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Wall Street Journal
Feb 16, 2000
by Carol Gentry
As Aetna's Woes Pile Up, Its Chairman Is Under Fire
Aetna Inc. Chairman Richard L. Huber is facing mounting pressure from shareholders fed up with the health insurer's sickly stock price -- and his own brash management style.
Even as Aetna struggles with its rapid, acquisition-driven growth, its relations with doctors remain sour. And it is contending with a number of lawsuits amid a consumer backlash against managed care. Just last week, Aetna disclosed that its medical costs have turned out to be unexpectedly high.
Major investors were once reluctant to publicly complain about Mr. Huber and Aetna, figuring some of the problems might be industrywide. But now they are pillorying top management and demanding action, a push that could put Mr. Huber on the hot seat at Aetna's next board meeting Feb. 25.
One issue is the 63-year-old Mr. Huber's combative public persona. Last year, he called the wife of a deceased Aetna patient who won a $120.5 million judgment against the insurer a "weeping widow." Mr. Huber later apologized.
"He's a lightning rod," says John Schneider of Pimco Equity Advisors, which owned 495,000 Aetna shares at last report. "People hate him. His big mouth has cost the company millions of dollars in litigation."
Wall Street has been pounding Aetna for months, and on Monday, reflecting last week's disappointing earnings report, the stock fell to $39, having lost two-thirds of its value since August 1997. In New York Stock Exchange composite trading as of 4 p.m. Tuesday, Aetna had gained $1 to $40 -- about the same price it was in 1981.
"We are extraordinarily frustrated right now," says Michael Greene, chief executive of the asset-management company David J. Greene, which owned 740,000 Aetna shares at last report. "When the stock collapsed from $100, Dick Huber assured us he would take action, and he's done nothing."
Other concerned investors are sounding off. At least two fund managers have sent letters to the company's board seeking a change in management and direction. Another, John Levin of Levin & Co., called for an end to the Huber era last week during a conference call about fourth-quarter earnings.
Mr. Huber declined to comment, through Aetna spokeswoman Joyce Oberdorf. He and other Aetna executives are listening to the critics and are "aware of the necessity to rebuild confidence," she adds. The $1 billion in cash operating earnings for 1999 reflects genuine accomplishments, she says, but it is legitimate for investors to ask for more.
Some are demanding the revival of an idea floated late last year by Mr. Huber and Alan Weber, Aetna's chief financial officer: to split off the financial services or international divisions of the company through sales or a tracking stock. But when the board met in December, those ideas were shelved. Instead, Mr. Huber said last month that the company would merge its international and domestic divisions and create two business units, one for health and the other for financial services. But Wall Street was unimpressed.
Mr. Huber, who owns 800,000 Aetna shares, has been one of the industry's most outspoken leaders. He drew a defamation suit last year when he accused the plaintiff's attorney in the "weeping widow" case of being an "ambulance-chasing lawyer." It was later thrown out.
He has called analysts who gave his company critical reports "a lynch mob" -- too uninformed about financial services to value Aetna properly. Jittery shareholders, he said, had succumbed to "mass hysteria." Doctors who fight Aetna are "old curmudgeons" motivated by greed or fear of having their performance reviewed, Mr. Huber said in an interview last October.
Aetna's former chairman, Ronald Compton, brought Mr. Huber in as vice chairman for finance and strategy in 1995 to give the placid, old-fashioned company a kick in the pants. Mr. Compton and the board asked Mr. Huber, a turnaround specialist with a background in banking, to bring Aetna into the modern age of managed care by engineering the purchase of U.S. Healthcare, then seen as the most profitable operation in the industry.
Mr. Huber, a neophyte to the health-care business, turned over the newly merged health operations to the U.S. Healthcare staff, led by president Michael J. Cardillo. Meanwhile, Mr. Huber concentrated on making the company grow, and he certainly accomplished his mission. The number of customers served grew to 47 million last year from 33 million in 1996. Revenue rose to $26.5 billion last year from $15 billion in 1996, and cash earnings grew to $1 billion from $693 million in 1996.
Mr. Huber has defenders. Analyst Ken Abramowitz of Sanford C. Bernstein likens Mr. Huber to a ballplayer "swinging for the fences" in hopes of a home run while his peers are satisfied with singles and doubles. David Lawrence, chairman of Kaiser Permanente Health Plan, says, "He's a very courageous guy in representing his company and point of view."
Aaron Sears, a New York City CPA who has a small holding in Aetna stock, supports Mr. Huber. Too many investors are off chasing profits in Internet stocks, Mr. Sears says, but "when that craze dies down, people will come to their senses" and buy Aetna's undervalued shares.
Still, Mr. Huber's reputation has suffered as the entire HMO industry draws fire for cuts in health coverage. A particular hot-button at Aetna: its incentives for primary-care doctors to cut costs. A copy of the contract shows that a small portion of pay for primary-care physicians depends on their being more frugal -- ordering fewer expensive tests, for instance -- than their peers.
"He gives a face to the HMOs' bad name," says Jamie Court, a consumer advocate with the California group Consumers for Quality Care.
Some still fault Mr. Huber's timing in arranging the purchase of U.S. Healthcare for more than $8 billion in 1996. The value of HMO companies dropped 20% to 30% between the negotiation of the deal and the closing, says Mr. Schneider of Pimco, but Mr. Huber didn't insist on a discount to bring the payment in line. Mr. Huber later admitted that he erred, Ms. Oberdorf says.
Integrating U.S. Healthcare into Aetna took longer than planned. The computer systems were different, and the low-key Aetna workers didn't always blend with their more aggressive co-workers from Blue Bell, Pa., where U.S. Healthcare was based. Meanwhile, customer service suffered, and the brush wars began with medical groups.
After that Mr. Huber moved ambitiously to buy two other health insurers in quick succession: New York-based NYLCare in July 1998 and the health-care division of The Prudential Corp. last summer.
There were antitrust problems in Texas, where both NYLCare and Pru had sizable operations. Soon after Mr. Huber described the Texas acquisitions as "filet mignon" to a newspaper reporter, federal trustbusters began an investigation that ultimately forced Aetna to sell off the NYLCare holdings in the state.
While Aetna paid top dollar for U.S. Healthcare, it got the Prudential health unit for a bargain price of $200 per member because of its losses. To protect Aetna while he integrated and trimmed costs from the Prudential unit, Mr. Huber obtained administration payments and loss protections that run until 2001. Aetna's stock has been hampered by concerns over what will happen after that.
Mr. Huber has tried in vain to shore up the stock with buybacks. In 1998, Aetna bought 12 million shares of common stock for $1 billion, or about $80 a share. It bought another 10.1 million shares in the past 14 months at about $55 a share.
Messrs. Huber and Weber have told analysts and investors they expect earnings growth of 16% to 18% this year. And Mr. Huber says he has a committee exploring the possibility of making money off Aetna's online services.
Mr. Huber is 21 months away from mandatory retirement, from a job he has clearly relished. "Very seldom does someone my age have this opportunity -- the opportunity to really make a difference," he said in an interview last year.
He added, "I'd work for free. This is the most exciting job I've ever had."
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