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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 city’s 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 wasn’t in a position to do anything about the U.S.’s troubled health care system.

Not any longer. As CEO of Hartford, Connecticut–based Aetna, Bertolini is responsible for the health care coverage for 24 million Americans, a number that would grow to 33 million if the company’s recently announced deal to buy Louisville, Kentucky–based 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 Aetna’s 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 deal’s 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 he’s at it, Bertolini figures he may as well also fix the problem of the shrinking middle class. In January, he announced plans to raise Aetna’s minimum wage to $16 an hour, a 33 percent increase for the company’s 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 he’s also indicated that a broader, macroeconomic perspective had plenty to do with the decision.

“If we’re going to reinvigorate the economy, we have to restore the middle class,” Bertolini says. “There’s just been this question of, ‘Who wanted to try it first?’ It was sort of like, ‘Let Mikey try it.’ So I said, ‘I’ll do it.’” Aetna’s 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 I’ve 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 don’t think Mark believes his job is simply to increase earnings for shareholders; I think he believes it’s 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: You’ve said that the U.S.’s health care system is broken. What do you mean by that?

In most every other facet of our economy, we talk about investments we want to make, and we talk about how we’ll 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, we’ve 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; you’ve got device manufacturers and drug companies getting 20, 25 and 30 percent margins. The insurance part of it is like 5 percent.

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, let’s take the financing decision and set that aside.” Let’s 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 we’re taking care of, then we’re going to improve their productivity. If we improve their productivity, we’re going to improve their economic viability. If we improve their economic viability, they’re 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 it’s been designed.

How does Aetna stand to profit from the changes you’re talking about?

It changes the way we think about managing risk. That’s 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 I’m 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 severity.

In that case, the underwriting model is being paid appropriately for the risk you’re assuming, and because you’re 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. You’re getting rewarded for improving the productivity, economic viability and happiness of the people you’re 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 you’re 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 opportunity?”

For us, it’s 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 don’t work well together at all. If you can get everyone on the same economic basis by saying, Let’s get paid for the risk we’re assuming, let’s 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 we’re the insurer, we pay the bills, and here’s how you’re going to do it.

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