Executives at Kaiser Permanente's Northwest Division and Group Health Cooperative of Puget Sound say they hope discussions now under way will result in a full merger of both companies by the end of March.
The combination would create a not-for-profit HMO with more than 1 million enrollees in the Northwest. Group Health, based in Seattle, would become part of Oakland, Calif.-based Kaiser's 7.4-million-enrollee system.
Group Health and Kaiser announced Sept. 13 that they began discussions about a closer affiliation that would range from expanding current joint marketing agreements to a full merger. Interviews with Mike Katcher, president of Kaiser's Northwest Division, based in Portland, and Philip Nudelman, president and chief executive officer of Group Health, made clear that the plans want to merge.
"In viewing the possibilities, a merger makes the most sense from every angle," Nudelman said.
"We want to do this as quickly as we can," Katcher said.
The two organizations have similar exclusive relations with physicians, and officials say the talks address how the medical groups will relate to each other.
The move underlines Kaiser's resurgence since Chairman and CEO David Lawrence, M.D., told MODERN HEALTHCARE*in July 1995: "We're looking at a number of expansion and acquisition opportunities that would enable us to expand our presence nationwide" (July 17, 1995, p. 34).
At that time, Kaiser-whose growth was flat-had not made an acquisition since it took over a Maxicare plan in Atlanta in 1988.
In the past year, Kaiser has acquired a 350,000-enrollee plan in New York state and announced it will buy a Humana plan in Washington, D.C., and a PPO in Kansas City. Counting the New York State plan, Kaiser added 605,000 enrollees in the first seven months of this year.
"Nobody seems surprised" at the two not-for-profits' plans to consolidate, said Kenneth Rutledge, president of the Oregon Association of Hospitals and Health Systems.
That's because other HMOs in Washington and Oregon-including PacifiCare and Sisters of Providence Good Health Plan-have consolidated their Oregon-Washington operations. In a wider affiliation, Blue Cross and Blue Shield plans in the region have linked up in the Benchmark Group, which includes plans in Idaho and Utah as well, Rutledge said.
Joining the trend, health systems such as Legacy Health System in Portland and Sisters of Providence Health System in Seattle also have moved to a stronger corporate structure, Rutledge observed.
The HMO consolidation is precipitated by rate competition, Nudelman said. "With rates declining rapidly, you have to have costs going down at an even greater rate or you don't have the margin to create capital." Consolidation will allow the plans to slash administrative and other costs and build capital.
Unlike their for-profit rivals, Kaiser and Group Health can't raise money in the stock market to expand and go after multistate accounts and to build sophisticated information systems.
"And uniquely to Kaiser and Group Health, without the capital you can't provide the appropriate social benefit" the HMOs have historically provided, he said.
A merger would make Group Health part of a national program, Katcher said. "From Kaiser's perspective, there are gaps in the areas we cover" including Seattle and Northern Washington as well as Idaho, where Group Health operates, he said.
Besides the usual regulatory approvals, a merger would require the approval of Kaiser's board and Group Health's elected board. That board is elected by a 40,000-member group of consumers who chose to participate in Group Health's traditional cooperative structure by paying a nominal fee.