a successful, dynamic, rapidly growing high-tech company. According to Simon, Connecticut should he downright thankful that US. Healthcare was coining to Aetna’s and the state’s economic rescue.
Aetna executives found the passage objectionable and inappropriate, and they said so. It seemed to be a gratuitous and petty slap at Aetna, which was, after all, a hometown company that the state Insurance Department had known for years. It did not seem either wise or necessary to insult Aetna as an employer in order to secure the department’s approval of the deal. According to some, Simon’s remarks erected a wholly avoidable stumbling block to the development of future good relations between employees of both companies. If U.S. Healthcare personnel like Simon were openly taking cheap shots at Aetna, what kind of signal did that send to employees further down the line in both organizations?
But Simon was defiant. He flatly refused Aetna’s request to delete or at least rework the obnoxious passage. He delivered his full remarks before the Insurance Department hearing, thus making his insult a part of the public record. The incident rankled many at Aetna and was a taste of things to come.
Indeed, it became hard to ignore the preconceived notions people carried into the merger and afterwards—notions that slide fairly easily into caricature.
Viewed in the extreme, U S. Healthcare managers perceive Aetna employees as dull, unimaginative drones completely lacking in entrepreneurial spirit. They admit Aetna personnel are smart, but only in a narrow, technical sense, and while they may be qualified to work at a major Fortune 500 company, they can’t even tie their own shoelaces when it comes to managed care. That explains why Ron Compton hired the top brass of U.S. Healthcare in the first place: to teach his own clueless employees the fundamentals of managed care despite the fact that Aetna has been in the managed-care business for over 15 years.
For their part, many at Aetna Health Plans perceive U.S. Healthcare employees as a bunch of crass, unethical shysters who will stop at nothing to make a buck. While sufficiently competent to operate a small, single-product regional company, U.S. Healthcare employees as a group are generally viewed as crude and untutored when it comes to the complexities of running a major corporation. When making a sale to a major corporate client, U.S. Healthcare’s sales employees sound more like phone-bank salesmen than polished insurance professionals.
Stripping away the emotional content, it is fair to say that U S. Healthcare is indeed much more aggressive in going after business and hammering on doctors and hospitals in order to keep medical costs low. U.S. Healthcare managers at the field-office level are said to speak openly about medical providers as political enemies and economic adversaries to be beaten down in contract negotiations. But the irrefutable fact of the matter is that the younger, leaner company has been able to generate enormous profits—and bring lower costs to its customers—largely because it has practiced what some of its managers have called a “scorched earth" policy toward doctors. In contrast, Aetna has traditionally looked upon medical providers as partners, not adversaries, in the delivery of medical care to consumers. It historically has considered itself to be engaged in the health-benefits business for the long haul and typically has not wanted to burn any bridges in the medical community or with the public as long as it was able to make a reasonable profit. But this more gentlemanly strategy did not enable Aetna to keep up with the pace of change in the health-care industry. It needed its scrappier partner even if it had to hold its nose during the marriage ceremony and the loveless honeymoon afterwards.
Officially, Aetna denies any serious clash of cultures between the two companies.
"In many areas,” says a company statement, “teams of people with roots in both Aetna Health Plans and US. Healthcare have worked together seamlessly to tackle projects that enable us to serve our customers better, moving with great speed and without regard to former allegiances. Many industry observers have commented that our integration has been among the most successful mergers they have ever seen.”
Still, as 1997 has progressed, it’s become clear to some observers that the takeover of Aetna by U.S. Healthcare continues. In March, there was the announcement that former U.S. Healthcare co-president Joseph Sebastianelli, 50, would be the new president of Aetna Inc., thus relieving Ronald Compton of that title and putting himself into strong contention to be Compton’s successor as chairman and CEO. At the time of his appointment, Sebastianelli waved off reports of poor morale at Aetna, saying bad feelings had “evaporated" during management meetings. “I think we’re pumped up,” he added, presuming to speak for the thousands now under Ins command, In late May, however. Sebastianelli stunned Compton and the rest of Aetna Inc. by announcing his resignation, effective June 1. The sudden decision, lied to what Compton called “serious” family problems, clouded the picture of who would succeed Compton, who will retire early next year.
Earlier, in March, as the thousands of Aetna layoffs neared their midpoint, it was revealed that Sebastianelli had earned $739 million in cash, stock and other compensation in 1996, while U.S. Healthcare’s other former co-president, Michael Cardillo, earned $7.07 million. Much of this pay came as a result of the merger. For his part, Compton earned $5.8 million, but he also received stock options that could be worth up to S3 million more. This orgy of remuneration at the top did little to improve morale elsewhere in the company.
Nor did the new company policy, adapted directly from US. Healthcare, that requires hundreds of Aetna Inc. employees to sign “non-compete" agreements, saying that if they leave the company, they will not work for a competitor for at least six months. Although such an agreement is often written into contracts for top management positions, at Aetna it is being imposed on midlevel executives, supervisors and even sales personnel. If you recall, Leonard Abramson required $25 million to sign his non-compete agreement. If the workers now at Aetna sign it, they get to keep their jobs.
And Aetna itself admits that the transition has not come without some pain.
"We recognize that the pace of change has been rapid for many of our longtime employees, and painful for some whose jobs were lost," says a company statement. "We have treated displaced employees with dignity and respect, offering industry-leading severance benefits and job-placement programs, as well as giving Aetna employees first opportunity at any new jobs.”
And so it continues. Aetna and U.S. Healthcare employees struggle on, trying to meld their divergent corporate cultures without killing each other first. If they succeed, the world would seem to be their oyster, since the new Aetna is indisputably the largest health-benefits corporation the world has ever seen.
Aside from the intramural problems, the first hurdle the new company may have to face is the appearance of a backlash against some aspects of managed care, Last autumn, President Clinton signed a federal bill banning “drive- through” baby deliveries. Other voices, on the stale and national level, have been raised over the similarly cavalier treatment of mastectomy patients. Many more issues are certain to be raised.
One thing is certain, though: For better or worse, Aetna has put virtually all of its eggs in the managed-care basket—and is intent on remaking itself in the image of Len Abramson. Only time will tell whether this is a wise business strategy, but there’s little doubt that the Aetna Connecticut has known for 143 years is no more.