The managed-care giants keep stumbling as they're proving unfit to keep up with soaring enrollment.
Earlier this month, not-for-profit Kaiser Permanente joined the ranks of big for-profit HMOs reporting higher-than-expected losses for 1997 (Feb. 16, p. 4). Kaiser Foundation Health Plan and Hospitals posted its first-ever loss -- $270 million for 1997, compared with earnings of $265 million in the previous year. That loss came on record revenues of $14.5 billion, up 10% from $13.2 billion in 1996.
Kaiser's loss showed once again that record growth can be a double-edged sword. Oxford Health Plans suffered last year, saying its computer systems couldn't keep up with huge enrollment gains, and it lost track of what it owed doctors and hospitals. PacifiCare Health Systems and Aetna U.S. Healthcare ran into similar problems as a result of merger-induced growth.
But these problems aren't plaguing everyone in the managed-care industry. Last week, WellPoint Health Networks said its earnings rose 25% to $58.6 million in the fourth quarter of 1997 from $47 million in the year-ago quarter. Earnings for the year were up 10% to $222.9 million from $202 million in 1996.
WellPoint added 2.1 million enrollees in 1997, 1.3 million from the acquisition of the group health and life businesses of John Hancock Mutual Life Insurance Co. and 854,000 from growth within its existing networks. Yet WellPoint's system kept up with this growth, even as Leonard Schaeffer, chairman and chief executive officer, boasted that WellPoint offers consumers a wide choice of plans.
Schaeffer said WellPoint's system was designed from the beginning to support pricing, contracting and claims tracking for a wide range of managed-care products and fee-for-service plans. Although there were some surprises in integrating Hancock and Massachusetts Mutual Life Insurance Co. enrollees, WellPoint's systems alerted the company to potential problems in time, Schaeffer said.
By contrast, Kaiser's record enrollment growth of nearly 1.5 million last year -- to just short of 9 million enrollees -- was unexpected and overwhelmed Kaiser's capabilities. It came in part because Kaiser's premiums were lower than its competitors'. "We missed the price turn in the industry," said David Lawrence, M.D., Kaiser chairman and CEO. Now it has to wait until 1999 to get a premium increase.
The unexpected growth meant a large number of enrollees had to be treated outside Kaiser facilities. Because Kaiser has had limited experience contracting with community providers in California, the high cost of that care accounted for $180 million of the $270 million loss.
"I don't think Kaiser knows how to do large-scale outsourcing yet. It's been a fatal flaw in the last 12 months," said Peter Boland, a healthcare consultant in Berkeley, Calif.
Because Kaiser physicians control outside referrals, they must be held more accountable through pay-for-performance, which is now foreign to the Kaiser culture, Bo-land said.
Combined with the record growth, the consolidation of the Northern and Southern California regions slowed down Kaiser's systems and created a claims backlog, Lawrence said.
Last November, Kaiser had expected a loss of $50 million. By December, it was clear the loss would be more than five times that much.
Kaiser said it will make operational changes to deal with the loss. It will decide whether to divest money-losing plans in Kansas City, parts of New England, North Carolina, Ohio and Texas. Kaiser lost $50 million in Texas last year, but other plans' losses are not yet audited and public, said Susan Porth, Kaiser's chief financial officer.
Kaiser also hired 1,200 nurses in the last quarter. It will hire more nurses and will open a new hospital in Southern California.
Kaiser also will focus on quality improvement efforts that should have a big payoff in reducing costs, Porth said.
Through its Care Management Institute, which Kaiser created with the Permanente Federation -- its new physician organization -- Kaiser will develop and use more standardized "care paths" for the treatment of different diseases, Porth said.
Kaiser also is "moving in the direction" of pay-for-performance in its health plans and medical groups, Porth said.