Despite its efforts to stem losses this year, the giant managed-care company Kaiser Permanente is on track to match or top last year's $266 million loss, MODERN HEALTHCARE has learned.
Senior officials at Oakland, Calif.-based Kaiser said the not-for-profit has been unable to stop the hemorrhaging.
"We're still looking at a difficult year, similar to what we had in 1997, and we're making difficult decisions," said Jim Williams, president of Kaiser Permanente International and newly named president of the Kaiser/Group Health Cooperative unit in the Pacific Northwest.
Williams acknowledged last week that racking up losses worse than those in 1997 is "not out of the question." He noted that some of Kaiser's markets nationwide are experiencing "significant financial difficulties."
One of the key problems, Williams said, is that Kaiser recently has had to double its estimate of what it will cost the company to address its year-2000 computer problems.
Possible responses to continuing losses include an across-the-board 5% budget cut and the sale of several of the organization's non-California divisions, company officials and consultants said. Williams has not ruled out selling some units.
In a late September internal newsletter, Kaiser Chief Executive Officer David Lawrence, M.D., said the organization needs to become well-positioned in major markets across the country but "must do so in a manner which does not drain our financial or human resources."
Roughly 61% of Kaiser's 9.2 million enrollees reside in California, and its West Coast bailiwick has long been the main source of its revenues and profits.
As recently as 1995, Kaiser posted a $550 million profit. Two years earlier it boasted net income of nearly $850 million. However, losses for 1998 could approach half a billion dollars, a huge amount even for the $15 billion behemoth, according to one senior official who asked not to be identified.
"It's like turning a battleship around," said Glenn Smith, a healthcare consultant with Watson Wyatt Worldwide in San Francisco. "Kaiser may have overestimated the speed with which they can make these course adjustments."
Through 1998's first two quarters, Kaiser suffered a $162 million operating loss but was bailed out by investment income-an unlikely factor in the second half, given Wall Street's recent woes. Investment income shrunk the net loss for the first half to just $33 million. But sources say Kaiser has since suffered through a horrendous August; and unless significant changes are made, the company will continue to post big losses throughout the rest of 1998 and possibly into next year.
Until last year, Kaiser had never posted an annual loss. But in 1997, unprecedented enrollment growth in California and Kaiser's inability to care for the flood of new enrollees at its own facilities led it to engage in a number of expensive contracting deals with non-Kaiser providers. The company also experienced steep losses in Texas and in several other non-California units.
Kaiser agreed in mid-June to sell its troubled Southwest division in Texas to HMO Texas, an affiliate of Las Vegas-based Sierra Health Services. The complicated deal initially was valued at $129 million. The Southwest unit lost $50 million last year and landed the national health plan in a nasty dispute with Texas Attorney General Dan Morales. Kaiser ended up paying a $1 million fine to settle the dispute over quality and claims payment issues (Aug. 25, 1997, p. 61).
The Texas sale is expected to close by the end of the month.
"We're looking at a whole range of options," Williams said. Selling some of Kaiser's divisions with less-than-stellar operating results is a possibility, he said.
Units in the Southeast, mid-Atlantic and Ohio have posted "relatively positive results," he said, but other areas, notably the Latham, N.Y.-based Northeast division, have proven "difficult to integrate" into the Kaiser system.