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Read Making a Killing

home / healthcare / in the media

LA Times
Mar 02, 2000

by James Peltz

Insurance Giant Aetna Faces Takeover Bid

Medical insurance giant Aetna Inc., its own health faltering amid a growing public outcry over the managed-care industry, said Wednesday that it had received a $ 10.3-billion takeover offer from a partnership that includes smaller rival WellPoint Health Networks Inc., the Thousand Oaks-based parent of Blue Cross of California.

Aetna said the partnership of WellPoint and ING Groep, a major Dutch insurance and financial services concern, made the offer a week ago and that Aetna would consider it "in due course."

If the firms do merge, they would create a health-care giant responsible for 28.3 million Americans, by far the largest in the nation. Aetna has generated widespread dissatisfaction in recent years, not only among investors, but among consumers and health-care providers disgruntled about the concept of managed health care.

Aetna will be under pressure to embrace the offer or come up with an alternative, because the bid represents a huge premium for shareholders over the company's current stock market value.

The unsolicited bid--which caught many on Wall Street off guard--was another bold stroke by WellPoint Chairman Leonard Schaeffer, who engineered Blue Cross of California's recovery from massive losses in the 1980s and later expanded it into the profitable WellPoint, which has a total of 7.3 million members.

With the bid, WellPoint and ING are trying to acquire the nation's biggest health insurer and a company much larger than WellPoint: Aetna has 21 million members in its Aetna U.S. Healthcare program nationwide and nearly 16 million in its dental-care program. The company had overall 1999 revenue of $ 26.5 billion, or 3 1/2 times that of WellPoint, which had $ 7.5 billion in revenue last year.

But a big question mark is how Aetna's membership would fare under the leadership of WellPoint, because Schaeffer and his team have never run a health-care company of such size. Health regulators, medical experts, consumer groups and Wall Street analysts all would be looking to see how WellPoint's prices and service might change if it absorbs Aetna.

In fact, one consumer group took no time in condemning the proposal.

"Medical services will be downsized and premiums will soar if this consolidation is allowed," asserted Jamie Court, advocacy director for the Foundation for Taxpayer and Consumer Rights in Santa Monica.

The merger would leave only a handful of major managed-care companies, leaving patients, hospitals and medical-care providers with "even less ability to vote with their feet when they dislike the quality of care," Court said.

And much of the public already is fed up with managed care, where the amount of services patients receive--and from whom--is strictly regulated by the HMO or other managed-care provider.

Managed care came into vogue during the last two decades as insurers and their corporate clients pressed to clamp down on soaring, and often excessive, costs for medical care. But many believe the pendulum has swung too far in the other direction.

For instance, the U.S. House recently passed legislation giving patients broader rights to sue their health plans in state court under state malpractice laws, just as patients now do when they sue individual doctors.

But despite the potential pitfalls of acquiring much bigger prey, Schaeffer is making the move at a potentially lucrative time for WellPoint, because Aetna is flat on its back

Aetna, a Hartford, Conn.-based concern that traces its roots to the 1850s, is struggling with rising health-care costs, dissatisfaction among doctors and other medical providers and a mounting public backlash--including lawsuits. Aetna also is coping with upheaval in its own executive suite after a much-criticized acquisition.

Richard Huber, who was Aetna's chief executive and the architect of the company's move away from financial services and into managed care in the mid-1990s, abruptly resigned last week as investor pressures and negative publicity all but forced him out.

The departure of Huber, who was succeeded by longtime Aetna director and Wall Street veteran William Donaldson, came only a day after Aetna received the WellPoint-ING offer of about $ 70 in cash and stock for each of Aetna's shares.

"It's a surprise that WellPoint would go after Aetna, simply because of Aetna's much bigger size," in health-care, said Bradley Ellis, an analyst at Duff & Phelps Credit Rating Co. in Chicago.

"This is a very big bite for WellPoint and Schaeffer to take," he said. WellPoint and Schaeffer had no immediate comment.

Aetna also provides financial services, such as selling annuities, and those reportedly would go to ING under the takeover proposal. Aetna's much larger health-care division would be absorbed by WellPoint.

The WellPoint/ING offer represents a whopping 70% premium over Aetna's closing stock price Tuesday.

But Aetna had seen more than half of its stock market value wiped out in the last 12 months because of investor disaffection with the company's eroding prospects.

As the latest chapter in Aetna's struggle, the takeover offer is also the latest illustration of the swirling changes that continue to envelop the U.S. health-care industry.

For much of its existence, Aetna mainly sold life, property and casualty insurance. It was known as a classy, rather genteel vendor for its U.S. corporate customers and their millions of employees.

But as the 1990s arrived and managed-care--especially health maintenance organizations, or HMOs--took center stage, Aetna followed suit and embraced the trend. Perhaps the biggest change came in 1996, when Aetna bought U.S. Healthcare, a big, aggressive HMO, for nearly $ 9 billion.

Aetna might have had little choice: Its traditional insurance lines had low growth rates. But it has been mostly downhill for Aetna since the U.S. Healthcare purchase, which cost nearly as much as WellPoint and ING are offering for all of Aetna today.

Scores of patients, corporate employers, doctors and other medical providers are unhappy with Aetna's payment levels and its speed for reimbursing claims. Aetna also has struggled to handle surging costs for many medical procedures, products and supplies, including pharmaceuticals. Its profit has slumped badly, disappointing Wall Street and contributing to its stock's rapid descent.

(The Los Angeles Times, and its parent Times Mirror Co., are customers of Aetna and its Aetna U.S. Healthcare unit.)

WellPoint, in contrast, has been performing well lately. Last month it reported fourth-quarter 1999 financial results that topped Wall Street's expectations and included evidence that it has been able to raise premiums faster than its medical costs are rising.

Trading in the stocks of Aetna and WellPoint was halted shortly before financial markets closed Wednesday, pending the WellPoint-ING announcement. Aetna said the two companies were prepared to offer $ 44 in cash and $ 26 in WellPoint stock for each Aetna share.

Before trading was halted, Aetna's stock had jumped on media reports of the deal, gaining $ 11.93 a share to $ 53.06, whereas WellPoint had dropped $ 5.63 to $ 61.88. Both trade on the New York Stock Exchange.





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