Aetna’s Stock Again Tumbles

Aetna Inc.’s already battered stock plunged 12% Thursday after the giant insurer said one of its key health-care executives abruptly quit and that its profit is still trailing expectations.

The stock has plummeted 40% in just the last five months--wiping out nearly $7 billion of its investors’ holdings--as Aetna has suffered one unexpected setback after another in 1997.

Most of the problems relate to Aetna’s purchase last year of U.S. Healthcare Inc. for $8.2 billion, which promptly made Aetna the largest managed health-care insurer in the nation--just as the managed-care industry ran into trouble.

Aetna’s overall U.S. health-care membership is nearly 14 million, with 1.2 million members in California.

Melding the two companies has proved more difficult and costly than Aetna anticipated. And its struggle is being exacerbated by widespread turmoil in the managed-care industry, especially its health maintenance organization segment.

Managed-care companies have been grappling with rising medical costs, their inability to accurately estimate costs as their enrollments grow, and merger-related problems in cases such as Aetna’s. That has been hurting profits throughout the industry.

Aetna’s HMO problems apparently sparked the latest development that rocked its stock: Aetna’s managed-care unit, Aetna U.S. Healthcare, said its chief financial officer, James H. Dickerson Jr., is leaving “shortly.” It would not elaborate.

Wall Street didn’t wait for an explanation. The stock nose-dived $9.38 a share, to $69.50, as more than 4 million of its shares changed hands in New York Stock Exchange composite trading.

The sell-off reflects how the mishaps have left investors without confidence in estimating Aetna’s growth, analysts said.

“It’s very difficult now as an investor to understand the basic earnings power of this company,” said analyst William McKeever of the securities firm Schroder & Co. in New York. “This is a company that’s frankly adrift.”

Adding to the uncertainty is that Aetna’s chief executive, Richard L. Huber, is fairly new to the job. A longtime banker, he joined Aetna in February 1995, and was named CEO only five months ago. He is scheduled to become chairman in March, succeeding Ronald E. Compton, who is retiring.

However, Huber is “the architect” of Aetna’s shift toward managed care and away from being an old-line insurer, and “the strategy is sound,” said Cathy Seifert, an analyst at Standard & Poor’s Corp.

“The problem is, they fell down on the implementation” of the shift, she said.

And the snags are continuing. Aetna told analysts Thursday that its fourth-quarter operating costs are running up to $15 million higher than expected, so “we expect to fall short of our fourth-quarter [profit] target by that amount,” said Aetna spokesman Fred Laberge.

It’s getting to be a familiar story in managed care. Last year was the second year of falling profits following six years of improved earnings, according to research firm Weiss Ratings Inc. HMO earnings plunged 60% in 1996 to $700 million from $1.8 billion the previous year, according to the firm’s analysis of more than 300 HMOs.

Perhaps the most egregious example is Oxford Health Plans Inc., a Norwalk, Conn.-based provider whose stock has plunged to about $15 a share from $87 only five months ago. Once the star of the industry, Oxford stunned Wall Street when it reported a $78-million third-quarter loss.

Last month, Orange County-based Pacificare Health Systems Inc. said fourth-quarter earnings would be well below expectations, due to high costs tied to its purchase of FHP International Corp.

Aetna, a Hartford, Conn.-based concern with $15 billion in revenue last year, is a broad-based provider of life insurance, financial services and indemnity health insurance, but had been slow to build up its managed-care segment.

Aetna last year moved quickly to change that, buying U.S. Healthcare, one of the nation’s largest HMOs.

HMOs promise their members lower costs in exchange for a limited choice of doctors, hospitals and prescription drugs that are part of the HMO’s network.

When it bought Pennsylvania-based U.S. Healthcare, Aetna said it would “redefine the way health care is delivered” with its “dream-team management.” But so far, the merger has been a nightmare.

Among other things, Aetna--in merging the companies’ claims systems--found itself with a backlog of unpaid claims that initially went undetected, analysts said. That meant Aetna had underestimated its overall medical costs. So, in this year’s third quarter, it had to take a $103-million after-tax charge to bolster its medical-claims reserves.