Aetna chief executive Mark Bertolini got his start in the
health care industry in the late 70s as an emergency
medical technician in his native Detroit. He spent four years
as a department coordinator in one of the citys trauma
center emergency rooms while earning an undergraduate
degree in business administration and finance from Wayne State
University. When he decamped for Cornell University in 1982 to
get an MBA, he swore never to return to what he considered to
be a broken industry. Today the 59-year-old says his early
dissatisfaction resulted from the fact that he wasnt in a
position to do anything about the U.S.s troubled health
Not any longer. As CEO of Hartford, Connecticutbased
Aetna, Bertolini is responsible for the health care coverage
for 24 million Americans, a number that would grow to 33
million if the companys recently announced deal to buy
Louisville, Kentuckybased rival Humana for $34.1 billion
in cash and stock is approved. After the deal closes, which
Aetna management expects will happen as soon as the second half
of next year, the company would be the U.S.s
second-largest health insurance provider by revenue, with $115
billion in annual sales, behind only UnitedHealth Group.
Post-merger, 56 percent of Aetnas revenue will come
from its government-related business an attractive
segment as the number of baby boomers aging into Medicare
grows. But even as opportunities tied to Medicare continue to
expand, the Affordable Care Act is pressuring insurers
margins. The regulations that are embedded in the law are
regulating the profitability of the industry in a stringent
manner much more so than they ever have before,
says Ana Gupte, a health care analyst at Boston-based
investment bank Leerink Partners. Here you have this huge
revenue opportunity [in Medicare], but you have to be much
better at adding value if the price points are being contained
as a result of all this regulation.
Bertolini says bringing Humana and Aetna together will allow
him to do just that. He expects the company to save an annual
$1.25 billion in cost synergies starting in 2018 and to post
low double-digit percent accretion to operating earnings per
share by that year.
Bertolini, who was recruited to Aetna in 2003 by then-CEO
John Rowe to fix its pharmacy, behavioral health and dental
businesses and ascended to the top spot in 2010, also trumpets
the deals potential to drive down health care costs for
consumers. That will become increasingly important as
individuals head to online marketplaces to compare insurance
plans post-ACA. In June, the Supreme Court upheld the legality
of subsidies paid to individuals who purchase insurance from
the federal exchange.
While hes at it, Bertolini figures he may as well also
fix the problem of the shrinking middle class. In January, he
announced plans to raise Aetnas minimum wage to $16 an
hour, a 33 percent increase for the companys lowest-paid
employees. He cites several motivations for the move: For one,
he projects that the $26 million cost could help save the
company about $120 million annually on rehiring and retraining
workers. But hes also indicated that a broader,
macroeconomic perspective had plenty to do with the
If were going to reinvigorate the economy, we
have to restore the middle class, Bertolini says.
Theres just been this question of, Who wanted
to try it first? It was sort of like, Let Mikey try
it. So I said, Ill do it.
Aetnas stock price was up nearly 40 percent from the
January 12 announcement leading up to the news of the Humana acquisition.
Mark is unlike any other CEO Ive ever
covered, says Barclays health care analyst
Joshua Raskin. One reason is his foresight. He
worries every day about the future of health care. I dont
think Mark believes his job is simply to increase earnings for
shareholders; I think he believes its also about
improving the integrity of the CEO suite and about improving
the delivery of the health care system.
Institutional Investor Contributor Katie Gilbert
recently spoke with Bertolini to learn about his vision for
improving the U.S.s health care system.
Institutional Investor: Youve said that the
U.S.s health care system is broken. What do you mean by
In most every other facet of our economy, we talk about
investments we want to make, and we talk about how well
finance them. In health care, we smash the two of those
together. The financing is really the insurance. The investment
is really, What do we do when we spend the money that is
created by the financing? In the U.S. health care system,
weve confused these two concepts, and we attribute the
cost of financing to all of the ills of health care. And so
insurance, because it puts the final price out to the market,
becomes the bad guy in all of this, even though its margins are
the lowest across the whole health care industry. You have
large hospital systems that are getting 10 percent margins;
youve got device manufacturers and drug companies getting
20, 25 and 30 percent margins. The insurance part of it is like
What we need to do is deconstruct the system and say,
Whether or not we want a single payer system or we want a
private insurance system or we want an out-of-pocket system,
lets take the financing decision and set that
aside. Lets ask, How should we spend our money, and
what do we consider to be a good return on that investment?
How is the Affordable Care Act driving improvements
in the health care system?
What the Affordable Care Act has done is create an
action-forcing event that has scared enough actors in the
system to have a fundamentally different conversation. If we
were to design [the system] over, I would suggest we design it
with a definition of the best outcome being a productive
individual. If we constantly invest in the quality of life of
the people that were taking care of, then were
going to improve their productivity. If we improve their
productivity, were going to improve their economic
viability. If we improve their economic viability, theyre
going to be happier. That ought to be the definition of what a
good outcome of a health care system is not the absence
of disease, which is how its been designed.
How does Aetna stand to profit from the changes
youre talking about?
It changes the way we think about managing risk. Thats
what insurance companies do; we manage risk. In the past we
tried to create balanced risk pools of individuals, large
enough populations where we could then put a price in the
marketplace that would allow us to grow. It was in that growth
and the stability of that pool over time that the underwriting
margins, the profits coming from managing risk, were sufficient
to reinvest in the business to fuel future growth. The model
Im talking about turns that old one on its head and says,
We should accept incidents; we should accept people where they
are. The sick are sick; the well we should try to keep well.
Instead of trying to manage incidents, we should try to manage
In that case, the underwriting model is being paid
appropriately for the risk youre assuming, and because
youre getting paid to manage that risk, you actually work
on the severity and improve the underlying quality, and in that
underlying quality and outcome management, there is the margin.
Youre getting rewarded for improving the productivity,
economic viability and happiness of the people youre
taking care of.
You have predicted the death of health insurers and
the rise of government as a force for change in health care.
What does this mean for Aetna?
The Affordable Care Act cracked open the black box of
underwriting and insurance. Whenever you expose the rules and
the way things run, you have a tendency to move toward
commoditization. There are two ways to deal with
commoditization: One is you put your thumb in your mouth, get
in a fetal position, get in a corner and hope it all goes away
cut costs, cut costs, cut costs and hope youre the
last one standing.
Or you can stand back from the value chain and say,
That value chain has been disrupted by commoditization.
What are the things we do that are valuable, that we could use
in a new value chain that actually creates
For us, its really engaging with our partners in the
provider system and saying, We can put all of our economic
models on the same basis. Today in the system, doctors work on
a cash basis, hospitals work on a revenue basis, and insurers
work on a margin basis. Those are the three key actors in the
health care system. Those three economic models dont work
well together at all. If you can get everyone on the same
economic basis by saying, Lets get paid for the risk
were assuming, lets take care of people and take
care of the quality of their life; then we need to impart how
we do that to our provider partners, versus standing over them
with a stick and saying were the insurer, we pay the
bills, and heres how youre going to do it.