Case in Point: To go from worst to first, alter the business model

December 10, 2011

The big idea: Leaders need to tell a compelling story about where the organization is headed and how it will get there.

The scenario: In 2000, when John W. Rowe, an esteemed gerontologist and the former chief executive of Mount Sinai NYU Health, became chairman and chief executive of Aetna, he inherited a company that had become a symbol of all that was wrong with managed care.

The Hartford, Conn.-based insurance giant was in turmoil. Patients and doctors were angry about new restrictions that limited their power to make health-care decisions. Sentiment against the company was so strong that employees avoided wearing clothing with the Aetna logo in public for fear of scorn. Investors were unhappy with the downward trend of the stock — the company was losing $1 million a day — and anxious about pending class-action lawsuits filed against Aetna by state medical societies over claims-processing practices.

Some in the investment community viewed Rowe’s hire with skepticism. One industry analyst even told Rowe that he expected the company’s performance to decline further with him in charge because he had not previously managed a company of Aetna’s size. Rowe replied that he had not been hired to manage Aetna, but to lead it.

The resolution: Rowe, a member of the American Medical Association, settled the lawsuits and reached out to physicians to build collaborative approaches to improving the quality and efficiency of care.

The changed approach was not merely skin-deep. Rowe and his leadership team started a pride initiative that engaged Aetna employees at all levels as change agents. Together they redefined Aetna’s mission, value, goals and operating principles around the core value of quality care — one mutually shared by all of the company’s key stakeholders.

Convinced that a new business model focusing on quality care would differentiate the company from industry peers, Rowe demanded that this perspective guide everyday decisions made at the company.

For example, he argued that using the common industry financial metric of “medical loss ratio” in reference to payments made to physicians for care was inaccurate and counterproductive. In his view, medical treatment is how doctors create value for patients, so it should not be view as a “loss” — it was a cost that should be expected. The term was changed to “medical cost ratio.”

Rowe also created a series of Chairman’s Initiatives, in which Aetna took stances viewed as being in the public interest. The company went from worst to first in trustworthiness. In 2006, Jessi Hempel and Diane Brady wrote in BusinessWeek, “The once notorious company is now frequently cast as the country’s most physician friendly insurer.”

Changing the business model also restored employee pride and altered the financial trajectory of the company. Within five years, Aetna went from losing $1 million a day to making $5 million a day, resulting in a return to shareholders of more than 700 percent during Rowe’s tenure.

 

 

The lesson: Sometimes you have to change the business model to change the story of an enterprise. Transformational leaders energize others to become part of a new story.

Brian Moriarty and R. Edward Freeman

Moriarty and Freeman are professors at the University of Virginia Darden School of Business. Freeman is academic director of the Business Roundtable Institute for Corporate Ethics, where Moriarty serves as director.

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