Aetna's Massive Middletown Building May Face A Wrecking Ball

Huge Structure Nearly Empty; Lease Almost Up

By Kenneth R. Gosselin , The Hartford Courant
April 25, 2010

In 1983, Aetna built the massive 1.4-million-square-foot Middletown complex at a cost of $170 million to house 4500 employees. Today, the buildings sit empty with all the workers back in the Hartford headquarters. (Stephen Dunn / Hartford Courant / April 23, 2010)

A Crown Jewel

'Dead Center'

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Insurers Unfairly Demonized; Problem Of Cost Remains

From the start, Connecticut has had a significant stake in the successful reform of the nation's health care system. This past week, President Barack Obama signed a bill into law that will help many Connecticut residents get access to health care services. Across the country, an estimated 32 million people will soon have access to the protection offered by health insurance. These are important milestones by any measure.

While we remain concerned that health care costs will continue to rise too fast under the current health care reform provisions, the bill that President Obama signed into law this week will fundamentally change the health insurance market. I agree with the concern that health care costs are unsustainable, that average Americans and their employers are being priced out of the market, and that the system doesn't work for small businesses and individuals. That's why I'm proud to work for a company that has been putting forward proposals since 2005 to bring about meaningful reform.

When fully implemented, the new law will have a major effect on the market. Individuals and small employers will have more options and choices. The private sector will do what it does best — innovate to solve problems. Finally, the bill will support harnessing data that can make the health care system more efficient and work toward eliminating the 30 percent of health care spending that is wasted.

But to meet the affordability concerns of working families, we also need to get at the drivers of costs — hospitals, doctors, drugs and devices, as well as behavior and lifestyle choices. Insurance premiums are a result of these drivers — not the cause. In testimony offered on Capitol Hill last year, we offered proposals for tackling these drivers comprehensively through initiatives such as provider payment reform and a greater emphasis on prevention and wellness. For reform to be successful, we need all of the major players back at the table offering up innovative ideas to solve our collective problems.

Our industry played a key role in advancing many of the provisions that ultimately became part of the law. But somewhere along the way politics overtook policy, and health care reform became health insurance reform.

This shift gave rise to political rhetoric about our industry, and the people who work in it, that has been extremely disappointing to me and to our employees most of all. Demonizing an entire industry and its many thousands of employees is just bad leadership. The rhetoric ignores the reality of today. Our business is most effective when we listen to our customers and help them solve the challenges they face in the health care marketplace.

Our employees have a great sense for what works and what doesn't in the health care system, and they help make the system work better for our members on a daily basis. They are not alone. The health insurance industry employs tens of thousands of Connecticut residents and many more indirectly, pays hundreds of millions of dollars in taxes, and literally has an impact on every community in our state. But you wouldn't know it from listening to the people who represent us in Washington and here in the state.

Reform isn't done. There are years of regulations to be considered and implemented, and we will be an active participant. In the meantime, the people who I work with will continue doing what we do best — helping our customers and members. We will find opportunities in the new insurance market to improve peoples' lives. We will not be satisfied until the real issues of affordability are fully considered and addressed, and everyone truly benefits from health care reform.

Mark Bertolini is president of Aetna, a diversified health care benefits company based in Hartford with annual revenue of more than $34.6 billion in 2009.

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Aetna's Ron Williams on Health Care: What to Expect

At the Table: Charlie Rose talks to Aetna's Ron Williams

By Charlie Rose, Business Week Magazine
March 25, 2010

Nixon couldn't do it. Clinton couldn't do it. But on Mar. 23, after decades of debate, lobbying, and political wrangling, Barack Obama signed health reform into law. What does this new mandate mean for individuals, companies, and the health-care industry? On Mar. 24, I talked with one of the executives on the firing line, Chairman and CEO Ron Williams of Aetna (AET), which provides health-insurance benefits to more than 36 million Americans.

CHARLIE ROSE:  How do you assess the health-reform bill just signed by President Obama?

RONALD A. WILLIAMS:  I think it is a significant milestone because it will give millions of people access to health-care services. I would probably have done things a little differently. But this is now an opportunity to get to work on the fundamental affordability of health-care services, [because] the mischaracterization of our industry as the problem really didn't permit us to work in a collaborative way.

My impression is that the President listened to doctors, nurses, insurance companies, and every other element of the health-care community.

There was good dialogue, but for a variety of reasons there was a point in the dialogue—in the summer—when the focus shifted from health-care reform to health-insurance reform. But it's not too late. We're committed to looking beyond where we are now and getting back to what we need to do to really achieve affordability.

Will insurance premiums go up?

The answer is yes, and some of the things that will drive those premiums are significant additional taxes the industry will ultimately have to pay in the first year.

The President said that this bill would not have any impact on people who already had coverage, that it was about the uninsured, that there would be no change. Will this legislation change the coverage of people who are already paying for it?

My perception is, yes, things will change. You might not have a plan that includes the exact same doctors. You might have plans that have richer benefits, and therefore you're going to pay more for benefits you may or may not want. It would have been a better message to say, we're going to make certain you maintain your eligibility.

Clay Christensen of Harvard Business School said recently that in health care, competition does not help control costs but rather drives them up. He said the structure of the system pits hospitals that want to fill their beds against insurers that want to minimize reimbursement and access. His answer was the health-care provider and health-care insurer should be one and the same, suggesting an integrated system like Kaiser Permanente in California.

Well, I think it's an interesting idea. But all health care, ultimately, is local. There are communities where that model has worked well. Kaiser and Group Health of Puget Sound are examples of where that's worked very well. But it requires a unique physician culture. And even firms like Kaiser, which has tried to expand into other geographies, have found that it's incredibly hard to replicate. Where it can work, it's a fine model. It's just not going to work in most communities.

During this year of debate that you talked about, there was a moment in which Health & Human Services Secretary Kathleen Sebelius was concerned by Anthem Blue Cross in California proposing a 39% rate hike and wanted an answer from the insurance company and the industry as to why this was happening? Was it justifiable, especially at a time of recession? What was the answer?

I'll leave it to others to explain the exact increase, because it wasn't our firm that was doing it, but the generic answer I gave the Secretary was first you had an increase from the underlying rate of medical costs—inflation from hospitals, physicians, drugs, devices, technology. You then had the fact that as a result of the economy, healthy members who had been insured for some time but found themselves in tight economic circumstances were canceling their insurance. So you lose the subsidy that is keeping the premium affordable for the insurance pool. At the same time you had a third factor: Healthy young members, as a result of the economy, not entering the insurance pool. Finally there is simply the aging of the population in the insurance pool. And I think that to blame the premium on the health plan really doesn't get at the underlying forces.

Do you feel like the insurance industry was demonized in this debate that took place over the last year?

Yes, I do. And I think our 35,000 employees at Aetna were perplexed and really, I think, very disappointed in the leadership of the country and their selection to demonize and impugn the motives of employees, doctors, nurses, and pharmacists.

By that, you mean the President.

I mean everyone involved.

A Wall Street Journal editorial on Mar. 22 said the first result of reform will be turmoil in the insurance industry, and as small insurers find it impossible to make money, a wave of consolidation is likely. You've already said premiums are going to go up. Are we also going to see consolidation?

I'm much more worried about the solvency question. If you're a small plan and you experience costs that you simply weren't able to price for, there could very well be insolvencies. It's been a long time since we've seen them in the insurance industry, but the insurance commissioners know what can happen.

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Aetna's Middletown Employees Will
Move To Hartford In Next 6 Months

By Mark Mirko, The Hartford Courant
September 28, 2009

Aetna's values are depicted in a graphic on the atrium floor of the insurer's building at Farmington Avenue and Flower Street in Hartford, where preparations continue for the relocation of employees from the company's Middletown building.

Three years of renovations at Aetna Inc.'s Hartford headquarters have all been one big lead-in to this weekend, when the health insurer will begin moving 3,600 Middletown employees to its Asylum Hill campus.

But the $220 million renovation project is still in full swing, including the installation of solar panels on the roof of the former Tower Building, at Farmington Avenue and Flower Street, and on the south side of the building, which faces I-84. A web of blue scaffolding now covers that side of the building, and workers are installing the necessary brackets on the building's smooth granite exterior. Five rows of solar panels are expected to appear in mid-October.

"The unique architecture of the building allowed for that," said Michael L. Marshall, who oversees Aetna's renovation and construction projects. "We would never have been able to do that on the other building."

The former Tower Building — now renamed the "Atrium Building" because each of its floors opens onto a large interior atrium — was built in the 1970s in the Modernist style, in sharp contrast to the Colonial Revival architecture of the main building.

The solar panels will be angled upward to catch the optimal amount of sunlight and won't be visually distracting to the tens of thousands of motorists passing by daily on the highway, Marshall said. The solar panels are expected to generate 6 percent to 8 percent of the Atrium Building's daily electrical supply. At a cost of $2 million, the insurer estimates that it will take 15 years to recoup the cost. The state is providing a rebate of about $800,000.

Fred Laberge, an Aetna spokesman, said the solar panels and other "green" innovations in the 1.7 million-square-foot campus are intended to project an image of Aetna's corporate culture. "It's not just the energy savings, but it's the right thing to do in terms of the green movement," Laberge said.

Since 2006, renovations have included the construction of two parking garages — one replacing an outdated one — that doubled the number of spaces to accommodate workers from Middletown, who will move in over the next six months. The majority of renovations have focused on the Atrium Building, vacated by ING in 2007. ING had occupied the building since 2000, when it acquired Aetna's financial services business. ING later decided to build a Connecticut headquarters in Windsor rather than renew its lease.

Aetna subsequently decided to give the space a much-needed renovation and consolidate operations from Middletown. Renovations are expected to be completed in six months. The campus will share a new cafeteria twice the size of the old one, as well as larger dining facilities. A new 28,000-square-foot "education center" will be used for training, a function once done in Middletown.

Most of the 3,600 employees moving from Middletown work in information technology. Of that number, 2,600 will be located in the Atrium Building; the remaining 1,000 will be in the main building, Marshall said.

Laberge said the workers who will now commute to Hartford will work schedules with staggered arrival and departure times to minimize traffic snarls on Asylum Hill. Workers are being given $50 monthly incentive payments to car pool or use public transportation.

Aetna built its 1,000,000-square-foot campus in Middletown but later sold it to GE Capital and leased the space back. It still owns the land. Laberge said that Aetna is in negotiations with GE over the future of the site.

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Despite Making Concessions, Insurers Face Renewed Attacks

By Janet Adamy, The Wall Street Journal
July 30, 2009

Health insurers are facing renewed fire from President Barack Obama and Democrats, but are still mostly on board with the president's effort to overhaul the U.S. health-care system. That's because the industry conceded months ago to key demands that Mr. Obama has just begun promoting. And insurers still have much to gain from an overhaul because they could get millions of new customers.

In a town-hall meeting Wednesday in Raleigh, N.C., Mr. Obama took aim at insurers as a way of selling his health plan. "The truth is, we have a system today that works well for the insurance industry, but it doesn't always work well for you," the president said. He said he wants to forbid insurers from denying coverage to people because they have a pre-existing illness, cap consumers' out-of-pocket medical costs and provide preventive care at no additional cost.

In fact, insurers have already agreed to stop denying coverage to the sick and charging people higher premiums because of their gender or health status, as long as lawmakers pass a requirement that most Americans have to carry health insurance. Such a requirement is part of most of the bills making their way through Congress.

"We really have enormous agreement about the insurance reforms," said Ron Williams, chief executive of Aetna Inc., one of the nation's largest carriers. Mr. Williams has met with Mr. Obama privately or in small groups six times, the company said, and the CEO has personally pushed for such changes as far back as 2005. "Consumers don't necessarily understand how the industry has changed and the commitments we've made to eliminate some of the challenges," Mr. Williams said.

Insurance-industry executives are privately complaining that the administration's rhetoric is eroding the consensus they have spent months trying to build with lawmakers, one industry official said. Another point of frustration is that the Senate is moving toward taxing insurers on particularly generous health plans to help pay for expanding coverage of the uninsured.

If health legislation succeeds, the industry would likely get a fresh batch of new customers. In particular, many young and healthy people who currently forgo coverage would be forced to sign up and pay premiums that would offset the cost of insuring older Americans.

Insurers have focused their opposition on some Democrats' push to create a new public health-insurance plan -- an entity they fear will drive private insurers out of business. House versions of the legislation include a public plan, but the Senate Finance Committee is expected to opt for nonprofit cooperatives that would pose less of a threat to private insurers.

Karen Ignagni, president of America's Health Insurance Plans, the industry's main lobby, said the battle over the public plan has been "obscuring the consensus about insurance-market reforms." The group recently began airing national television advertisements trumpeting its support for not rejecting people based on pre-existing health conditions.

Still, insurers are pushing back against several proposals that lawmakers see as favorable to consumers. One proposal would prevent insurers from charging older Americans more than twice the rates charged to younger people. Insurers want to be able to charge older people as much as five times more.

Some insurers also are calling for a higher cap on consumers' out-of-pocket costs and are warning that waiving charges for preventive care will simply lead to higher costs elsewhere. "If you put too low a cap on out-of-pocket expenses, that could drive up the premium," said Alissa Fox, a senior vice president at the BlueCross BlueShield Association, which represents 39 independent insurers nationwide.

Meanwhile, insurers continue to wage an aggressive campaign against Democrats' proposals to create a public health-insurance plan. America's Health Insurance Plans has stationed employees in 30 states who are tracking where local lawmakers hold town-hall meetings.

Big insurer WellPoint Inc. has set up an online network where it makes the case against the public health insurance plan and urges consumers to contact their elected officials.

Write to Janet Adamy at janet.adamy@wsj.com

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Aetna Profit Down 28 Percent In Second Quarter

By Diane Levick, The Hartford Courant
July 28, 2009

Aetna's net profits plunged 28 percent in the second quarter as pricing of health plans failed to keep pace with rising medical costs. The company chopped its earnings forecast Monday for the second time in two months. The Hartford-based insurer said that it will step up efforts to root out unnecessary medical tests and procedures, further trim administrative costs and raise prices as needed.

"Our 2009 [medical] trend is higher than we projected and our 2009 pricing was insufficient to cover these higher medical costs," Aetna CEO Ronald A. Williams told analysts on a conference call. "We are taking decisive yet thoughtful actions to put these execution challenges behind us and regain our momentum."

Although Aetna said it's realigning overhead costs because of lower projected earnings, company spokesman Fred Laberge said, "There are no job implications associated with today's announcement." Aetna had 7,206 Connecticut employees at the end of March, and the number has remained nearly flat, he said. Aetna had 35,225 employees companywide at the end of June, little changed from 35,276 on March 31.

Rising medical costs are at the heart of the debates over health care reform. Aetna and other insurers say they can control costs better than a competing government health plan would do.

The company reported $346.6 million, or 77 cents a share, of net income for the second quarter, down from $480.5 million, or 97 cents a share, a year earlier. Operating earnings, which exclude realized investment gains and losses and other items, were $308.5 million, or 68 cents a share, falling short of the Thomson Reuters analysts' consensus of 78 cents a share. Operating profit a year ago was $466.3 million, or 94 cents a share.

Aetna had to boost reserves for prior periods' claims by about $60 million because of higher medical costs than it projected. Claims are reflecting more expense per visit, such as more tests and other procedures, resulting in higher costs for emergency room, outpatient, lab and preventive services, the company said.

The company is increasing scrutiny of claims to determine whether all the services are appropriate and is adopting new reimbursement rules for second and third procedures that are done at the same visit, said company President Mark Bertolini. He promised "direct intervention" at certain hospitals to "ensure contract compliance."

Aetna lowered its forecast Monday for 2009 operating earnings to $2.75 to $2.90 a share, from its June estimate of $3.55 to $3.70.

Overall enrollment remained nearly flat at 19.05 million as of June 30, although commercial membership dropped by 64,000. Williams said that as Aetna raises prices to improve profit margins, "We would be willing to forgo membership growth if necessary to do so. We have a clear bias toward profitability over growth."

Aetna's stock closed down 72 cents, or 2.7 percent, at $25.72 a share Monday.

It will take Aetna several quarters to re-price its business, "and we believe that earnings-per-share risk remains heightened over the next quarter as medical claims from the second quarter further develop," said Matt Perry, health care services analyst at Wells Fargo Securities. "We do not expect much earnings per share growth in 2010."

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Ten Questions on the Health-Care Overhaul

The Effort to Change the System Enjoys More Support Than
Past Attempts, but the Complications Are as Acute as Ever

By Janet Adamy, Wall Street Journal
July 21, 2009

It is crunch time for health care. Lawmakers who are trying to fundamentally remake one-sixth of the U.S. economy say this might be the most complicated legislation they have undertaken. Here are some basics that everyone can grasp -- and probably ought to, because the health bill, if it passes, will affect almost everyone.

1. What is the problem with health care, anyway? Is it as bad as they say?

The problem, as advocates for change see it, boils down to two big areas: high costs and lack of coverage. For some households and employers, the cost of care already is out of reach, and many more will struggle to afford it if costs keep escalating. Medicare is eating up a bigger share of government spending, and a growing number of bankruptcies and home foreclosures are linked to medical expenses.

Even though the U.S. spends $2 trillion a year for health care, some 46 million people don't have health coverage. To be sure, that oft-cited number from the Census Bureau is somewhat misleading because it includes illegal immigrants, healthy young adults who don't think they need insurance and poor people who are eligible for Medicaid.

Still, as the recession wears on, the number of uninsured appears to be rising. One study, by the left-leaning Center for American Progress Action Fund, found that as many as 14,000 people are losing their health insurance every day because of job cuts. Families who have insurance pay an additional $1,000 a year in premiums to effectively subsidize all the people who receive care but don't pay for it, according to a separate study by the liberal group Families USA and actuarial consultancy Milliman Inc.

2. Can Democrats and Republicans agree on anything?

Actually, yes. There is broad support for changing the way hospitals and doctors are paid so that they are compensated for the quality of care they provide, not the quantity of procedures they do. Democrats and Republicans also back the idea of creating online marketplaces where consumers and small businesses can comparison-shop for plans.

Both parties want to bar insurance companies from denying coverage to people who are already sick. The insurers are willing to make that concession, as long as lawmakers also require most people to carry insurance, since that would force young, healthy people into the insurance system.

It amounts to a twin mandate -- one on insurers to sell policies, and another on Americans to buy them. Although there are pockets of Republican opposition to the latter idea, both have enough bipartisan support to pass. These steps alone would represent big changes to the status quo.

3. Where are the main points of disagreement?

The sharpest divide between the two parties: Whether to create a government-run insurance plan (otherwise known as a "public plan") that would go up against private plans in online marketplaces. President Barack Obama says a public plan will keep private insurers honest. Republicans say it would give the government too much control over health care.

The other main battle, which doesn't break down as easily along party lines, is how to pay for a plan expected to cost at least $1 trillion over a decade. Many lawmakers think it makes sense to impose a tax on employer-provided health-care benefits, a perk that currently is tax-free.

Then they looked at the poll numbers. Many voters hate the idea of paying taxes on something that right now costs nothing. So Democrats have instead proposed raising taxes on the rich.

Congress also remains divided over whether to make employers (except really small ones) provide insurance. House Democrats propose that if companies don't offer insurance, they should contribute as much as 8% of their payroll spending toward helping workers buy insurance on their own. Republicans argue that companies will make up for it by cutting jobs and lowering wages.

4. What would a public plan look like?

The country already has a huge public plan -- Medicare, which covers the elderly and some other groups. It generally pays doctors and hospitals less than private insurers. Liberal Democrats would like to replicate it in the new marketplaces. They want the government directly to set premiums and services under the plan, perhaps with basic and premium options.

That isn't going to fly in this Congress, despite Democratic control of both chambers. Republicans are more opposed to having a government plan than Democrats are bent on having it. Conservatives figure the government would quickly drive private insurers out of business by undercutting them on price.

Two other scenarios have emerged as compromises. One is to hold off on creating the plan and instead impose heavy regulations on insurance companies aimed at making coverage accessible and affordable. If that doesn't work, then the government insurance plan would kick in after several years. The other idea is to create a batch of regional nonprofit insurance cooperatives to compete with private insurers. But many liberals consider that a far stretch from the original idea, since the government wouldn't run those plans.

One point that gets overlooked in the debate is that most people probably wouldn't even be eligible for the public plan. Only individuals without affordable employer-provided insurance and businesses that aren't big enough to buy reasonably priced plans on their own would qualify.

5. Why is the total price of the overhaul so expensive, especially considering that it is designed to bring down costs?

The cost mostly comes from giving people subsidies to buy insurance, and from expanding Medicaid, the federal-state insurance program for the poor, to cover more low-income Americans.

The theory is that once more Americans carry insurance, the entire health system will spend less money caring for them. Those people will have more access to care that prevents them from getting sick in the first place, and they would rely less on costly forms of treatment such as visiting the emergency room. But it could be years before that really reduces health costs, if it ever does.

President Obama often talks about more fundamental fixes for high costs, like paying for quality and blocking doctors from boosting their income with unnecessary tests. But Congress has limited power to change that.

6. What are the most likely ways to pay for the overhaul?

The White House has proposed about $950 billion in savings over 10 years to pay for the plan that include things like lower reimbursements to hospitals that treat Medicare patients.

The wealthy are a natural target. One proposal is limiting itemized tax deductions for families who earn more than $250,000 annually, a campaign idea of the president. House Democrats want to impose a surtax on wealthy individuals. Less likely are new taxes on soda and sugary drinks, which many lawmakers see as politically unpopular.

7. Which industries are most likely to lose, and which to gain, from any overhaul?

Perhaps no industry stands to gain more from the changes than health insurers, who would get tens of millions of new customers because Americans would be required by law to carry health insurance. Pharmaceutical companies would sell more prescription drugs because more people would have coverage for drugs and access to doctors who prescribe them. Hospitals and doctors wouldn't have to provide as much free care as they do now.

But each of those groups also could take hits, particularly the health insurers if some kind of public option drives down their profit margins. The big losers would be retailers, restaurants and other businesses with low-income workers who provide little or no health insurance, since they would be forced to start paying for it.

Businesses that are too small to afford health insurance but not tiny enough to fall below the proposed $250,000 annual payroll cutoff that exempts them from providing coverage also could get squeezed by the legislation.

8. I already have insurance through my job - what happens to me?

Not too much at first. A handful of tax-free perks for the insured could get axed. For instance, lawmakers want to end the practice of allowing people to put money into so-called flexible spending accounts, which allow them to pay for everything from cosmetic dental work to surgery with tax-free dollars.

Longer term, a lot could change. For instance, your employer could drop coverage, preferring to pay the penalty for doing so and deflecting employees to Uncle Sam's plan. Cost-cutting efforts in other parts of the system could eventually affect employer-provided plans as well.

9. Politicians have tried for decades to push universal health insurance Why did they always fail before? Why would this time be any different?

These efforts stretch back to the 1930s, when President Franklin Roosevelt proposed creating a compulsory health-insurance system for all Americans, run by the states. Doctors, worried it would hurt their pay, helped kill the measure, buoyed by opposition from business and labor groups. Other major health overhaul attempts, most notably President Bill Clinton's 1993-94 effort, died because powerful interest groups feared their members would either earn less or have to pay more under the new system.

What is different now is that major health and other interest groups are on board with the idea. Many insurers, hospitals, doctors and drug companies agree that the system is so flawed it isn't sustainable, and they see a bill as a chance to push through improvements like adopting electronic health records, broadening the use of data to show which treatments work best and reducing the threat of malpractice lawsuits. Employers see it as a chance to curb the sharply rising price of covering their workers. Almost no one is arguing that the system is fine the way it is. Mr. Obama's high popularity, coupled with wide Democratic margins in Congress, also grease the wheels for passing a bill.

10. What happens if the effort once again fails?

Lawmakers would likely scale back their plans and try to at least pass a measure that partially expands insurance coverage or helps stall the increase in health costs. But so many parts of the legislation are intertwined that they will be less effective, and perhaps impossible to achieve, if done piecemeal. Lawmakers might be reluctant to take up the controversial legislation ahead of congressional elections next year. So it would probably be several years before lawmakers tried again.

Write to Janet Adamy at janet.adamy@wsj.com.

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From Here to Retirement

Editorial - New York Times
January 25, 2009

If you have a 401(k) retirement plan at work, you don’t need us to tell you that you’ve taken a hit in the past year. The really bad news is that the damage to your retirement security is likely worse than what the numbers say on your statement.

Many Americans didn’t have enough savings coming into the downturn. And employers are increasingly cutting back or suspending their 401(k) match. FedEx, Eastman Kodak, Motorola, General Motors and Ford, among others, have announced such moves.

There’s also no guarantee that today’s battered 401(k)’s will rebound powerfully. People close to retirement don’t have time for a do-over. Even for those still far from retirement, there’s no telling how stocks will perform in the future.

They could post impressive gains, especially in the near term, from their current low levels. But they could also struggle. The last 25 years was a time of low inflation rates and low interest rates, which boosted stock prices. Going forward, inflation and interest rates have nowhere to go but up, which would be bad for stocks.

It wasn’t supposed to be this way. Over the last several decades, businesses and government used matching contributions and tax breaks to encourage the proliferation of 401(k)’s. They lauded them as a way to harness the market to create wealth and increasingly viewed them as replacements for traditional corporate pensions.

In 1983, 62 percent of workers with retirement coverage had a traditional pension only, while a mere 12 percent had 401(k)’s. Today, approximately 20 percent have a traditional pension and about two-thirds have only 401(k)’s.

The shift to 401(k)’s also shifted investing risks and responsibilities from employers to employees, but as long as participants generally made money and recovered losses quickly, the risks seemed reasonable. Now many Americans are inevitably having second thoughts.

So far, the cumulative wipe-out of household retirement savings totals about $2 trillion, and no one believes that the downturn is anywhere near over. As a result, participants in 401(k)’s are in greater danger than ever of coming up short in retirement.

That grim reality calls for an expanded approach by policy makers to retirement issues. Traditionally — and correctly — an important focus has been on lower-income Americans who lack the means to save and tend to work for employers who do not offer retirement plans.

During the campaign, President Obama supported a better savers’ tax credit to encourage savings among lower-income Americans. He also supported universal I.R.A.’s, which would make a 401(k)-like account available to all workers. Those good ideas should be pursued. There are also good ideas for improving 401(k)’s that deserve attention, such as helping people manage their retirement withdrawals so that the money lasts a lifetime.

The wipeout in 401(k)’s has made it clear that it is not enough to get more people to save more. There needs to be a better way to reasonably ensure that a lifetime of savings can’t be undone by forces beyond one’s control. The Center for Retirement Research at Boston College, a leader in retirement policy, is advocating a new savings account — in addition to Social Security and 401(k)’s — that would enable risks to be shared among workers, retirees and the government.

After decades of promoting and improving 401(k)’s, in which employees bear substantial risk, that’s a new and difficult reality for policy makers to grapple with. The sooner Mr. Obama puts his team on the issue — his budget director, Peter Orszag, is one of the nation’s top retirement experts — the better.

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Health Insurers Get Poor Marks From Hospitals

UnitedHealth is rated worst of the bunch in a a survey of executives.

By Lisa Girion, Los Angeles Times Staff Writer
March 6, 2008

The nation's biggest health insurers lately have taken to rating hospitals on quality and cost, saying the information can help patients make better choices. Now, hospitals are giving insurers a dose of their ow n medicine.

A survey of hospital executives to be released today found some national insurers have image problems of their own. Three of the nation's five largest insurers had higher negative approval ratings than positive ones, according to the effort to gauge relations between hospitals and the insurers who hire them to take care of their members.

UnitedHealth Group Inc., which has contracts with 96% of the hospitals responding to the survey, was hit with the worst ratings. The Minnetonka, Minn.-based insurer received an "unfavorable" opinion from 91% of the hospital executives who responded, while 8% gave it a "favorable" rating. United owns PacifiCare of California.

Indianapolis-based WellPoint Inc., which owns Blue Cross of California, was second-worst with 48% unfavorable and 20% favorable. Philadelphia-based Cigna received 47% unfavorable and 44% favorable. Hartford, Conn.-based Aetna got the best score with 57% favorable and 37% unfavorable. Other positively rated insurers included Coventry/First Health and regional insurers that were rated as a group.

United challenged the findings and methodology of the report. "UnitedHealthcare ranks above the industry regarding claims payments," said spokesman Tyler Mason, adding that it pays more than 20 million claims a month -- 95% of them within 10 days. "We are working with many hospital systems to improve electronic claims submission to reduce the time to pay claims," Mason said. "Our goal is to work directly and collaboratively with hospitals to decrease administrative cost and complexity so that hospitals receive fair compensation for services at the same time balancing the overall healthcare cost in line with the consumer price index on behalf of our members."

A spokeswoman for Blue Cross parent WellPoint said it was reviewing the survey and that it took it upon itself to stay abreast of hospital executives' opinions through its own surveys. Jan Emerson, a spokeswoman for the California Hospital Assn., said the survey confirmed "what we are hearing from a lot of our member hospitals about health plans that operate in California, particularly the two largest ones, United and Wellpoint."

Davies Public Affairs, a Santa Barbara firm that represents some hospitals, commissioned the survey. It was conducted by Fabrizio, McLaughlin & Associates Inc., a polling firm whose clients include politicians, corporations and the American Insurance Assn. The results were based on interviews with 113 executives representing more than 500 hospitals, or 10% of all U.S. hospitals.

The findings could help consumers shop for coverage, said Brandon Edwards, chief operating officer of Davies. "It's definitely a wake-up call for the employers," Edwards said. "When you pick a health plan for your employees, think very hard about what the health plans' relationships are with their primary providers."

lisa.girion@latimes.com

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Aetna's Profit Meets Forecasts

By Stephen Singer, Associated Press
February 8, 2008

Managed care provider Aetna Inc. said Thursday that its fourth-quarter profit rose 3 percent from membership growth, premium and fee rate increases and continued cost cuts. Net income grew to $448.4 million, or 87 cents a share, from $434.1 million, or 80 cents a share, a year earlier. Excluding items, profit totaled 88 cents a share in the latest period. Revenue rose 12 percent, to $7.14 billion, from $6.36 billion a year earlier.

Per-share profits matched the expectations of analysts polled by Thomson Financial, although revenue came in below the anticipated $7.17 billion.

The Hartford-based company's combined medical-loss ratio, which measures the amount of money spent on services, compared with the amount of payments collected, widened to 80.3 percent for the fourth quarter from 78.8 percent in the 2006 period. Fourth-quarter total medical membership increased organically by 168,000. Including Goodhealth Worldwide's 58,000 members, total medical membership on Dec. 31 was 16.85 million members, compared with 16.61 million on Sept. 30 and 15.43 million a year earlier.

Aetna forecast first-quarter adjusted earnings of 92 cents a share and 2008 profit of $4; Wall Street expects 94 cents a share and 2008 earnings per share of $4.03. Shares fell $1.32, to $51.96, on Thursday. Wachovia Capital Markets analyst Matt Perry called the sell-off of Aetna shares "unwarranted." Fourth-quarter results, he wrote in a report, "have been challenging for managed care companies, but Aetna's Q4 results are the best yet, in our view."

For 2007, Aetna reported revenue of nearly $27.6 billion, up 9.8 percent from $25.1 billion in 2006. Net income was $1.83 billion, or $3.47 a share, up 7.6 percent from $1.7 billion, or $2.99 a share.

Chief executive Ronald Williams told analysts in a conference call that the company expects between 550,000 and 600,000 new members in the first quarter of 2008, which would double the growth of 300,000 that previously was projected.

For 2008, Aetna expects between 800,000 and 850,000 new members in its medical insurance, more than the 650,000 that had been projected. Joseph M. Zubretsky, chief financial officer, said Aetna tempered its membership outlook for the year beyond the first quarter. "We think our guidance for '08 contemplates a slowing economy," he said in an interview.

Dave Shove, an analyst at BMO Capital Markets in New York, said Aetna performed well. "This was a difficult economy, and here you have a company that's growing its earnings well into double digits," he said. "To achieve that, I think, is pretty good."

Still, Aetna did not raise its earnings guidance.

About 75 people, chanting and carrying placards, protested outside Aetna's Hartford headquarters about the company's $1.8 billion of 2007 profit at a time when so many people have inadequate or no health insurance.

The protesters chanted: "Aetna, Aetna, we won't let ya, make your bucks while health care sucks." Some of the activists wore open-backed hospital gowns and fake buttocks to dramatize how people don't have enough coverage and "are being left behind," said Jon Green, executive director of Connecticut Working Families.

Courant Staff Writer Diane Levick contributed to this story.

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Aetna Glitch Affects Seniors

Some Receive Bill Meant For Another

By Diane Levick, Hartford Courant
January 30, 2008

A glitch at Aetna has left thousands of senior citizens around the nation, including 505 in Connecticut, with some other Aetna member's premium bill for prescription drug insurance. The Hartford-based insurer, which discovered the problem Monday, said the bills don't contain Social Security numbers or medical, Medicare, claim, or bank or credit account information.

Fred Laberge, an Aetna spokesman, said the company expects to mail correct bills and apologies today to affected members. "We are embarrassed by the inconvenience this caused to our members and are taking quick action to alert them," Laberge said.

Aetna would not disclose exactly how many seniors on its Medicare drug plans were affected nationwide. The company said that about 18 percent of those in a "limited mailing" from Jan. 22 to 24 received misdirected premium invoices.

The company's apology will come none too soon for Diane Daniel in North Carolina, who receives and handles bills for her ailing mother in Florida. When Daniel got the Aetna bill Monday addressed to her mother, but meant for someone else, she called the company and asked the customer service representative whether an apology would be issued. She says the representative said no. Daniel said she was taken aback by "her whole callous approach that this is no big deal."

Laberge declined to comment on Daniel's experience, but said, "We take our responsibility to safeguard member information very seriously."

In addition to sending a letter of apology and the correct invoice to members, Aetna is posting a recording on a toll-free line to explain the error and the steps being taken. Each incorrectly mailed bill contained a name, address and eight-digit member identification number of another member.

"We are reviewing how the system malfunctioned, and we are assessing options, including more extensive quality control measures, to avoid future problems," Laberge said.

Aetna's system was set up to print each premium bill on one page, front and back. When the printing of one bill ran beyond one page, it affected the next bill and created a chain reaction.

Laberge said the problem was not large enough in scope to require reporting it to regulators.

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Battling Over Payments

Patients Caught In Aetna-AMA Out-Of-Network Fight

By Diane Levick, Hartford Courant
January 11, 2008

Aetna and the American Medical Association are fighting about payments to doctors again, and patients across the nation are getting caught in between. The dispute centers on how much Aetna pays out-of-network doctors in some instances and the right of those doctors to bill HMO members for charges the insurer doesn't pay.

Millions of dollars are at stake, and physicians say Aetna is violating a provision of its 2003 nationwide settlement with doctors, which ended massive litigation over claim payment denials and delays. Aetna says it's trying to protect members from high charges.

The issue is who pays what when Aetna HMO members end up getting care from physicians who aren't part of the insurer's network because there was no opportunity to choose an in-network doctor. That often happens in emergencies and with hospital-based surgery or other care where patients aren't in a position to pick in-network anesthesiologists or other doctors to take care of them. In those instances, Aetna HMOs, as of June 1, 2007, are reimbursing out-of-network providers 125 percent of what Medicare would have paid for the same services. A different formula is required in New Jersey. The 125 percent of Medicare, however, is less than what many doctors charge, and they often bill patients for the balance that insurance doesn't pay.

Aetna, however, is telling HMO members who involuntarily got out-of-network care that they're not liable for the balance billed by the physicians. Aetna sends an "explanation of benefits" showing what it paid the doctor, and a letter telling members that if the doctor bills them for the balance, to send the bill to Aetna. Aetna says it will try to resolve the situation itself with the out-of-network physician, and may end up making additional payments to some doctors. It isn't clear how much money consumers will still be on the hook for.

"Our goal is to keep patients out of this," said Aetna spokeswoman Susan G. Millerick. But some patients are in the thick of it, confused and refusing to pay the doctors. "There has been a lot of bad blood between patients and physicians" because of Aetna's actions, said Dr. Alan Schorr, an endocrinologist in Langhorne, Pa. "It has put us in an adversarial position." Schorr, who believes he's owed nearly $10,000 from the balance-billing fallout, doesn't contract with HMOs or PPOs, and is the only endocrinologist at the local hospital.

The American Medical Association (AMA) is denouncing Aetna's policy, which doesn't apply to PPO, or preferred provider, health plans. "This policy fails to recognize each physician has different practice costs as reflected by their billed charges," AMA Chief Executive Dr. Michael D. Maves said in a recent letter to Aetna Chief Medical Officer Dr. Troyen A. Brennan. "It is simply arbitrary and capricious for Aetna to deem 125 percent of Medicare to be a fair payment across the board." The two men are scheduled to meet to discuss the issues in early February.

The AMA believes Aetna is breaching the 2003 settlement by failing to state on explanation-of-benefits forms to HMO members that out-of-network doctors have a right to balance-bill them. "We think that's a fairly clear violation of the settlement," said Cameron Staples, compliance dispute facilitator for the Aetna settlement. He says he's gotten eight or nine complaints from doctors — none from Connecticut — stemming from the balance-billing issue. "Patients are getting caught in the middle," added Staples, a lawyer and also a Connecticut state representative.

Aetna says that in instances where HMO members had no choice in getting out-of-network doctors, the company is treating the care as if it were in-network. That's because in-network doctors aren't allowed to balance-bill HMO members.

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Methods Used by Insurers Are Questioned

By Robert Pear , The New York Times
May 6, 2007

WASHINGTON — Insurance companies have used improper hard-sell tactics to persuade Medicare recipients to sign up for private health plans that cost the government far more than the traditional Medicare program, federal and state officials and consumer advocates say.

Erik S. Lesser for The New York Times

Bobbie S. Whatley of Columbus, Ga., said a young man who showed up on her doorstep in November and talked to her about insurance forged her signature, and a month later she received mail thanking her for joining a plan. “It turned into a nightmare,” Mrs. Whatley said.

Tracking Growth Enlarge

Tracking Growth Insurance agents, spurred in some cases by incentives like trips to Las Vegas, have aggressively marketed the private plans, known as Medicare Advantage plans. Enrollment in them has skyrocketed in the last year, and Medicare officials foresee continued rapid growth in the next decade.

In Mississippi, George R. Dale, the state insurance commissioner, said, “Abusive Medicare insurance sales practices are spreading rapidly throughout the state.” State Senator Terry C. Burton, a Republican, said, “My office is receiving calls daily from seniors who have been victims of unscrupulous salespeople.”

Proponents of private plans say they are indisputably good for many older Americans because they coordinate care and may offer extra benefits, like discounts on eyeglasses, hearing aids and dental care.

But federal officials said that the fastest-growing type of Medicare Advantage plan generally does not coordinate care, does not save money for Medicare and has been at the center of marketing abuses.

These “private fee-for-service plans” allow patients to go to any doctor or hospital that will provide care on terms set by the insurer. In most cases, no one manages the care. And some patients have found that they have less access to care, because their doctors refuse to take patients in private fee-for-service plans.

Moreover, those plans may be more expensive than traditional Medicare for some patients, because the co-payments for some services may be higher. The Medicare Payment Advisory Commission says that the cost to the government is also higher because it pays the private fee-for-service plans, on average, 19 percent more than the cost of traditional Medicare.

Richard S. Foster, chief actuary for the Medicare program, said “the additional payments to Medicare Advantage plans, above and beyond the costs” of traditional Medicare, were causing higher premiums for all beneficiaries and speeding the depletion of the Hospital Insurance Trust Fund for Medicare.

Almost one-fifth of the 43 million Medicare beneficiaries are now in some type of private plan.

Much of the growth in private fee-for-service plans has come in rural areas, where doctors and hospitals are often in short supply.

In Georgia, two insurance agents were arrested last month and accused of conspiring to defraud Medicare beneficiaries.

“The agents signed up unwilling consumers and even deceased individuals for private Medicare plans,” said John W. Oxendine, the Georgia insurance commissioner. “This appears to be a national problem, based on my conversations with insurance officials around the country.”

In an interview, Bobbie S. Whatley of Columbus, Ga., a 69-year-old nurse practitioner, said that a young man wearing a blue denim shirt with a WellCare logo showed up on her doorstep in November and talked to her about her insurance.

Mrs. Whatley did not sign up, she said, but he “forged my signature,” and a month later she received mail thanking her for joining one of WellCare’s private fee-for-service plans.

“It turned into a nightmare,” she said. “I spent two months trying to cancel my enrollment. I have all my mental faculties. If I let somebody like this come into my home and take advantage of me, then I am really concerned about older people who are more debilitated and not able to take care of themselves.”

John N. Aberg, a spokesman for WellCare, said the company had terminated contracts with 10 independent sales agents who had engaged in door-to-door solicitation and other prohibited marketing practices in Georgia and several other states.

“We have zero tolerance for any behavior that violates marketing guidelines,” Mr. Aberg said.

The Louisiana insurance commissioner, James J. Donelon, said some agents were using “overly aggressive sales tactics,” including false promises, “to market Medicare-related products with little or no concern for the needs of the consumer.”

James E. Long, the insurance commissioner in North Carolina, is investigating complaints that insurance agents switched residents of an assisted living community from traditional Medicare into private plans without their permission. Officials in Kansas, Oklahoma and Wisconsin said they were investigating similar complaints.

Insurers sell private fee-for-service plans as a replacement for traditional Medicare and for Medicare supplement policies, known as Medigap insurance.

But Dr. Barbara L. McAneny, a cancer specialist in Albuquerque, said that many of her patients who signed up for such plans “suddenly found that they had huge new co-payments — $1,250 every three weeks for a combination of five intravenous chemotherapy drugs.”

In Florida and seven other states, the Universal Health Care Insurance Company offers a private fee-for-service plan that promises “the ultimate freedom to see any doctor, any time, anywhere.” This product — the Any, Any, Any plan — got off to a fast start, enrolling 85,000 people. But it “temporarily postponed new enrollments as of Feb. 14” because of a dispute with the Florida insurance commissioner, Kevin M. McCarty, who said the company did not have adequate cash reserves to comply with state law.

Tracking Growth Robert M. O’Malley, a spokesman for Universal, said, “Our plan was much more popular than we expected.”

Coventry Health Care offered a three-night trip to Las Vegas as a reward for agents who generated the most applications for its private fee-for-service plans. By the end of January, enrollment “had already exceeded our initial expectations for the entire year,” Coventry said. The company, which trains agents in the “dos and don’ts of marketing,” said it had “an excellent track record” of compliance.

Insurers frequently offer cash bonuses, trips and other financial incentives for agents to increase sales in the Medicare market.

From December 2005 to April of this year, total enrollment in private plans increased 39 percent, to more than 8.5 million. Private fee-for-service plans accounted for more than half of the growth. Their membership rose to 1.5 million, from 209,000 at the end of 2005.

In a letter inviting insurance companies to participate in Medicare next year, the Bush administration expressed alarm about the marketing of some private plans. It said that beneficiaries and even doctors were often confused about them.

“Providers and people with Medicare do not clearly understand this product,” said Abby L. Block, the Medicare official who supervises private plans.

Leslie V. Norwalk, acting administrator of the Centers for Medicare and Medicaid Services, said her agency had visited WellCare’s corporate headquarters in Florida and conveyed “strong concerns” about the company’s behavior.

“WellCare was informed that its efforts thus far to address marketing issues were inadequate and unacceptable,” Ms. Norwalk said. She vowed to step up supervision of private plans.

David A. Lipschutz, a lawyer at California Health Advocates, a nonprofit group, said that insurance agents working for WellCare had made unscheduled visits to a subsidized housing complex in the San Francisco area and signed up elderly Chinese-Americans with limited ability to speak English. After being enrolled in one of WellCare’s private fee-for-service plans, he said, some of the low-income patients discovered that their doctors did not accept the plan.

The private fee-for-service plan is like a privately administered version of traditional Medicare. Congress authorized such plans in 1997 at the urging of the insurance industry, rural lawmakers and the National Right to Life Committee, which opposes not only abortion, but also euthanasia and the rationing of care for older people.

Brock A. Slabach, administrator of the Field Memorial Community Hospital in rural Centreville, Miss., said that private fee-for-service plans were causing havoc at his 25-bed hospital.

“People are signing up for programs they don’t understand,” Mr. Slabach said. “Agents for a private fee-for-service plan set up tables in front of a grocery store or a drugstore here. Seniors think they are signing up to get drug coverage or just to get more information. The next thing they know, when they show up at our hospital, they are in that company’s plan.”

Private plans generally provide all the services of traditional Medicare, and many offer extra benefits, but the co-payments may be different. Thus, Mr. Slabach said, under traditional Medicare, a beneficiary does not have any co-payment for the first 20 days in a skilled nursing home, but some private fee-for-service plans charge $100 a day, and that charge comes as a shock to some patients.

Kelly E. Van Sickle, director of managed care at Catawba Valley Medical Center in Hickory, N.C., said, “Private fee-for-service plans have flooded our market and created significant confusion for our senior population.”

Michael Hagen, chief executive of Riverwood Healthcare Center, which runs a small hospital and three clinics in rural Aitkin, Minn., reported a similar experience.

“Patients buying these private fee-for-service plans are not sure exactly what they have bought,” Mr. Hagen said. “They go to a meeting sponsored by an insurance company. They hear a salesman. Sometimes the salesmen do not understand the nuances of the products they are selling. They do not realize that the beneficiary’s co-payments may be higher than in traditional Medicare.”

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Bill to Let Medicare Negotiate Drug Prices Is Blocked

By Robert Pear, New York Times
April 18, 2007

WASHINGTON — A pillar of the Democratic political program tumbled today when Republicans in the Senate blocked a proposal to allow Medicare to negotiate lower drug prices for millions of older Americans, a practice now forbidden by law.

Democrats could not muster the 60 votes needed to take up the legislation in the face of staunch opposition from Republicans, who said that private insurers and their agents, known as pharmacy benefit managers, were already negotiating large discounts for Medicare beneficiaries.

Fifty-five senators, including 6 Republicans, supported a Democratic motion to limit debate and proceed to consideration of the bill, while 42 senators voted against it. Such motions require a three-fifths majority under Senate rules. Without a limit on debate, opponents can prevent legislation from ever coming to a vote.

The Senate had only a brief debate on the merits of the legislation, which is a high priority for the new Democratic majority in Congress.

Republicans framed the issue as a choice between government-run health care and a benefit managed by the private sector. The drug benefit is delivered and administered by private insurers, under contract to Medicare.

Senator John Cornyn, Republican of Texas, denounced the bill as “a step down the road to a single-payer, government-run health care system.”

Democrats said they were merely trying to untie the hands of the secretary of health and human services, so he could negotiate on behalf of 43 million Medicare beneficiaries.

“The Department of Veterans Affairs is able to negotiate for lower-priced drugs,” said the Senate majority leader, Harry Reid, Democrat of Nevada. “H.M.O.’s can negotiate. Wal-Mart can negotiate. Why in the world shouldn’t Medicare be able to do that?”

The 2003 Medicare law prohibits Medicare from negotiating drug prices, setting prices or establishing a uniform list of covered drugs, known as a formulary.

Mr. Reid said the Democrats fell short today because of “the power of the insurance industry and the pharmaceutical industry” and their close ties to Republicans in Congress.

But the vote also reflected ineffectual advocacy by Democrats, who were slow in responding to criticism from knowledgeable, well-prepared Republican senators like Charles E. Grassley of Iowa.

“Private competition works,” said Mr. Grassley, a principal author of the 2003 Medicare law. “The government has very little experience and a dismal track record figuring out what to pay for drugs.”

Big companies that offer the Medicare drug benefit, like Caremark and Medco Health Solutions, “have more market power than Medicare” because they negotiate for tens of millions of people in private health plans, as well as for Medicare recipients, Mr. Grassley said.

The House passed a bill requiring the Secretary of Health and Human Services to negotiate drug prices by a vote of 255 to 170 on Jan. 12, just eight days after the new Congress convened. The Senate bill would permit but not require such negotiations.

President Bush had threatened to veto either or both versions of the legislation.

Neither the House bill nor the Senate bill gives much guidance to Medicare officials on how to negotiate.

In creating the drug benefit in 2003, Congress made a radical departure from traditional Medicare, which offers uniform benefits defined by law. Medicare recipients in every state now have a choice of prescription drugs plans with different benefits, premiums, co-payments and deductibles.

The 2003 law prohibited the government from interfering in negotiations between drug manufacturers and private companies that provide the Medicare drug benefit. The House and Senate bills would repeal this ban.

Employers and health plans typically get discounts on particular drugs in return for encouraging patients to use those medicines, rather than competing products.

The Congressional Budget office said that the Senate bill, like the House measure, “would have a negligible effect on federal spending.”

“Without the authority to establish a formulary or other tools to reduce drug prices, we believe that the secretary would not obtain significant discounts from drug manufacturers across a broad range of drugs,” the budget office said.

The Republican senators who joined Democrats in voting to take up the drug price negotiation bill were Norm Coleman of Minnesota, Susan Collins of Maine, Chuck Hagel of Nebraska, Gordon H. Smith of Oregon, Olympia J. Snowe of Maine and Arlen Specter of Pennsylvania.

Some Republicans were prepared to filibuster the Senate bill, but that proved unnecessary.

The Senate Republican whip, Trent Lott of Mississippi, said Republicans had blocked consideration of the bill because they did not want to dicker with Democrats over amendments on unrelated issues, “with no happy end in sight.”

But Senator Ron Wyden, Democrat of Oregon, predicted that the Senate would vote again on the issue, perhaps on an amendment to a spending bill or other legislation.

“The fight will go on,” Mr. Wyden said.

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Pension Pinch? Not For CEOs

Obligations soar as top executives' plans are beefed up

By Ellen E. Schultz and Theo Francis, Wall Street Journal
June 24, 2006

To help explain its deep slump, General Motors Corp. often cites "legacy costs," including pensions for its giant U.S. work force. In its latest annual report, GM wrote, "Our extensive pension and (post-employment) obligations to retirees are a competitive disadvantage for us." Early this year, GM announced it was ending pensions for 42,000 workers.

But there's a twist to the automaker's pension situation: The pension plans for its rank-and-file U.S. workers are overstuffed with cash, containing about $9 billion more than is needed to meet their obligations for years to come.

Another of GM's pension programs, however, saddles the company with a liability of $1.4 billion. These pensions are for its executives.

This is the pension squeeze companies aren't talking about: Even as many reduce, freeze or eliminate pensions for workers, their executives are building up ever-bigger pensions, causing the companies' financial obligations for them to balloon.

Companies disclose little about any of this. But a Wall Street Journal analysis of corporate filings reveals that executive benefits are playing a large and hidden role in the declining health of America's pensions. Among the findings:

Boosted by surging pay and rich formulas, executive pension obligations exceed $1 billion at some companies. Besides GM, they include General Electric Co. (a $3.5 billion liability); AT&T Inc. ($1.8 billion); Exxon Mobil Corp. and International Business Machines Corp. (about $1.3 billion each); and Bank of America Corp. and Pfizer Inc. (about $1.1 billion apiece). Benefits for executives now account for a significant share of pension obligations in the U.S., an average of 8% at the companies above. Sometimes a company's obligation for a single executive's pension approaches $100 million. These liabilities are largely hidden, because corporations don't distinguish them from overall pension obligations in their federal financial filings. As a result, the savings that companies make by curtailing pensions for regular retirees - which have totaled billions of dollars in recent years - can mask a rising cost of benefits for executives. Executive pensions, even when they won't be paid till years from now, drag down earnings today. And they do so in a way that's disproportionate to their size, because they aren't funded with dedicated assets.

One reason executive pensions have grown so large is that they are linked to ballooning overall executive compensation. Companies often design retirement payouts to replace a percentage of what a person earns while active.

But for executives, the percentage of pay replaced is itself higher. Compensation committees often aim for a pension that replaces 60% to 100% of a top executive's compensation. It's 20% to 35% for lower-level employees.

David Dorman was chief executive of AT&T Corp. from 2002 until its merger with SBC Communications in November. He left in January. His total of five years at AT&T earned him a yearly pension of $2.1 million. That will replace 60% of his annual salary and bonus in his final three years.

By contrast, former AT&T accountant Ralph Colotti's $28,800 annual pension replaces 33% of his final pay. He was at the company for 33 years.

Colotti's pension was held down by a change AT&T made in 1998 in the formula used to calculate pensions. The switch had the effect of freezing pension growth for older workers like him. The 55-year-old now works at another company with a pension plan. "Working here another 10 years won't make up for what my old pension would have been" without AT&T's change in formula, he said.

'Reasonable' deal

AT&T described its retirement benefits as excellent and said a pension on the scale of Colotti's is good in the telecommunications industry. Dorman's richer deal is "reasonable, customary and comparable to what similarly sized companies offer," AT&T said. A spokeswoman noted that "in any industry, senior executives are almost always provided with enhanced levels of benefits as a way to recruit and retain the best talent and the best leadership possible to lead the company."

In percentage of pay replaced, Pfizer's chairman and CEO, Henry McKinnell, does best of all. His future $6.5 million-a-year pension will replace 100% of his current salary and bonus.

Even as executives' pensions grow, many companies are curtailing those for the rank and file. In one move, hundreds of employers, including Boeing Co., Xerox Corp. and Electronic Data Systems Corp., have switched to pension formulas known as "cash balance" plans. One effect is to slow the growth of older workers' pensions or halt it altogether.

Other companies, including Verizon Communications Inc. and Sears Holdings Corp., are freezing their pension plans for some workers. A freeze leaves intact pensions already earned but prevents any further growth during a worker's career.

Some employers have added pensions for executives at about the same time as they limited those for others.

Allied Waste Industries Inc. froze pensions for certain salaried workers in 1999. Among those affected was Brad Green, then a safety official at a business Allied Waste had acquired. Although he never expected his pension to be big, Green, 45, said the freeze meant any future growth "was basically just wiped out with the stroke of a pen."

Four years later, Allied adopted a pension plan that covers 10 executives. It did so "to provide a competitive recruitment and retention benefit," said Allied's treasurer, Michael Burnett. He noted that the plan that was frozen had come from a company Allied acquired.

Burnett added that all employees have a 401(k), a savings plan to which they can contribute from their own earnings. Many companies, including Allied, match part of employee contributions.

The 401(k) strategy

Companies that restrict regular pension plans often point to the 401(k), some noting that they've enhanced their match of contributions. Unlike pension plans, 401(k) plans don't create a corporate debt or liability, since employees provide most of the assets and firms are typically free to halt any contributions of their own.

Companies generally are also free to alter, freeze or end regular employees' pension plans, unless a union contract is involved. But executive pensions often are protected from management interference by employment or other contracts.

By curtailing pensions for regular workers, large companies have reduced pension obligations to them by billions of dollars in recent years. So pension obligations to regular workers are stable or shrinking at many companies while those for executives rise. At BellSouth Corp., for example, the obligations for pensions for ordinary workers have edged down 3% since 2000. The liability for pensions for executives is up 89% over the same period.

The promise of any pension becomes a corporate obligation. Although the payments are in the future, the promise means the company has a liability now. And a number can be put on it.

Pfizer's promise to pay McKinnell $6.5 million a year for life in retirement equals an $83 million liability for Pfizer today, federal filings by the drug-maker show. Pfizer defends McKinnell's pension as fair.

When Edward Whitacre, chairman and CEO of AT&T Inc., turns 65 in November, he'll be entitled to a pension of $5.4 million a year for life, plus an $18.8 million lump sum. For this, AT&T's liability today is $84.4 million, according to an actuarial estimate done for The Wall Street Journal by Katt & Co. of Mattawan, Mich. AT&T said Mr. Whitacre's pension reflects four decades of service and 15 years of "very, very strong and visionary management" as chief of the company, which was called SBC much of that time.

UnitedHealth Group Inc. Chairman and CEO William McGuire will get a $5.1 million annual pension after he retires, plus a further $6.4 million at retirement. The result is a UnitedHealth liability of about $90 million, according to two actuaries. UnitedHealth declined to comment on their estimate.

Companies sometimes offer several tiers of pensions for the highly paid. The structure at IBM illustrates this.

Its chairman and CEO, Samuel Palmisano, is due a yearly pension of about $4.7 million in retirement after age 60. He's now 54. IBM's liability today for this is about $50.3 million, according to an estimate by Katt & Co.

Another IBM pension plan, which last year covered eligible executives earning $351,000 or more, had a $204 million liability at year-end, company filings show. And for a third plan covering a broader group of the well-paid, IBM had obligations totaling $1.1 billion. IBM declined to say how many are covered by these plans, saying only that it is "thousands."

Shifting liabilities

To put the figures in perspective: The liability for IBM's regular U.S. pension plan, covering 254,000 workers and retirees, was $46.4 billion at the end of 2005. IBM no longer provides pension coverage for new hires.

An IBM spokesman described the estimate of its liability for Palmisano's pension as high but declined to provide another figure. He said Palmisano's pension from 32 years at the company will replace about 45% of his compensation, which the spokesman called below average for heads of major companies.

A result of these trends is that executive pensions make up a significant portion of total pension liabilities at many companies: 12% at Exxon Mobil and Pfizer; 9% at Metlife Inc. and Bank of America; 19% at Federated Department Stores Inc.; 58% at insurer Aflac Inc.

Companies' retirement liabilities for their executives have also grown through another little-noticed trend: Over recent years, an increasing portion of executives' pay has been postponed, via pension and deferred-compensation plans, rather than given in current paychecks.

Even if a company's liability for executives' pensions totals hundreds of millions of dollars, its employees and shareholders may never know. Companies don't have to report this obligation separately in federal financial filings. A few specify it in a footnote, and some provide clues that make it possible to derive the figure.

Perhaps the most significant effect of the limited disclosure is to make it difficult, or impossible, to evaluate company statements about their retirement burdens and the need to cut benefits. To see this, it's necessary to understand a bit about how pensions are accounted for.

Pension plans, whether for executives or for others, are obligations to pay. In other words, they're debts. And like any debt, they have what amounts to a carrying cost. That carrying cost is part of a company's pension expense.

In the case of pensions for regular employees, the expense is partly or wholly offset by investment returns on money the company set aside in the pension plan when it "funded" it.

Executive pension plans are different. For tax reasons, they're normally left unfunded. They have no assets set aside in them. That means there is no investment income to blunt the expense. The result is that obligations for executive pensions create far more expense for an employer, dollar-for-dollar, than pensions for regular workers.

Bigger expense

In Pfizer's overall U.S. pension obligation of about $9 billion, executive pensions account for about one dollar in eight. Yet the pension expense they generate is proportionately far larger - equal to more than half as much as that from pensions for regular employees and retirees, who are much more numerous. The executive plans cover 4,200 people. The regular plans cover more than 100,000.

When General Motors cites retiree costs, the giant automaker has a point: It owed nearly 700,000 U.S. workers and retirees pensions that totaled $87.8 billion at the end of last year.

But $95.3 billion had already been set aside to pay those benefits when due.

All of these assets are earning investment returns, which offset the pensions' expense. GM lost $10.6 billion in 2005. But deep as its losses have been, they would have been far worse without the more than $10 billion per year in investment income that the GM pension plan for the rank and file generates.

The pension plan for GM executives is another matter. Unfunded to the tune of $1.4 billion, it detracts from GM's bottom line each year.

Earlier this year, GM announced it would freeze the pensions of its 42,000 salaried workers starting next January, as well as of those 5,200 highly paid employees. The freeze of the executive pensions will cut GM's pension liability by $60 million, while its freeze of salaried workers will yield a far bigger reduction, $1.6 billion.

A spokeswoman for GM said its concerns about its pension plans have eased, though the company remains concerned about retiree health-care costs. With the pension freeze and improved returns on its pension assets, including billions of dollars GM has contributed to the plans in recent years, "I would say pension really is not a problem anymore," the spokeswoman said. She said that GM has no fixed obligation to pay the executive benefits and could renege at any time, although she called such a move unlikely.

GM has often said its U.S. pension plans added about $800 to the cost of each car made in the U.S. in 2004. It declines to say how much was due to executive pensions.

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Bogle: Capitalism Has Suffered 'Pathological Mutation'

By Russ Juskalian, Special for USA TODAY

When John Bogle, a 50-year veteran in financial services, says capitalism is in trouble, there is only one proper reaction: You listen. First, Bogle's qualifications: He founded the first index fund in 1975 (Vanguard 500 Index Fund). In 1999, Fortune named him one of the four investment "Giants of the 20th Century," and in 2004, Time magazine called him one of the world's 100 most influential and powerful people. A lifelong businessman (and Republican, he likes to add), Bogle is nothing if not the champion of idealistic capitalism.

In The Battle for the Soul of Capitalism (Yale University Press, 251 pages, $25), Bogle argues that our current system has undergone " 'a pathological mutation' from traditional owners' capitalism to a new form, managers' capitalism."

With power moving away from owners of securities, this new system has been led afoul by "grossly excessive executive compensation and stock options, part of an enormous transfer of wealth from public investors to the hands of business leaders, corporate insiders and financial intermediaries."

Remarkably well read and logical, Bogle is meticulous in supporting his thesis that our brand of capitalism is failing because of a shift of power away from owners. He quotes Edward Gibbon, Mark Twain, John Maynard Keynes, Warren Buffett, Oscar Wilde and others, with rigorous acuity  –  often assuming the reader is as well read.

The Battle for the Soul of Capitalism remains cogent, if at times in a rarified way. However, barring a familiar knowledge of corporate, mutual fund or investment terms and theories, reading this book is a feat in itself. Charts and math abound.

Bogle organizes the book into three main parts: Corporate America, Investment America and Mutual Fund America. Each part is broken into three divisions: what went wrong, how it went wrong and how to fix it.

All three areas of capitalism are failing because of similar causes, Bogle says. Executives are paid too much, speculation is triumphing over value and long-term growth as the primary influence in a stock's price, and managers make decisions in their own interests, not their clients' or shareholders' interests.

"In 1980, the compensation of the average chief executive officer was forty-two times that of the average worker; by 2004, the ratio had soared to 280 times that of the average worker (down from an astonishing 531 times at the peak in 2000)."

And in the matter of corporate scandal and fraud, it's not a case of a few "bad apples," Bogle writes, but of "a corporate barrel that itself is in need of considerable repair."

According to a USA TODAY/CNN/Gallup Poll (July 2002), which he references, only 25% of Americans trust corporate executives  –  barely more than used-car dealers. While managers and executives are partly to blame, shareholders must fess up to their responsibilities as owners. "The failure of Investment America to exercise its ownership rights over Corporate America has been the major factor in the pathological mutation" that capitalism is undergoing, he says.

Investors have turned away from the fundamentals of value, sustainability and growth, says Bogle, and hold securities for far shorter periods. Instead of buying for value and dividend payments over the long term, investors buy and sell on speculation alone  –  creating a damaging hollowness to the financial market itself, he warns. Investment America has become a "rent-a-stock" culture, as opposed to an "own-a-stock" culture.

This same plague has infected the mutual fund industry, which also suffers from an inefficient management problem Bogle calls "Corporate Incest" in homage to the title of "an early law review article about the industry's structure."

Nearly every mutual fund organization (besides Bogle's Vanguard) is run by an external management company, "with its own set of shareholders," that make all decisions regarding the mutual funds themselves: what fees to charge, who will manage the fund and what funds to create.

The trouble is that small fees, a few dollars per hundred dollars invested, add up over time the same way that compound interest can make a small investment huge.

So how does Bogle suppose we fix an industry  –  moreover, an economic paradigm  –  in which shareholders put up 100% of the cash, assume 100% of the risk and get only 25% of the returns? "The place to begin is with a federal government commission that works to resolve the problems of our intermediation society, and fosters the development of an investment society that gives owners a fair shake."

Bogle's ultimate prognosis is lifted from the title of shareholder activist Robert A.G. Monks' monograph: "Capitalism Without Owners Will Fail."

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Pension Funds Pin Target on CEO Pay

By Greg Farrell, USA TODAY

Runaway CEO pay, a longtime pet peeve of shareholder activists and corporate governance experts, is about to take center stage in Washington, D.C.

At least that's the hope of 10 pension funds from the USA, Canada and Europe. In a confidential letter sent to the Securities and Exchange Commission on Nov. 30, representatives of the funds, which together manage almost $1 trillion, urged the SEC to look more closely at the pay for performance among top executives.

SEC Chairman Christopher Cox said last month that the commission would develop a rule proposal early next year regarding executive compensation. Once the proposal is announced, most likely in January, the SEC will seek public comment.

In a copy of the confidential letter obtained by USA TODAY, the pension funds cited research showing that CEO pay at many companies in the Russell 3000 index (representing 99% of the U.S. stock market) bore no relation to how well those companies performed.

At 60 of the worst-performing companies in that group, which lost $769 billion in market value over the past five years, the aggregate pay for the top five executives of those 60 companies over the same period was $12 billion.

In other words, since January of 2000, some 300 executives who were responsible for more than three-quarters of a trillion dollars in shareholder value vanishing were rewarded by their shareholders with salary, bonuses and stock options worth $12 billion.

That averages out to $40 million for each of those companies' top five executives over the five-year period, or $8 million per executive per year.

"The system's broken," says Mark Van Clieaf, who compiled the data used in the pension funds' letter. Van Clieaf did not provide the letter to USA TODAY, but when asked about its contents, he confirmed the findings of his research.

His company, MVC Associates International, specializes in pay-for-performance issues. He stressed the point that CEOs at successful companies deserve everything they're paid. "We don't want to cap pay. We want to make sure that pay and performance are in alignment, which they're not today."

The letter to the SEC from the pension funds cites Honeywell as a company where during the last five years managers erased $4.3 billion in economic value  –  defined as net operating profit minus the total cost of capital used up  –  while the top five executives earned a total of $223 million for the period.

Executives at Time Warner destroyed $41.4 billion in economic value (and $59.8 billion in market value) while collecting $1.3 billion in pay.

Honeywell and Time Warner declined comment.

The funds that sent the letter include the California Public Employees' Retirement System, the California State Teachers' Retirement System, two New York state pension funds, the Ontario Teachers' Pension Plan and the State Board of Administration of Florida.

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Verizon Freezing Managers' Pensions

Firms Phase Out Plans

By Stephanie Armour, USA TODAY
Jan 1, 2005

Verizon Communications (VZ), the nation's second-largest telecom, said late Monday it was restructuring retirement benefits for 50,000 managers in a bid to save $3 billion over the next 10 years. Under the plan, managers will no longer earn pension benefits or receive service credits toward retiree health care benefits starting in July.

Verizon is acquiring MCI, and the combined company will also increase the 401(k) matching dollars for about 30,000 MCI managers who join the company after the deal closes.

As companies look to control costs, even financially healthy employers are freezing or cutting pension plans in a sign the time-honored retirement system is increasingly being chipped away.

Freezing Pensions

According to Watson Wyatt, 11% of Fortune 1,000 companies that have defined-benefit plans had a frozen or terminated plan in 2004. Nearly two-thirds of the Fortune 1,000 firms have a defined-benefit plan.

FROZEN/TERMINATED PLANS
Year	No. Frozen or Terminated	% of Sponsors With Such Plans
2001	34	5%
2002	39	6
2003	45	7
2004	71	11

Source: Watson Wyatt survey of Fortune 1,000 firms

The trend drew the attention of President Bush on Monday, who called on companies to protect workers' retirement benefits.

"My message to Corporate America is: You need to fulfill your promises," Bush said in a speech in North Carolina in which he called for tougher pension-reform legislation.

Hewlett-Packard this year announced that it's ending guaranteed pensions for new workers. Others altering plans include Sears, which says it will freeze pension benefits in 2006, and Motorola, which stopped offering pensions to new employees this year.

In 2004, 71 companies in the Fortune 1,000 that sponsored traditional pensions froze or terminated their plans, according to a study released earlier this year by Watson Wyatt Worldwide, a human resources consulting firm. That represents an increase from 45 companies in 2003 and 39 companies in 2002.

When companies freeze a plan, they keep it in place but halt future benefits that would have been earned. Terminating a plan involves closing it down. More companies are also not offering pension plans to new hires.

Driving the trend:

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'Broken' Pension System in 'Crying Need' of a Fix

By Marilyn Adams, USA TODAY

WASHINGTON - Most surviving American steelmakers long ago abandoned costly pensions plans. But AK Steel still covers most of its 7,500 workers with a plan that pays retirees a monthly benefit based on tenure and past wages  –  a coveted defined-benefit plan.

AK has never missed a benefit payment to a pensioner or a payment to fund the plan. That's a source of pride for the 105-year-old Middletown, Ohio, company. Nonetheless, the assets of the AK pension plan fall $1.3 billion short of meeting estimated future obligations. The plan's long-term survival isn't assured.

Much of the attention in the raging pension-reform debate in Congress and the executive branch focuses on big companies such as United Airlines and other corporate giants that have used Chapter 11 bankruptcy-court reorganization to dump defined-benefit pension plans on the already overburdened government insurer, the Pension Benefit Guaranty Corp. But it's also cases such as AK Steel  –  a relative corporate good guy that has seen assets fall short of liabilities even while the company follows the rules  –  that have reformers fearing a possible financial catastrophe on the scale of the savings-and-loan meltdown 15 years ago.

David Walker, chief of Congress' non-partisan Government Accountability Office, describes the pension system as "fundamentally broken." He's frustrated that policymakers so far have been unable to solve a problem that's been documented over and over. "There's a crying need," he says.

Business, Congress and the Bush administration agree that the U.S. system of private pensions is badly in need of fixing. What they haven't agreed on is how to fix it. Despite alarming statistics, years of studies and urgent calls for reform from advocates on all sides, Rep. John Boehner, R-Ohio, a sponsor of the pending House bill on pension reform, rates chances of passage by both houses of Congress this year as slim. Senate Majority Leader

Bill Frist, R-Tenn., said Monday that the Senate bill might reach that chamber's floor by next week. If Congress fails to act, "The problem will become much worse," says Bradley Belt, PBGC executive director. "To call upon taxpayers  –  most of whom don't have defined-benefit pensions  –  to pay for the benefits of those who do would be fundamentally unfair." In total, defined-benefit pension plans offered by private employers are underfunded by $450 billion, up from $39 billion just five years ago. The PBGC itself has a deficit of at least $23 billion. PBGC numbers coming out today are expected to paint an even bleaker picture: The high number of failed plans has left it without enough assets to cover future benefits. As more plans fail, the agency's deficit will grow. In recent years, Huffy bicycles, Big Bear supermarkets, Polaroid, Kaiser Aluminum, Bethlehem Steel, WestPoint Stevens, Archibald Candy and United Airlines have terminated their plans and transferred responsibility for them to the PBGC. What worries PBGC officials now is how many other large companies are out there with ailing plans covering tens of thousands of workers. The PBGC last year calculated that financially weak companies with a reasonable chance of terminating their pensions are $96 billion short of covering promised benefits.

GM a concern

The PBGC won't say whether General Motors, whose pension plan is the biggest in U.S. industry, is among them. But the PBGC estimates that if financially troubled GM had to terminate its plan soon, it would be underfunded by $31 billion, an estimate first reported by The New York Times. Using a different accounting method, Credit Suisse First Boston estimates the underfunding at $12.3 billion.

GM, whose plan covers 600,000 participants, disputes those figures but declined to provide its own estimate. It is not required by law to do so. "We don't think it's appropriate to view the pension plan on a termination basis," because GM has no plan to end it, said GM spokesman Jerry Dubrowski.

The U.S. Securities and Exchange Commission, meanwhile, is investigating how GM reports pension-plan liabilities in its financial statements as part of a broader look into the automaker's accounting.

PBGC director Belt fears the mounting pension crisis could approach the scope of the savings-and-loan debacle that pushed the Federal Savings and Loan Insurance Corp. into insolvency in 1989 and cost taxpayers $200 billion.

If the PBGC, which is supported by insurance-premium payments from pension-plan sponsors, were to sink too deeply into red ink, a giant taxpayer bailout might be the only way to keep millions of pensioners from losing their checks.

UNDERFUNDED COMPANIES
Companies with pension plans that are expected to be underfunded by at least 25% of their market capitalization, as of October 14
Company	2005 Est. Underfunded Amt.(bil.)	Est. Mkt. Cap.(bil.)	% Under- funded
Delta Air Lines	$5.8	$0.1	6,791%
Dehphi	4.6	0.3	1,712
Goodyear Tire & Rubber	3.1	2.5	125
Visteon	1.0	1.0	96
Ford Motor	13.5	16.0	85
General Motors	12.3	15.8	78
Unisys	1.2	2.0	58
Navistar International	1.0	1.9	51
Dana	0.4	1.0	47
Maytag	0.6	1.3	43
Hercules	0.4	1.3	28
Raytheon	4.1	16.5	25
Lockheed Martin	6.7	27.0	25

Stopgap pension relief for companies expires Dec. 31. Without comprehensive reform legislation this year, temporary rules will take effect that will increase the contributions companies must make to their plans as well as the insurance premiums they must pay the PBGC. U.S. Labor Secretary Elaine Chao says the price of doing nothing about reform will be "very bad" for plan sponsors.

The pension system in Corporate America is in trouble for many reasons, some within the control of Washington policymakers and some not. Not the least of the problems is Americans' lengthening life spans. Retirees are living longer than ever and will draw pension checks longer than ever. The biggest generation in history, the baby boom, starts hitting 65 in 2011.

Making things worse is that many pension plans let workers start drawing benefits after 30 years of work. For many retirees, that means benefits start in their 50s. Another factor: Pension funds rely on assets that grow through investments in stocks and bonds. For five years, markets have produced lackluster returns.

Loopholes in the law

But Congress can do nothing about demographics or investment returns. So reformers are focusing on loopholes in the law  –  and some companies' willingness to exploit them to avoid or reduce payments.

Private pensions are governed by the Employee Retirement Income Security Act, passed in 1974 after the collapse of automaker Studebaker a decade earlier, which left its retirees almost empty-handed. The law established the PBGC insurance program, which covers benefits up to specific annual dollar limits  –  up to $45,600 this year for someone retiring at 65  –  and requires companies to pay premiums. Over the years, changes have crept into the law designed to make it easier for firms to comply.

Among the issues that reform proposals address:

Most controversial is an administration proposal to penalize companies with poor credit ratings and underfunded plans by accelerating their plan payments. The thinking is that those companies are at higher risk for pension default and should be required to do more to keep plans afloat.

'Sky is not falling'

Boehner, the Ohio congressman, says such tough medicine would "kill the patient" and prompt some employers to drop their plans. AK Steel, for example, says its credit rating has been below investment grade for years, yet it has never missed a payment.

Business groups such as the National Association of Manufacturers acknowledged pension rules require tightening. But they question the administration's alarming projections and say companies with pension problems don't represent the majority.

"Our message is the pension sky is not falling," says NAM spokesman Darren McKinney. "The problem is not as big as some would have you believe." He says the PBGC's statistics show only 15% of private defined-benefit plans were funded below 70% in 2002, the latest data available.

What seems to gall reformers most is the recent pattern of big companies using Chapter 11 of the bankruptcy code to jettison the debt of underfunded pension plans, then exit bankruptcy and survive. US Airways did it, and United is in the process. Huffy and Big Bear did the same in bankruptcy court.

Now, reformers fear Delta Air Lines, Northwest Airlines and auto-parts maker Delphi, all of which filed Chapter 11 cases recently, will make the same argument to their bankruptcy-court judges.

"People are using the pension system and bankruptcy code as a business strategy," charges Walker of GAO.

AK Steel feels penalized

AK Steel agrees. It has seen plenty of competitors unload their plans. AK says its pension and retiree medical costs make its steel at least $40 a ton more costly to produce than some of its competitors'. "We are penalized because we didn't go bankrupt," says Vice President Alan McCoy.

So, AK has been going to its unions during contract talks, asking them to agree to freeze members' pension plans so benefits don't keep growing and so new employees aren't covered. Three unions, representing 20% of AK's unionized workforce, have agreed.

"They told us they needed that relief to stay competitive and stay out of bankruptcy," says Tim Imes, president of the United Steelworkers union in Ashland, Ky., that represents AK workers there. Given pension-plan terminations at Bethlehem Steel, National Steel and elsewhere, the union knew "the monster was real."

AK officials say they still believe in good pensions but can't ignore their competition. "We are disturbed that the bankruptcy system allows what has happened to happen," says McCoy. "We don't think that's right."

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Health Insurance Brings Dividends

Managed-Care Groups Produce Record Profits

By GUY BOULTON, Milwaukee Journal Sentinel
August 14, 2005

Stockholders are one group that can't complain about managed-care companies. While double-digit increases in the cost of health insurance have gotten most of the attention in recent years, investors in managed-care companies have been enjoying triple-digit returns.

The price increases  –  combined with consolidation, increased efficiency and better management  –  have produced record profits for managed-care companies.

"These companies have generated a huge return on capital," said Ivan Feinseth, director of research for Matrix USA, an institutional research and brokerage firm in New York.

The result has been stunning gains in the stocks of companies that sell health insurance and manage health plans.

The performance can be seen in the stocks of the three publicly traded managed-care companies with the largest market share in Wisconsin:

• UnitedHealth Group Inc., the parent of UnitedHealthcare, is up nearly fivefold since Aug. 1, 2000, increasing from $10.75 a share to close at $52.24 on Friday. In the past year, the stock is up about 63%.
• WellPoint Inc., the parent of Blue Cross Blue Shield of Wisconsin, is up roughly fourfold since it became a public company in October 2001, increasing from $18 a share to close at $72.74 Friday. In the past year, the stock is up about 80%.
• Humana Inc. is up roughly sixfold since Aug. 1, 2000, increasing from $7.25 a share to Friday's close of $45.65. In the past year, the stock is up more than 140%. These companies aren't the exceptions.

In the past five years, the Morgan Stanley Healthcare Payors Index, a composite of 12 managed-care companies, is up more than fourfold. In that time, the Standard & Poor's 500, a broad measure of the stock market, is down about 16%.

"Health care in general is a great business," said William Custer, director of the Center for Health Services Research at Georgia State University in Atlanta. "People are making a lot of money at it."

The question is whether the run will continue. And here, industry analysts are split.

Wall Street analysts, by a large majority, continue to recommend WellPoint and UnitedHealth, the two largest health insurers. And some analysts remain bullish on the sector. They see a promising market in enrolling Medicare beneficiaries in health maintenance organizations.

They also see the largest companies continuing to benefit from consolidation.

But others question whether the industry overall can continue to post impressive gains. For one thing, enrollment in commercial health plans is stagnant, as rising costs force more employers to drop health insurance as a benefit.

"Enrollment growth is what is going to be difficult for these companies on the commercial side," said Jackie Doeler, who oversees the health care portfolio for the State of Wisconsin Investment Board.

No one knows whether that will lead to price competition, Doeler said. And the outlook for the industry will depend partly on future premiums.

Managed care companies have been able to raise prices in recent years, she noted. "And therefore they have done quite well."

The rise in health care premiums is slowing. But the same goes for health care costs. The patents for several costly drugs have expired, for instance, and the same will happen to several others in the next few years.

Consolidation continues Consolidation also has contributed to the strong performance of managed-care stocks in recent years, Doeler said.

Administering health plans is a business, not unlike financial services, in which size can bring economies of scale.

Investments in technology, for instance, have helped managed-care companies lower administrative costs and increase profits.

"The people who are left have gotten pretty good at this," said Custer, who also is a professor of risk management and insurance at Georgia State. The industry's consolidation shows no signs of slowing.

Last month, UnitedHealth, based in a Minneapolis suburb, struck a deal to buy PacifiCare Health Systems Inc. for $8.1 billion in cash and stock.

In recent years, UnitedHealth has bought Oxford Health Plans Inc., Definity Health Corp. and Golden Rule. In Wisconsin, it bought Touchpoint Health Plan, a health maintenance organization, for $40 million last year. WellPoint, based in Indianapolis, was created when Anthem Inc. and WellPoint

Health Networks Inc. merged late last year. In Wisconsin, Anthem bought Cobalt Corp., the parent of Blue Cross Blue Shield of Wisconsin, in September 2003.

Humana, based in Louisville, Ky., has moved more gingerly. But its large presence in Wisconsin, where it employs about 3,300 people, stems partly from its acquisition of Emphesys Financial Group Inc. in 1995.

Consolidation has been the trend since managed care first began to take hold. And it's easy to forget that the personal computer has been around longer than many managed care companies.

Managed care didn't become widespread until the early 1990s. And the companies that entered the business were learning as they went along, experimenting with the type of plans they offer, the types of contracts they struck with hospitals and doctors, and the way they managed costs.

The results were often mixed. In its early days, managed care could be good way to lose money - and many of the companies did.

Nearly 60% of health maintenance organizations lost money in 1997, according to an overview done in 1999 by the Henry J. Kaiser Family Foundation, which does research on health policy. That started to change in the late 1990s.

"We've seen a maturing of the industry, in a sense," said Custer, of Georgia State.

With age comes growth The nascent market for Medicare HMOs, now called "Medicare Advantage," also could benefit managed care companies.

Many companies abandoned the business when rising health care costs outpaced what they were paid by the federal government. But the legislation that created a drug benefit for Medicare increased the fees paid to the companies. That's renewed interest in the market  –  one expected to grow as the population ages.

Managed-care companies also will administer the new Medicare prescription drug plans. That, too, could be a source of future profits  –  although the market could be chaotic in its early days.

Humana has a strong presence in Medicare HMOs. And the potential profit from Medicare HMOs partly accounts for the company's stock more than doubling in the past year.

Some analysts, though, question whether the market will be quite as profitable as expected.

"You don't know what the government is going to do with pricing, going forward," said Doeler, the portfolio manager for the state investment board.

Managed-care companies also see potential in so-called consumer directed health plans, which typically combine a high deductible with a type of savings account.

The plans have been a boost to the market for small businesses and individual health insurance. That's one of the strengths of Assurant Inc., with health insurance operations based in Milwaukee. Assurant Health writes individual and short-term health insurance and group health insurance to small-employer groups, primarily of two to 40 employees.

Assurant sells a variety of financial services and products. But its stock, too, has risen. Since being spun off by Fortis, a Belgian financial services company, in February of last year, Assurant stock has increased from $22 a share to $38.11 at Friday's close.

Consumer-directed plans have been touted as a way to slow the rise in health care costs. But Custer and others see the plans as little more than cost-shifting.

"All they are is less insurance," Custer said.

Health care costs continue to outpace inflation. And the impact of rising health care costs could be the biggest unknown in the long-term prospects of managed-care companies. There is no shortage of employers, hospitals, doctors, economists and managed-care executives who contend the health care system is broken. And Custer said that at some point the system will have to be restructured. That day, he added, is "not necessarily that far away."

Wall Street clearly doesn't see that risk. But Custer, a university professor and researcher, looks at the insurance industry's role in the health care system.

Analysts such as Feinseth, the research director of Matrix USA, look at return on capital and other financial yardsticks. And there the numbers speak for themselves.

"These companies," Feinseth said, "have been able to earn very good returns on capital."

Given the companies' performance over the past five years, so, too, have their stockholders.

gboulton@journalsentinel.com

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