Can Bill Donaldson Save Aetna?

At an age when many executives are sunning themselves on the beach, Wall Street legend Bill Donaldson has taken on his toughest assignment ever, trying to turn around embattled Aetna—and maybe health care as we know it.

Every Sunday the local rink in Brewster, New York, holds its “Sticks and Pucks” open ice at 5:30 a.m. Wall Street legend William Donaldson is a regular, showing up in the bleary predawn with his gear and 10-year-old son in tow. For about an hour the former Yale University hockey star glides and pivots on his skates, teaching young Adam the finer points of stickhandling and wrist shots.

That, anyway, was the routine until February, when the 69-year-old Donaldson took over as chairman and CEO of Aetna after Richard Huber was ousted in a boardroom coup. Since then he has been a bit pressed for time.

“We have this little game we play,” says Donaldson. “On Friday nights my wife says to us, ‘Hey, why don’t you guys go play hockey tomorrow morning?’ And I look at him, and he looks at me. He can tell when I’m pooped, and he says, ‘It’s all right, Dad, we don’t have to play tomorrow.’”

It’s a cool, overcast Wednesday in early May, and as he tells this story, Donaldson is looking, well, pooped. He is riding back to Aetna’s Hartford headquarters from Meriden, Connecticut, where he fielded an hourlong barrage of tough questions from angry members of the Connecticut State Medical Society. It was his first official contract with any group of doctors, a key constituency in his effort to turn Aetna around. The night before he was up until 3:00 a.m., having jetted back from a banquet in Atlanta, where he glad-handed the CEOs of companies that use Aetna health plans.

It’s not looking good for ice time on Saturday.


Since taking over as the CEO of the 147-year-old firm, Donaldson has been engaged in the corporate version of a hockey brawl. Doctors, hospitals and medical societies nationwide are in open revolt over the stingy reimbursements and burdensome paperwork requirements of Aetna and other insurers. Tort lawyers, fresh from their victories over Big Tobacco, have filed dozens of state and federal lawsuits, including eight class-action claims; the charges include what plaintiffs say are illegally restrictive treatment policies, slow payments and fraudulent business practices. Congress is working to pass a patients’ bill of rights, prodded in good measure by problems in Aetna. And local Connecticut politicians are warning Donaldson not to abandon a depressed Hartford.

Then there are Aetna’s shareholders. If anyone should give a break to the new CEO, who confounded Donaldson, Lufkin & Jenrette and served as chairman of the New York Stock Exchange, it’s these institutional investors. Instead, they began howling in protest almost from day one. On February 24, the day before Donaldson arrived on the job, rival Wellpoint Health Networks and Dutch insurer ING Groep, made a joint bid of $10.1 billion, or $70 per share, for Aetna, then trading at about $38. Donaldson dismissed it as grossly undervalued.

Indignant over a stock price that remains lower than it was four years ago, despite a 66 percent run-up since Donaldson took over, fund managers continue to agitate for a sale of all or parts of the company or a radical restructuring of its sprawling, poorly integrated operations.

And Aetna is one behemoth. Its Aetna U.S. Healthcare subsidiary, with more than $20 billion in revenues, 46,500 employees and more than 20 million policyholders, ranks as by far the world’s largest managed-care concern. Aetna Retirement Services boasts $77 billion in assets under management, primarily in annuities and 401(k) plans. The company also runs health, life and retirement businesses on five continents, which are managed by a subsidiary called Aetna International. Last year, despite a 28 percent increase in revenues, the company’s earnings dropped by 15 percent, to $717 million, chiefly because of its acquisition of Prudential Insurance Co.'s money-losing health care business.

“The company is one big colossal mess right now,” says Bane of America Securities health care analyst Todd Richter. “Donaldson certainly has his work cut out for him.”

Start with image; almost no one in America likes their health insurer—or will admit that they do. Aetna is to HMOs what Philip Morris Cos. is to tobacco: public enemy No. 1. Keen to turn around public perceptions, Donaldson has hit the hustings with a passion, sweet-talking lawmakers, doctors and hospitals, delivering his personal assurances that his Aetna is a changed company.

Beyond politesse, Donaldson has made a series of decisive moves. First, he took a scalpel to Aetna’s bloated administrative costs. Then, aiming to placate doctors and state attorneys general, he summarily eased restrictive treatment policies in Texas and Connecticut. He has nudged aside senior management in the health care business and recruited famed turnaround specialist Robert (Steve) Miller, fresh from a stint at Reliance Insurance Co., as his chief lieutenant.

Most critically, just days after rejecting the joint bid from Wellpoint-ING, Donaldson crafted a restructuring plan that would split Aetna’s health care and financial services subsidiaries into two separate, publicly traded companies—dubbed health and wealth—and unload selected, unrelated international assets.

Though derided by some analysts, the strategic maneuvers, as well as Donaldson’s relentlessly upbeat politicking, are paying dividends. Last month lNG returned to the bargaining table, offering $7.5 billion for the financial services and international business, and Aetna says it is now talking to a number of parties about the properties.

“Bill Donaldson is a breath of fresh air,” says Connecticut Governor John Rowland. “He’s a true diplomat. He has got a way of just bringing people along, and he has already given Aetna a real boost just by reaching out to people.”

Count in some previously disaffected doctors. In Meriden Donaldson apologized for Aetna’s sins and promised a “sea change in our corporate attitude toward working with your profession.’' Then he added, “When I go to my own doctor, I want to hear that Aetna has changed for the better.”

Says Dr. Timothy Norbeck, head of the Connecticut physicians’ group: ''I’ve never heard those kinds of things said by any insurance CEO, and I’ve been in this business for 33 years. I believe he’s sincere.”

Even some disgruntled shareholders are sounding more charitable. “I was skeptical at first,” says Leon Cooperman, chairman and CEO of Omega Advisors, a major Aetna investor. “But they seem to be on the right track now, and I am pleased that they have become more flexible to alternatives for delivering shareholder value.

Still, Aetna’s problems defy quick fixes. The company wisely jettisoned its property/casualty business in 1996, but since then three major acquisitions of HMOs, most notably U.S. Healthcare, were wildly overpriced and remain poorly integrated. The corporate culture deteriorated, and the health care arm lags competitors such as Wellpoint and Humana in important product innovations, such as higher-fee policies that give consumers more choice.

Litigation and the potential for further state and federal regulation of HMOs remain huge risks for the company. Key positions will be hard to fill. Donaldson and Miller have been searching since April for a CEO to run Aetna U.S. Healthcare, and there is much skepticism about whether any serious candidate will apply. And, Donaldson’s efforts notwithstanding, Aetna still suffers from massive amounts of ill will, brought about in part by its own policies and made much worse by former CEO Huber’s penchant for combative public statements. “Aetna is a company that everyone loves to hate,” says hedge fund manager Cooperman.

Why is Donaldson throwing himself so completely into this hatefest, especially at a time when he could reasonably be expected to be off practicing slap shoes with his son? Credit a number of motives. An Aetna board member since 1977, he rightly feels responsibility for the company’s slide. He will also make a bundle if he turns things around. With options and stock grants for 600,000 shares, he stands to make $34 million, on top of a $1 million-a-year salary, if he brings the stock back to its June 1999 high of 97 3/16. Some think, too, that with his greatest accomplishment, the creation in DLJ of the first publicly traded New York Stock Exchange member firm, three decades behind him, Donaldson may be eager to buff his legacy and bask one more time in the limelight.

Fair enough. But Donaldson is also sincerely motivated by the larger public policy issues of Aetna’s survival. He has spent his career shuttling between moneymaking jobs and public service positions that included serving as undersecretary of State in the second administration of president Richard Nixon and acting as founding dean of the Yale School of Management, which was best known for its unorthodox emphasis among business schools on preparing students to be public sector managers. If Aetna and other private companies continue to falter, the public and lawmakers might demand governmental solutions to the ongoing health care crisis.

“What if Aetna doesn’t make it?” Donaldson asks. “Health care is front and center as a big, unresolved national problem. And as the CEO of the largest company in the industry, I believe I have a major role to play in deciding how it gets resolved. This may be the last, best chance to prove that somehow our health system can be run by the private sector.”

And don’t discount Donaldson’s eagerness to throw down his gloves and get into a good scrap. “The worse things are,” says Dan Lufkin, Donaldson’s Yale classmate, longtime friend and DLJ co-founder, “the more Bill likes it.”


Founded in 1853 as one of first life insurance companies in the U.S., it had by 1902 diversified into health and property/casualty insurance. Known locally as Mother Aetna, the company has been a pillar of the Hartford community—two employees have served as mayor. The leading insurer in the insurance capital of America, Aetna entered the pension business in 1930 to catch up with rivals that had begun offering retirement products during the 1920s. In 1960 the company began a three-decade international acquisition spree.

Among its achievements over the years, Aetna insured the Manhattan Project, wrote policies on the lives of the nation’s first astronauts and paid the first Medicare claim in 1966.

By the 1990s, as “shareholder value” became corporate America’s touchstone, Aetna concluded that its core p/c business, which suffered from thin margins, could only be exploited by buying enormous market share and achieving related economies of scale. Rather than pursue this expensive strategy, then-chairman and CEO Ronald Compton sold Aetna’s p/c business to Travelers Group in 1996 for $4 billion and focused on the higher-growth health and financial services sectors. (Donaldson aide Miller acted as an adviser to Aetna on this strategy.)

Compton then essentially bet the company’s future on the $8.9 billion acquisition of U.S. Healthcare, which made Aetna the country’s largest managed-care company. When he retired in 1997, the board turned to Richard Huber, a former Citicorp executive who had become a banker for merger boutique Wasserstein Perella & Co. before joining Aetna as a vice chairman in 1995. At the time, his selection was heralded as less disruptive for the company than hiring an outsider after Compton’s heir apparent, former U.S. Healthcare co-president Joseph Sebastianelli, resigned unexpectedly. Huber quickly upped the ante by acquiring the health care businesses of New York Life Insurance Co. and Prudential in 1998 and 1999, respectively, for a combined $2 billion.

The health care strategy was sound, but Aetna’s execution was deeply flawed. Analysts now estimate that Aetna may have paid three times as much as U.S. Healthcare was worth. And Prudential’s managed-care business was riddled with losses that continue. “We bit off more than we could chew,” says Donaldson.

Integrating the companies proved difficult. Before the U.S. Healthcare acquisition, Aetna had a largely paternalistic, process-driven culture. Proud of its heritage and conscious of its status as a benevolent corporate citizen, the company avoided controversy—internally and externally. In contrast, U.S. Healthcare, founded in 1982 by former cab driver and pharmacist Leonard Abramson, had become a market leader with an aggressive, in-your-face culture that often angered doctors.

The merged company featured the worst of both cultures. U.S. Healthcare’s freewheeling, entrepreneurial executives took charge but got bogged down by Aetna’s bureaucracy, which kept them from making strategic adjustments. True to character, though, they wasted no time leveraging their newfound size, becoming the brash bully of managed care. Aetna aggressively cut reimbursements to physicians and championed a series of restrictions on both doctors and patients, including the much-maligned “capitation” system of paying doctors according to the number of patients they treat rather than the actual services they render. Physicians accepting patients enrolled in one of the company’s health plans were forced to participate in every plan it offered—even those that had yet to be introduced.

“People hoped that the grand old Aetna would soften U.S. Healthcare’s rough image,” says Connecticut State Medical Society’s Norbeck. “Instead, the pitbull mentality of U.S. Healthcare became Aetna’s.”

CEO Huber rubbed salt in the wounds. When Aetna lost a $120 million lawsuit brought by the wife of a deceased policyholder, Huber referred to the plaintiff as a “weeping widow.” He locked horns with doctors and hospitals, essentially calling them lazy and overpaid. He questioned the motives of those who criticized the company. “Dick Huber certainly did seem to get his jollies by denigrating physicians,” says Norbeck. “He said some pretty outrageous things, and that really added a lot of fuel to the fire for Aetna.”

Huber remains unapologetic. “I certainly do fault myself for thinking I had more time than I did. But my team built the company. In five years we doubled revenues and came close to tripling the aftertax cash earnings. I’ve been known to be blunt, sure. But I felt that the industry needed someone to speak out on its behalf.”

In Huber’s eyes, his undoing had more to do with aggressive value investors, among them Omega’s Cooperman, buying up lots of Aetna stock last winter and demanding swift change than it did with any fundamental flaws in his strategy.

Nevertheless, the ill will left over from Huber’s tenure remains a serious liability for the company. Aetna became the target of lawsuits brought by patients, health providers and governments in state and federal courts throughout the country. The American Medical Association joined a suit in Georgia charging Aetna with routinely delaying claims payments. The plaintiffs are seeking class-action status.

To be sure, Aetna was partly the victim of massive problems buffering the entire health care industry, a situation that hasn’t changed much since before First Lady Hillary Rodham Clinton’s ill-fated crusade to remake the health system seven years ago. The cost of treating sick people is rising faster than the ability of insurers and patients to pay, and an estimated 40 million Americans still have no health insurance. Managed care was supposed to solve both problems by focusing on less expensive preventive medicine and aggressively controlling medical costs by cutting down on unnecessary procedures and prescriptions. By lowering the cost of patient coverage, insurers would be able to reduce premiums and broaden access to the uninsured.

Rather than being heralded for cutting costs and expanding coverage, HMOs are now vilified for placing excessive restrictions on which doctors patients may see and what treatments they may receive from those providers. Physicians and hospitals are buried in paperwork. Claims payments are delayed by months of red tape.

Hence today’s backlash. The same class-action attorneys who conquered Big Tobacco are now homing in on managed care with a series of federal lawsuits. A June Supreme Court ruling blocked one angle of attack for the plaintiffs’ bar, but a patients’ bill of rights now under consideration by Congress would make it easier for policyholders to sue HMOs under certain circumstances. Several states, including Illinois and Virginia, have passed laws clearing the way for similar suits.

Aetna’s competitors are also under pressure. Wellpoint, a Wall Street darling because of its stable earnings growth and popular, flexible policies, was viewed as a potential acquirer of Aetna’s health business a few months ago. In May, however, Wellpoint and two other HMOs were sued by the California Medical Association, which alleges that they violated federal racketeering laws by using their size to restrict doctors from properly treating patients. Louisville, Kentucky-based Humana agreed last month to pay $14.5 million to settle allegations that it submitted false Medicare-payment information. Oxford Health Plans, which only recently recuperated from serious operational problems, also faces litigation in a number of states.

Aetna’s image and stock have taken the biggest hits. During the heady early days of the U.S. Healthcare acquisition, from mid-1996 to mid-1997, the share price climbed from less than $60 to more than $110. Aetna’s shares hovered at about 100 last June before concerns over integration difficulties and a fourth-quarter earnings disappointment caused them to plunge to a low of 38 11/16 on February 18, a week before Huber was ousted.

LIKE THE COMPANY HE RUNS, BILL Donaldson’s life spans eras of American history.

The younger of two sons of Eames Donaldson, a Buffalo, New York, machine-tool manufacturer wiped out in the 1929 crash, and his wife, Guida, Donaldson grew up in trying times. “The overwhelming environment was one of sacrifice and self-sufficiency,” he recalls. “We went through some pretty tough times. My father was always preaching to me, ‘If you want it, do it for yourself.’”

While his older brother was off at war, Bill organized scrap drives, sold lemonade and managed a newspaper route. At 17 he started a company called United Enterprises that hired out 50 other teens for painting and home-repair work. With the profits, he bought a series of Ford Model A automobiles that he painstakingly restored.

From Buffalo the star defenseman for the Nicholls School hockey team went off to Yale, where he was tapped for the Skull and Bones society, the university’s most elite social organization (inductees include former president George Bush, writer Calvin Trillin and Senator John Chafee). Donaldson met Lufkin, his future partner; he also hobnobbed with conservative thinker William Buckley, editor of the Yale Daily News. (Donaldson later served as publisher.) After graduating, Donaldson joined the Marine Corps. He was called to active duty in Korea, but the conflict soon ended and he saw no combat.

In 1959, just 28 and one year out of Harvard Business School, Donaldson founded DLJ with Lufkin and Richard Jenrette. The brokerage firm pioneered the practice of providing research for institutional clients. In 1970, in a move fiercely resisted by the Wall Street establishment, DLJ became the first New York Stock Exchange member firm to go public.

Just three years later, already wealthy from the DLJ IPO, Donaldson left the Street to become undersecretary of State under Henry Kissinger in the besieged Nixon administration. Working for Kissinger, a fabled taskmaster, was no picnic. After less than two years, Donaldson left State to become an aide to vice president Nelson Rockefeller, serving on a variety of commissions that studied energy and commerce issues. “It was a very difficult time in Washington, with the whole Watergate thing, the Mideast war and the oil crisis,” says Donaldson, who got a valuable education in the art of navigating through a bureaucracy. “At the State Department, a lot of Kissinger’s people came with him from the National Security Council to augment the existing staff, and I was the only high-ranking guy from the outside during a very fast-moving situation.”

From 1975 to 1980 Donaldson served as founding dean of the Yale School of Management. He taught a course in entrepreneurialism, bringing in “entrepreneurial personalities” such as former Ford Motor Co. president, Defense secretary and World Bank chairman Robert McNamara to show that entrepreneurial energy could be used to transform large organizations as well as start small ones.

After Yale he started his own private equity investment firm, Donaldson Enterprises. But his firm, though profitable, never caught fire, making headlines only with a failed takeover bid for industrial conglomerate Crane Co. in 1984. The fever for leveraged buyouts that enveloped Wall Street frustrated Donaldson, who preferred searching for value at his own pace. “I felt the pressure to put my investors’ money to work,” he says, “but I wasn’t willing to pay the exorbitant prices resulting from the competitive bidding that was going on.”

In 1990, 20 years after defying the NYSE by taking DLJ public, Donaldson became its chairman during one of the exchange’s most politically divisive and strategically challenging periods. There, despite a glittering record and a widespread reputation as a genuinely nice guy, Donaldson was tagged in some quarters as an “empty suit,” a man whose resume exceeded his accomplishments. Much of this criticism emanated from old-timers who worked on the exchange floor and who had hoped that Richard Grasso, then the NYSE’s president and chief operating officer and Donaldson’s eventual successor, would become the Big Board chief instead.

Donaldson’s reserved style and Ivy League connections contrasted sharply with Grasso’s humble background and with predecessor John Phelan’s aggressive manner. Donaldson stood out like, well, a Bonesman on the rough-mannered trading floor. “Bill is not a gregarious fellow. He’s quiet, unassuming. His style was so different than what so many people here had been used to,” says Peter Sullivan, a partner in NYSE specialist firm Wagner Stott Mercator and vice chairman of the exchange when Donaldson came aboard. “He was an excellent steward for the exchange and had a great deal to do with nurturing and further developing Dick Grasso.”

Indeed, under Donaldson the NYSE boosted its flagging market share. When he took over, only 66 percent of all trades in NYSE-listed shares were actually executed at the Big Board. By the time he left that number was up to 72 percent. Average daily volume more than doubled during his tenure. After cutting administrative costs, he initiated a capital spending program to expand systems capacity. Grasso has also championed this strategy, which paid off handsomely as volumes soared to record heights. And Donaldson led the charge to globalize the exchange, traveling from country to country persuading executives to list their shares on the NYSE. When he took office the exchange had only 96 non-U.S. listings. By the time he left there were 247.

“He was a great champion of globalizing the stock exchange,” says Grasso. “He recognized how important that would be to the future of the exchange.”

After leaving the NYSE in 1995, Donaldson returned to an 18th-floor office at DLJ as chairman emeritus and senior adviser. But it didn’t take long for him to get hungry for action. Sources say that he lobbied colleagues on Aetna’s board for the top job three years ago, but lost out to Huber. Donaldson denies having sought the job then. But he does say one of the reasons he agreed to succeed Huber is that he differed with management on a number of strategic issues during recent years and felt obligated to right Aetna’s course.

Donaldson got his chance in late February, when Aetna’s shares hit an eight-year low. Huber’s abrasiveness already made him persona non grata with health care providers, patients and government officials. When the Street lost confidence in him, the board turned to the man most likely to please that constituency.

“Bill was very vital to DLJ, absolutely critical to getti8ng it started and through the first ten years, but some of the satisfaction over the long term wasn’t there,” says Jenrette. “I think Bill feels he’s still got another one in him.”

FOR A WHILE, IT LOOKED LIKE THE NEW CEO might have a very brief tenure.

On March 1, just days after Donaldson took the helm, Aetna announced that it had received the joint $70 per share bid from lNG and Wellpoint a week before. Some investors, including a number of hedge funds that had been buying shares on the cheap, were thrilled. Some longer-term shareholders saw instant liquidity and relief from a prolonged battering.

Donaldson and Aetna’s board deliberated over the weekend and voted to reject the offer. Donaldson termed it “totally inadequate.” He cited a list of objections, including antitrust concerns, tax issues and potential roadblocks from state and local governments. Then, too, Aetna’s book value was $75 per share, and some observers had estimated the breakup value of the company to be in the mid-90s.

Many big investors were furious, in part because they felt Donaldson was putting the interests of “stakeholders,” from doctors to the City of Hartford, ahead of their own. “The board may think it owes obeisance to history and tradition,” says Herbert Denton, president of investment boutique Providence Capital, which represents some of Aetna’s biggest shareholders, “but the institutional investor community is marked to market at 4:00 every day, and they are judged by their beneficiaries.”

Providence had begun building a modest position in Aetna’s stock on the cheap shortly before Donaldson took over. But many of the firms Denton represents had seen their shares plunge before Huber’s ouster in February.

Donaldson tried to mollify dissidents, to little avail. Omega’s Cooperman was so eager for a deal that he faxed each board member daily, encouraging them to sell.

Several investors report having had separate but similarly perplexing conversations with Donaldson during his first weeks on the job. “I don’t understand what you’re all so angry about,” one quotes Donaldson as saying. “I’ve already taken the stock up from 38 to 55. You should be happy.” Adds another, who also declined to be quoted by name: “The stock had gone up as a result of the Wellpoint bid. It had nothing to do with his management skills or his plan to split the company in two. I had a hard time believing this was Bill Donaldson, the founder of DLJ, the former head of the New York Stock Exchange, on the other end of the phone.”

But what Donaldson had in mind was not a short-term fix for Aetna, but a long-term cure—and his true focus was on the health care component. Hence his plan to spin out the company’s health care and financial services subsidiaries into two separate, publicly traded companies, while selling certain international assets. Donaldson hired consulting firm Deloitte & Touche to review the health business. Then, after bringing in Miller, the pair began a search for a health care CEO.

To sell a turnaround, not a business, Donaldson knew he had to court long-aggrieved stakeholders. He moved quickly to schmooze with Hanford Mayor Michael Peters and Connecticut Governor Rowland, addressing their concerns about whether Aetna would remain at least partially headquartered in the downtrodden city.

And Donaldson began his overtures to doctors, asserting that the “pendulum” of managed care had “swung too far” in the direction of restrictions and red tape, and pledging to “bring it back to center.” The goal: to ease limits on patient care, reduce paperwork for providers and patients and create more innovative products that will give patients and doctors more freedom while still holding costs down. “What we’re basically planning to do is run our business better so that we remove the irritants that have resulted in these suits,” says Miller, who is overseeing much of the day-to-day transformation of Aetna U.S. Healthcare and who plans to leave when a permanent health CEO is named and the fate of the financial and international businesses is decided.

As part of this cleanup, top managers at U.S. Healthcare, whose culture so irritated doctors and patients alike, have moved on. In May Donaldson created a three-person “office of the CEO” for the health care operation. It consisted of Donaldson, Miller and Michael Cardillo, a U.S. Healthcare veteran and former president of the unit. Cardillo, who clearly was not in the running to be CEO, chose to retire instead. Soon after, U.S. Healthcare founder Abramson also stepped down.

On the operating level, Miller has formed teams, each headed by midlevel managers, to dissect every aspect of the health care unit’s business and make suggestions for how it must be adjusted to better cope with changes in the industry. “I’ve told all the participants on these teams that I am not interested in hearing what their bosses think. I want to hear what they think,” says Miller. “We’re looking at a major investment in information technology over the next several years. The raw cost savings and the service to our various clients can be massively improved. We’re going to be rolling those things out week by week here.”

On the legal and public relations front, management is working on more agreements with hostile state attorneys general, physicians and hospital groups like those recently reached in Texas and Connecticut, in which Aetna pledged to rescind or alter many of its most restrictive policies governing the delivery of care. Additionally, the company likely will roll out new products geared toward the rising number of patients who are willing to pay higher premiums in exchange for more control over their care.

In a very real sense, Donaldson’s ambitions don’t stop with turning around Aetna. The old policy hand thinks that Medicare reimbursements are too low, and he worries that so many people still lack health insurance. He clearly views fixing Aetna’s woes as linked inextricably to repairing the health system’s broader problems. “Somehow we’ have to figure out a way to help the 40 million people in this country who are uninsured,” he says. ''I’m pretty convinced the private sector is the way to do it.”

Specifically, Donaldson wants Aetna to lead two major transformations of the way HMOs do business that could allow managed care finally to fulfill its original promise. One is to change the way benefit plans are structured so that they are provided by employers on a defined contribution basis, much like 401(k) plans are. Employees would gain more choice over their own contribution of wages into the plan and, more significantly, which specific plan they are covered by. Instead of offering workers one of two or three plans administered by the same insurer, employers will allow them to choose among a large array of plans and insurers. “For us this means a double sell,” says Donaldson. “We must sell a large corporation on offering our plan, and we must resell the individual member picking from a cafeteria of options. And those options will be much more tailor-made to the particular circumstances of a much more knowledgeable member.”

Donaldson also believes that the Internet and other technologies can provide doctors and patients with quick access to information that will expedite and improve treatment, especially preventive care, and eliminate the mountains of paperwork creating frustration and unnecessary costs throughout the system. He would like to see the process become paperless. “Ideally, you’ll be able to walk into a doctor’s office with your Aetna credit card, and while you’re being treated have your bill automatically processed,” says Donaldson.

Another goal is to use data mining as a tool to improve procedures and expand preventive care. “We have the capability, because of our vast data banks on both outcomes and procedures, to spot procedures that are being done incorrectly, and provide guidance,” he says. Aetna can actively comb its databases for anomalies in treatment patterns across the country and communicate with doctors to help them improve. Such a practice has important implications for preventive care; it would give insurers, and doctors, the ability to monitor whether patients with chronic diseases are taking their medication and contact them when they’re not.

DONALDSON’S EARLY MOVES—CUTTING COSTS, extending olive branches, hiring consultants—amount to picking off the low-hanging fruit. He now faces more difficult, even harsh, choices. Successful corporate turnaround chiefs are not typically known for their manners, and some market observers are uncertain if Aetna has the right plan or man. “Style and personality only take you so far,” says Bane of America Securities’ Richter.

Highfalutin policy wonking may play in Washington, but Wall Street can be a rougher audience. And for the most part, investors remain underwhelmed by the restructuring plan. Aetna can’t split until the Internal Revenue Service reviews the tax implications, which could take several months. Even if the plan goes through, some analysts still don’t see much value to the company. Health and financial services stocks trade at virtually identical multiples, so some believe splitting Aetna will end up with a pie cut in half, not a bigger pie. Last, some believe the loss-prone health care business actually benefits from the stability of financial services profits. “Is there value created by any of this?” asks William McKeever, a health care analyst at PaineWebber. “I don’t see it.”

Donaldson may yet have to resort to deals to buy more time. In May he reentered formal talks with lNG, this time without Wellpoint, concerning the possible sale of Aetna’s financial services and international businesses for a reported $7.5 billion. As a deal appeared imminent, the company’s stock climbed to 73 9/16, higher than the value of the ING-Wellpoint offer in February of $70 per share. But after talks cooled down, the shares slid back to the low 60s.

Institutional investors, who control 77 percent of the stock, still expect a sale. Talks continue with a number of parties, and the international businesses, assembled through a string of acquisitions over three decades, may be sold in pieces to several buyers rather than as a whole. Some analysts carp that such a sale would involve a huge capital-gains-tax hit for the company, though these concerns are not expected to derail any potential transaction.

Through all of this there is the sense that time may be running out. Given his age, few see Donaldson as a long-term solution, and the search for a health care CEO is now in its fourth month. Many wonder whether Donaldson will be able to repair the company’s badly wounded culture before shareholders completely revolt.

Less than one year from his 70th birthday, Donaldson has no regrets about wading into this mess and no interest in retiring when he’s done with his Aetna rescue mission. “I don’t feel that I’ve taken this job to satisfy some unsatisfied something in me,” says Donaldson. ''I’m healthy, I have a young son, I’ve got a lot of responsibilities, and I want to be actively engaged in all of them.”