Aetna to Buy Prudential’s Health Business
The flood of defections from the ravaged managed-care business took a significant turn on Thursday, as Prudential Insurance Co. of America agreed to sell its ailing health-care operations to Aetna Inc. for $1 billion.
The deal would affect about 6.6 million people nationwide, nearly 700,000 of them Californians, who are currently insured by Prudential.
It would make Aetna U.S. Healthcare the nation’s largest provider of managed care, with about 18.4 million members in HMOs alone. The deal would cement Aetna’s position as the nation’s largest health insurance provider, with an additional 3.6 million in traditional insurance plans, giving it a total of 22 million members.
The proposed sale alarmed doctor and consumer groups, who fear the new company would have the power to force patients to accept fewer services and doctors to accept smaller fees.
“Eight-hundred-pound gorillas may be able to survive better as insurers in the country right now,” said Jack Lewin, chief executive of the California Medical Assn. “But Aetna is going to be such a big player that they will be able to dictate to doctors. Doctors will have to contract with them.”
Consumers, meanwhile, might find that the company has new power to reduce services or raise prices, said Jamie Court of Consumers for Quality Care.
“It’s tightening the grip of consolidation,” Court said. “It’s going to result in patients having less choice of networks.”
Aetna, however, predicts that consumers will like the merged company and promises to offer greater choice of doctors when the two firms’ networks combine.
The Hartford, Conn.-based insurer also maintains that it has learned from its disastrous earlier merger with U.S. Healthcare, when the two companies’ administrative systems were so incompatible that doctors were paid late and patient referrals to specialists were delayed.
Prudential--sources on both sides of the deal said the company has lost hundreds of millions of dollars in its health-care operations over the last three years--is the second major insurance company to exit the health-care field this week. Jefferson-Pilot Corp., one of the nation’s biggest life insurance providers, announced plans Wednesday to leave the health insurance business.
New York Life opted out by selling to Aetna in March, and Metropolitan Life has also shuttered its health-care operations.
The exodus is the result of years of losses in health insurance as the market shifted to managed care and old-fashioned insurance companies struggled with how to make the switch.
Prudential began looking at the possibility of selling its health-care operations about 18 months ago, spokesman Kevin Heine said.
Like other insurance companies that left the health-care field, Prudential intends to concentrate on indemnity insurance and financial services, such as annuities and mutual funds, Heine said.
“Health care just does not fit in with the direction of the company,” he said.
Aetna has chosen the opposite tack. The company spun off all of its non-health-care divisions in the early 1990s and embarked on an aggressive campaign to expand by acquiring struggling providers.
“Look, health care is a $1.1-trillion business,” said Michael Cardillo, president of Aetna U.S. Healthcare.
“The population is 269 million, and they are going to be purchasing health care,” Cardillo said. “And the carrier that delivers quality health care at an affordable price is going to have an exceptional opportunity. I believe we are poised to capture that opportunity.”
The company thrust itself into the ranks of major players in the managed-care field in 1996, when it acquired U.S. Healthcare and absorbed the company’s 3 million HMO members. The purchase of New York Life’s NYLCare this year added another 2.2 million.
Aetna paid $500 million in cash for the Prudential business, which is financing the remaining $500 million with low-interest loans. Before the deal can go through, it must be approved by federal regulators, who are expected to make their decision by June.
The acquisition would be cheap by the standards of most mergers. Aetna is paying about $200 a head for the 6.6 million Prudential members--far less than the $500 to $600 it typically costs to find new members through advertising and marketing.
Cardillo said the price was depressed because of Prudential’s losses and other problems.
Aetna had considered buying the company’s health-care division about 18 months ago, Cardillo said, but declined because losses were so steep.
The purchase exemplifies a growing belief among insurance providers that in order to survive in the difficult managed-care environment, a company must devote itself almost exclusively to health care, said Peter Kongstvedt, a partner at accounting firm Ernst & Young who specializes in health care.
“It is a harbinger that companies that are in the health insurance business either have to make a major commitment to it or get out of it,” he said.
The problem, according to Kongstvedt and others, is that traditional insurance companies know how to take risk and pay claims, but they don’t know how to provide hands-on health care.
“You have to know how to do medical management and not just be a transactionally oriented financial company,” said Peter Boland, a health-care consultant in Berkeley. “And they didn’t--and they don’t.”
Aetna’s stock traded briskly on news of the merger, ending a generally down day for the stock market at $79.19 a share, down $1.63. on the New York Stock Exchange.
