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Sep 07, 2000
by Diane Levick
Doctors, Advocates Like Aetna's ChoiceAetna's appointment of Dr. John Rowe as its next chief executive gave hope to the medical community and consumer advocates Wednesday for further change at the nation's largest health insurer, while Wall Street weighed in with a bit of skepticism.
Rowe, who heads New York's huge hospital system Mount Sinai NYU Health, will become president and chief executive of Aetna U.S. Healthcare Sept. 15. He will continue as chief executive of the "new Aetna'' when the financial service business is sold to ING Group later this year.
Rowe faces the challenge of improving Aetna's profitability while mending fences with doctors, consumers and employers.
Medical officials like the idea that Rowe has experienced managed care from the other side, and believe he can make a difference at Aetna.
"I think this is a step forward,'' said Dr. D. Ted Lewers, chairman of the board of trustees of the American Medical Association. "This is an indication that they're serious'' at Aetna.
AMA officials have criticized Aetna for strong-arming doctors into restrictive and unfavorable contracts and payment systems.
"I think he will restore credibility if they let him do his job,'' said Lewers, who has worked with Rowe on a Medicare advisory panel. "I hope they let him do his job.''
Aetna could have hired a "financial man'' for the job, but "I've got to think [Rowe] is far more cognizant of the dangers of the dark side of managed care,'' said Timothy Norbeck, executive director of the Connecticut State Medical Society. "I've got to think that's a positive for consumers.''
Jamie Court, a strident critic of Aetna and executive director of the Foundation for Taxpayer and Consumer Rights in California, called Rowe's hiring a smart move politically, considering Aetna's run-ins with hospitals and physicians.
It shows Aetna is "heeding at least some of the criticism that provider-friendly people are not in charge,'' Court said. "He's got the right resume. It's just a question of whether he'll use it to change the company, or whether the company will change him.''
The reaction to Rowe was mixed on Wall Street, where his appointment was expected for weeks. Aetna's stock slipped slightly during trading Wednesday before closing up 12.5 cents, at $55.50 a share.
"It says that people are shrugging their shoulders and saying, `It's not really a thing that gets me excited,' " said William McKeever, an analyst at PaineWebber. Aetna's stock could have gotten a $2- to $3-a-share boost if the company had recruited its next CEO from a company such as United HealthGroup, CIGNA or WellPoint, he said.
"The jury's going to be out for quite a while,'' McKeever said. "He's got a huge task in front of him.''
On the positive side, McKeever noted, Rowe can bring a less combative culture to Aetna's dealings with the medical community.
But in the near term, he added, Rowe could pose a risk. "You could see a significant increase in costs as they become a kinder, gentler health plan for providers.''
Analysts including Todd Richter, senior research analyst at Banc of America Securities, find it troubling that Rowe's experience is in the nonprofit sector, and that he has never run a business as large as Aetna.
"Aetna is a very troubled company, and one guy can't turn it around,'' Richter said. Rowe will need to hire much new talent for Aetna and refine its strategies, and "I don't know that this guy's skills are sufficient to turn it around,'' he said.
Other analysts are a bit more optimistic, and Rowe himself believes his skills from Mount Sinai will translate well to Aetna.
Just because Rowe has never run a public company "doesn't mean you can't learn,'' said David Shove, senior equity analyst at Prudential Securities.
Being new to Wall Street could end up being a positive for Rowe, Shove figures. Many analysts consider Aetna a "shoot first, ask questions later company,'' he said. "If you're sort of an unknown, you have a better chance of a honeymoon.''
One Aetna U.S. Healthcare employee said fellow employees are also concerned about Rowe's inexperience with major for-profit businesses.
"I think we still need to be optimistic,'' the employee said, "and give him a chance and see what he's going to do.''
Rowe will face a company weighed down by hundreds of millions worth of one-time expenses, say analysts in the wake of a federal filing Aetna made Friday.
Aetna disclosed what its financial results would have been for the health care business in the first half of this year if the financial services operations had already been sold. The "new Aetna'' - the remaining health care business - had $232 million of net income from continuing operations on $13.4 billion of revenue.
But as Aetna concedes, the figures don't reflect many expensive items - many related to the ING deal - that the company hasn't yet quantified.
Analyst Richter estimates that the new Aetna's debt could rise by as much as $700 million because of the expenses. They would include payment for financial and legal advisers on the deal, stock options that vest as a result of the deal, taxes on the sale, and severance for job cuts resulting from Aetna's decision to drop many Medicare HMOs. Aetna hasn't said how many layoffs might occur.
Aetna's filing for the new Aetna shows $1.63 of earnings for the six months, which would mean more than $3 if annualized. A more realistic picture, Richter said, is that the new Aetna's annualized earnings are running about 64 cents to 93 cents a share, based on second-quarter results that were worse than the first quarter.
The data Aetna released, Richter said, are "incomplete and somewhat misleading.''
But Aetna spokeswoman Joyce Oberdorf said that the format for the preliminary filing is what the Securities and Exchange Commission requires, and that it isn't meant to forecast full-year earnings. Aetna clearly spelled out what's reflected in the numbers and what's not, and "it's hardly an attempt to obscure anything,'' Oberdorf said. "If anything, it's an attempt to be as open as possible.''
The document, she added, will be revised to include figures for some of the current unknowns before it's sent to shareholders later this fall.
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