TOPICS > Health

Merger of Aetna and U.S. Healthcare

April 2, 1996 at 12:00 AM EDT

CHARLAYNE HUNTER-GAULT: The changing world of health care changed a little more yesterday. Aetna Life & Casualty announced it would buy U.S. HealthCare, a leader in the move towards managed care, for $8.8 billion. The new company will serve 23 million people. For analysis of this deal and its impact on consumers, we turn to Sara Nichols, Washington director for Physicians for a National Health Program, and J.D. Kleinke, a health economist with HCIA, a health care research company in Baltimore. And starting with you, Mr. Kleinke, what is the significance of this deal?

J.D. KLEINKE, Health Economist: Well, the significance of this deal is this is a major step forward in a continuing story of consolidation throughout health care, not just health insurance but the pharmaceutical community, the hospital community, the physician community, just about every aspect of health care, as we know it, is coming together in alliances of this magnitude.

CHARLAYNE HUNTER-GAULT: And this particular merger, is it a mega merger?

J.D. KLEINKE: It’s not quite a mega on the order of other mergers we’ve seen, for example, among drug companies, but it comes close. And it’s certainly relevant to those, those 23 million people you described, particularly those in Aetna, who are going to have access to a whole new set of health care kinds of systems as a result of this merger.

CHARLAYNE HUNTER-GAULT: Explain that to me briefly. I mean, why does Aetna want to move–explain its traditional role and why it would want to move into this.

J.D. KLEINKE: Well, Aetna’s traditional role was simply to pay the claims for whatever health care was delivered to populations that it insured. That’s kind of the traditional insurance system as we know it. We went to a doctor. We went to a hospital, when we were sick and the insurer paid the claim and passed the cost of that along ultimately to who was purchasing the care for you, usually your employer. That system started to fall apart in the late 80’s as costs ran out of control, and they ran out of control for a number of reasons. What happened in the wake of that cost, cost crisis, which is really what it mushroomed into and by the early 90’s hence health care reform was the managed care revolution. The managed care revolution brought to health care a much more organized rational way of delivering health care. You don’t just pick any old doctor. You don’t wait till you’re sick and go to the hospital. What the HMO’s and other managed care kind of companies attempt to do is to maintain your wellness or maintain your health to prevent things like that from happening, to help steer you toward physicians who have better demonstrated quality.

CHARLAYNE HUNTER-GAULT: Do you agree, umm, with all that you’ve just heard, Ms. Nichols, I mean, the significance of this and the importance of it?

SARA NICHOLS, Physician Advocate: Well it’s a huge merger. I don’t think it’s a step forward. I think it’s a very big step backward for health care consumers. You’ve got to look at what Aetna is really buying here from U.S. HealthCare. When they buy it, they’re not buying hospitals. They’re not buying clinics. They’re not buying any real stuff. What they’re doing is they’re buying patients, and they’re spending about $3,000 a pop for these patients. If they could go out to the lobby to a vending machine and put in $3,000 and get out a patient, they’d stand there for the rest of the century. Why? Because it means big, big money for them to get all those guaranteed premium dollars in and then they also buy the expertise of U.S. HealthCare in maximizing their profits. U.S. HealthCare is really good at squeezing money out of a dollar and putting as much of it as possible to their shareholders and as little as possible to providing actual patient care.


J.D. KLEINKE: Oh, I don’t agree with that at all. I think that getting the typical patient into a system, into a managed care system, costs about 10 percent of that $3,000 figure through normal marketing channels. What they’re buying is not those lives. What they are buying are systems. And those systems are not cheap, and that’s why we see consolidations not just in this instance but across the health insurance landscape. The systems I’m referring to are disease management systems, information systems for tracking patients, information systems that are required to understand which hospitals are delivering quality care and which hospitals are not doing a good job.

CHARLAYNE HUNTER-GAULT: So more efficient, they’re buying more efficiency and better services, is that what you’re saying?

J.D. KLEINKE: Correct. They’re buying a much more organized delivery system, and that is not, not–it’s not a trivial asset to be purchasing, and that’s why the high price.

CHARLAYNE HUNTER-GAULT: What’s wrong with that?

SARA NICHOLS: Well, it’s not a trivial asset at all. Uh, what’s wrong with it is really the effect it’s going to ultimately have on health care consumers. The reason that they want this is obviously to make money, not to help patients.

CHARLAYNE HUNTER-GAULT: Why do you say that?

SARA NICHOLS: We would hope the two things would go together. Well, simply because that’s what corporations do. They have to make money for their shareholders, and that’s why they enter into a giant merger like this. And what they need right now more than anything is to be positioned–they have to have enough market power that they can make money in the new era. What’s coming down the pike is that in every single state in the union they’re proposing taking Medicare beneficiaries, the people over 65 who are on health care, and putting them into HMO’s, and unless you are a big company in one of those states, you are not eligible to take those Medicare beneficiaries onto your roll. And so what Aetna wants to be able to do by buying U.S. HealthCare is expand their market share, expand the number of states they’re in, and expand their bottom line by getting all that government money. What we’re concerned about is only 70 cents out of every dollar is making its way down to providing care. U.S. HealthCare is taking 30 cents out of that dollar and putting it to profit, to administrative overhead, to their CEO getting $900 million just by this deal being cut, and that’s not making its way to providing health care for people.

CHARLAYNE HUNTER-GAULT: What do you say to that?

J.D. KLEINKE: Well, I’d say to that those 30 cents issues you’re referring to are, in fact, the case, and one of the reasons for the efficiencies that come out of mergers like that is to start to carve into that 30 cents.

CHARLAYNE HUNTER-GAULT: Wait a minute. Explain that to me.

J.D. KLEINKE: Well, there are 30 cents in what are referred to as the gross margin between what is spent on medical care and what it takes to run an HMO today. And out of that 30 cents, yes, there is profit, and that’s what’s required to, to run a business and raise capital on Wall Street today. What–what Aetna and U.S. HealthCare and all the rest of them are seeking to do is with the additional 15 cents is to attempt to–attempt to minimize that. There’s a tremendous amount of duplication in administrations. If this country had seven hundred or eight hundred HMO’s forever, we’d have a tremendous amount of duplicative systems and paper work and claim forms and all the other sorts of things that the Clintons were very aware of during health care reform. And, and by consolidating these health insurers, we’re getting rid of a lot of that redundancy that creates exponential redundancy all down through the providers.

CHARLAYNE HUNTER-GAULT: Sara Nichols, we heard in the previous discussion on the phone mergers that efficiencies was one of the reasons for these kinds of mergers. You heard him just lay out all the efficiencies that be achieved by this merger. Wouldn’t that result in better service for consumers?

SARA NICHOLS: Well, actually, I think that the efficiencies are going to be at the expense of health care consumers. What U.S. HealthCare does best, what they’ve perfected and why they’re really special to be bought by Aetna is putting all the financial risk onto physicians and giving them financial incentives to under-treat their patient.

CHARLAYNE HUNTER-GAULT: What do you mean? Explain. Give me an example.

SARA NICHOLS: Okay. A U.S. HealthCare doctor who has a typical patient load of say 1500 patients, if they, umm, don’t refer to emergency rooms, don’t give expensive procedure tests, don’t give a lot of the health care that they may think it’s in their best judgment to do, they could net $150,000 a year more than they otherwise would if they follow the financial incentives of U.S. HealthCare. If they follow their own physician judgment, they may end up getting zero, no dollars over the cost of their practice. In other words, they may make nothing. So there are these tremendous incentives for them to under-treat their patients.


J.D. KLEINKE: Well, I agree completely. I think that’s a fantastic situation where you can align an incentive so that a physician is rewarded for not having a patient under his or her care needing to go to the emergency room.

CHARLAYNE HUNTER-GAULT: But that wasn’t what you were saying.

SARA NICHOLS: No. I’m saying that if somebody needs to go to the emergency room, they’d better go, and that I as a physician would not want–shouldn’t be put in a position where I would actually make money if I went against my better judgment. And that is why our doctors are getting very angry and very worried and very concerned about mergers like these.

CHARLAYNE HUNTER-GAULT: Are you seeing more mergers like this coming down the pike, I mean, the future?

J.D. KLEINKE: Well, there have been a rash of mergers a lot like this but none of this scale to date. But there certainly will be a number as a result of this. For the other larger insurers and HMO’s to stay competitive, they’re going to need to create the same critical mass that I think Aetna and U.S. HealthCare are going to achieve under this merger.

CHARLAYNE HUNTER-GAULT: And would there be checks on the kinds of things that Sara Nichols is concerned about?

J.D. KLEINKE: Well, I don’t think there need to be checks on this. I think what Sara Nichols is describing is precisely the fix for a market dysfunction that we’ve had for centuries in Madison, which is that physicians, unlike every other producer of an economic good in society, they have not had to worry about what it cost. They have only had to worry about the revenue brought in, and so physicians for centuries have been free to maximize revenue without having to worry about the ramifications of, of what they do.

CHARLAYNE HUNTER-GAULT: You get a quick last word, Sara Nichols.

SARA NICHOLS: Health care is not like any other commodity. It’s not an economic good. It’s a human right. We all need it.

CHARLAYNE HUNTER-GAULT: All right. We have to leave it there. Thank you for joining us.