After the novelties of a merger or acquisition wear off, the realities of systems integration come into focus
When Aetna, Inc. went public with news last September that a snafu related to its integration of U.S. Healthcare, Inc. would cause a third-quarter shortfall totaling as much as $105 million, its stock plunged 20 percent in the span of a week. The dive was the beginning of a decline that bottomed out in late December when the stock hit $66--a 44 percent decline from the 52-week high of $118 it had reached in early August.
Though Aetna, Hartford, Conn., is one of the largest healthcare companies to recently experience the highs and lows that growth through acquisition can bring, it isn’t the only one. Throughout the industry the message is clear. Please stand by: We’re experiencing technical difficulties.
Consolidation in the market is creating new technical problems and compounding old ones, says Jennifer Carr, senior analyst with GartnerGroup, Wakefield, Mass. One reason is that when merger-minded companies are signing deals, they are thinking of increased market share, not systems integration nightmares, she says.
"It seems so easy and so glorious at the time--’we’re going to merge and offer all these products and have a wider service area’--but you do need to be able to support them," Carr says. "If you can’t, you’re going to lose the members you hoped to gain."
It’s all right if a systems integration doesn’t happen overnight, Carr says. In the interim, there are relatively easy and inexpensive ways to combine limited amounts of information from two different systems such as creating a data warehouse or creating a common provider or member database.
Increasingly, though, companies are opting to consolidate their offerings by phasing out products and converting members into one plan, according to Carr. While converting members to one plan eliminates the maintenance of multiple systems, many companies such as Harvard Pilgrim and PacifiCare have found that the process has its pitfalls. Others, including Aetna, are grappling with old problems that have been compounded by the sheer enormity of their organizations, Carr says.
Costs of change
Aetna U.S. Healthcare, Aetna’s managed care subsidiary, took a $103 million charge in the third quarter of 1997 because a claims backlog masked a spike in medical expenses. But according to R. Max Gould, vice president of operations and technology, the backlog was the result of a human, not a system error.
As part of a post-acquisition streamlining effort, Aetna U.S. Healthcare embarked on a plan to reduce the number of its customer service centers from 44 to 12, says Gould. "Over much of 1997 we shut down 20 centers. That process caused us to build a backlog. It really wasn’t an IT problem, it was more a matter of moving from a trained staff at one office, a smaller office, to a less-trained staff at a bigger office," he says. "When we built that claims backlog, it caused our actuaries to misjudge the medical costs by about a percent and a half. But when you pay out $7 billion to $10 billion a year in medical costs, a percent and a half translates to $105 million."
By mid-February, Aetna U.S. Healthcare had the backlog under control, Gould says. To prevent another backlog as the company moves ahead with its plan to consolidate its service centers, it will slow down the pace of closures, hire more people to staff the new centers and extend the training time, he says.
By contrast, other integration efforts at Aetna U.S. Healthcare have gone smoothly, according to Gould. In an 18-month period ending last January, the company was able to convert its HMO membership from all but three states, where they are awaiting regulatory approval, to one system. "We consolidated 14 different HMO systems onto the one U.S. Healthcare platform," Gould explains. "That’s given us a tremendous ability to more easily develop products, more easily service national accounts with the same set of plans, some efficiencies in terms of systems and, from our customer viewpoint, the ability to create very national data."
The company has installed an in-house pharmacy system that does online real-time processing of all of its pharmacy transactions, an auto-adjudication system for its indemnity and PPO claims and an Oracle financial system, Gould says. "So we’ve made good progress."
But several big projects lie ahead. Aetna U.S. Healthcare’s members are still on two different systems: indemnity/PPO members are on one, HMO members are on another. Although the ultimate goal is to integrate the systems, Gould says, in the near-term the company is using a data warehouse and common lookup databases to gather certain data elements from both systems. After the 1996 acquisition, the company chose to keep the members on separate systems because each of the platforms was so strong and the company didn’t want to take on too much change at once, according to Gould.
Migrating to one system
Harvard Pilgrim Healthcare, Inc. in Brookline, Mass., also has maintained two systems since the merger that formed it three years ago. Harvard Pilgrim was created by the 1995 merger of Harvard Community Health Plan, Inc., Brookline, Mass., and Pilgrim Healthcare, Inc., Norwell, Mass.