Is Aetna reverse cherry-picking?

Aetna, the nation's largest HMO, is still losing money hand over fist, despite the return of most other large health insurance concerns to profitability.  In December, following a quarter in which they posted a loss of $54.4 million, Aetna executives announced they were terminating an additional 6,000 employees, or 16% of the remaining workforce, in an attempt to become profitable.

Market analysts remain skeptical that the moves will be sufficient to produce profitability.

In their analysis of what's wrong with Aetna, stock analysts point to one glaring statistic that holds this insurer apart from other HMOs.  At Aetna, the medical loss ratio is 90.5%.  That is, over 90% of revenues (money collected in insurance premiums) are frittered away on medical loss.  In contrast, UnitedHealth Group, the second largest HMO, holds its medical loss ratio down to 85%.

What's medical loss?  Medical loss (admittedly, now commonly referred to by a more "sensitive" industry as medical expense) is simply the money they pay out taking care of sick enrollees.  The greater the proportion of insurance premiums that HMOs actually spend on health care, it turns out, the worse they look to the market analysts and their shareholders.  To get back in the good graces of the analysts and, more importantly, its shareholders, Aetna is going to have to significantly pare down on its medical loss ratio.

That Aetna needs to become even tougher about spending its money on health care will be astounding to many doctors and patients. Aetna has developed a reputation in many quarters for being particularly unresponsive and insensitive to the needs of its doctors and patients. Indeed, Aetna is already being sued for intentionally delaying calls from doctors - calls that are necessary to certify patients for medical tests and procedures.  The intentional delays, the suit alleges, are caused in part by systematically refusing to supply sufficient staff to deal with those calls.  In this light, it is instructive that almost half of Aetna's newly-announced cuts will be to customer-services representatives.

Indeed, DrRich has a theory as to why Aetna may be suffering more than most large HMOs: It is entirely possible that Aetna's customer service is in such a state that it has succeeded in angering the very cadre of patients it should be courting - the young, healthy families that pay their premiums but don't utilize much health care.  If it drives these people away, it is left with the chronically ill (i.e., those who face horrible hurdles no matter which HMO they enroll with, so they might as well stay with Aetna.)  In other words, DrRich idly speculates, the geniuses at Aetna may be practicing cherry-picking in reverse.

In any case, unless Aetna succeeds in trimming its medical loss ratio, the stock analysts will remain skeptical, its shareholders will get angrier and angrier, and Aetna management will be on the ropes.  Patients beware.

January, 2002

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