Kaiser Permanente's 55-year history as a commercial health plan has been marked by two eras: a period of astonishing growth and success, lasting from 1945 to roughly the mid-1990s, virtually unmatched among U.S. companies, and Kaiser's tumultuous troubles since then.
Kaiser traces its roots in prepaid medical group practice to West Coast dam and shipyard workers in the 1930s and 1940s. By 1990, it had grown its commercial health plan membership by 1,300 percent, to become, with 6.5 million enrollees, by far the country's largest and most famous health insurer. Had Kaiser been a for-profit company, it would have ranked 80th on the Fortune 500 list.
No less an authority than the New York Times in 1989 declared the Oakland, Calif.-based HMO "a model for health plans of the future."
Then came the 1990s, when Kaiser became a poster child for the problems facing managed care in America. The company was hit by the industry equivalent of biblical plagues: employee strikes, lawsuits, government investigations, media scandals over emergency room deaths, consumer group and labor union criticisms, and declining morale among doctors, nurses and staff. It was forced to bail out of money-losing regions all over the country, and senior management made questionable decisions that damaged the company's finances and its standing with the public.
Kaiser could endure litigation, strikes and bad PR, but what really put the fear of God into the organization was its financial near-death experience. Kaiser lost $266 million in 1997 and $288 million, in 1998, with each quarter's bad news trumpeted mercilessly in the press. For the first time in a half-century, questions arose about the company's ability to survive.
Observers say Kaiser had grown complacent under the leadership of James Vohs, who by 1990 had been with the company for 37 years and its president for 14 years.
"They lost their competitive edge," says Glenn Smith, a senior healthcare consultant at Watson Wyatt Worldwide. As the largest and most respected HMO in the country, standing astride the nation in the golden glow of its idealistic, not-for-profit status, Kaiser felt little need to hustle.
Even the man at Kaiser's helm since 1991, Chairman and CEO David Lawrence, M.D., concedes that during this period Kaiser was "a sleeping giant that was conservative and unwilling to take risks."
Critics wondered whether one reason for Kaiser's situation was an absence of competition. There simply weren't any other HMOs that came near it in size or geographic scope. Nobody was even in the same league. True, Vohs and team felt the pressure to keep premiums lower than anyone else. But they saw little reason to fix something that didn't appear to be broken.
But in the 1990s, especially in California, HMO consolidation and changes in tax status created deep-pocketed, predatory for-profit competitors that were run with ruthless efficiency. Facing Foundation, Health Net, Blue Cross/WellPoint, PacifiCare and others, Kaiser found itself on the battlefield.
In the fight of their lives and faced with fiscal and other pressures that the founder, industrialist Henry J. Kaiser, and his physician guru, Sidney Garfield, M.D., never dreamed of, Kaiser's ill-equipped leaders simply buckled.
Physicians with Permanente Medical Group, the medical group arm of the giant HMO, grew steadily more miserable as managed care tightened its grip on healthcare. Not only were their salaries and bonuses capped, but they were ordered to see more and more patients every day--and Kaiser has always attracted more than its share of the poorest and sickest among the population.
"It was a problem for the whole organization, including doctors," says Permanente's executive director, Francis Crosson, M.D. "After all, it was the first time in 50 years we lost money."
Roger Baxter, M.D., a general internist in Oakland and 10-year Permanente veteran, recalls, "It was so bad that doctors were talking about, 'We better do something or we'll lose everything!"'
Kaiser Permanente did do something. "I think their financial difficulties were a wake-up call," says Steve McDermott, the head of California's biggest IPA, Hill Physicians Medical Group, which competes with Kaiser in Northern California.
It's still too early to tell whether what Lawrence is doing will work, but the most immediate and pressing challenge--getting the budget under control--seems to be succeeding. In late February, Kaiser reported a net loss for 1999 of $6 million, still troubling but significantly less than 1998's loss. That was good enough for chief financial officer Dale Crandell to claim, "Our efforts to turn the organization around are taking hold." Lawrence, reminding people that much of the loss was due to "unusual" one-time costs, says, "Despite the losses of 1997-1998, we're positioned to be very strong."
Lawrence attributes the apparent turnaround to exiting money-losing regions, such as Texas, North Carolina and New England; consolidating contracts in purchasing and building management; trimming costs in Southern California; certain payroll reductions; and reducing Kaiser's data centers to two from 24.
Lawrence, 59, took a bold step to turn the organization around: raise prices. This included a hefty hike in the co-pay for a visit to the emergency room in California and a series of double-digit premium increases the HMO began pushing through last year.
The action didn't go down well with one of Kaiser's most important clients, the 1.1 million-member California Public Employees Retirement System. Last summer CalPERS trashed Kaiser's "huge price changes," noting Kaiser had gone from being its lowest-priced health plan to eighth in affordability. In a move that shocked Kaiser, CalPERS urged its 350,000 Kaiser members to consider joining other health plans during last fall's open enrollment period. However, the net loss to Kaiser was negligible, less than 50 enrollees.
Under pressure from doctors, Kaiser also redesigned Permanente. The specific changes are in such early stages that their long-term impacts have yet to be determined, but the overall result has been to give Permanente physicians an autonomy they've never enjoyed.
Throughout their long association with Kaiser, Permanente's physicians have had only limited input into the strategic direction and administration of the organization. Instead, they were employed by regional Permanente Medical Groups around the country, with no formal links between them. As a result, the physicians never were able to speak with a single voice.
Numbering some 10,000 today, the Permanente doctors still are technically employed by their regional federations, but for the first time, the 10 groups have been united as a single company, one able to sit down on equal terms with Lawrence, who runs Kaiser's 30 hospitals and the health plan. That company, the Permanente Federation, and its entrepreneurial subsidiary, PermCo, began in January and July 1997, respectively.
"The Permanente side never had a national entity that could partner with what is a national health plan," says Crosson. "We needed to find a way to have a national voice with the health plan so together we could proceed to management oversight and governance over the whole organization."
The creation of the Federation may well turn out to be a signal event in Kaiser's history. Through it, and for the first time ever, says Crosson, "(Doctors) have a way to bring forward issues around strategic priorities." That means the physicians now have as much say as anyone else in determining Kaiser's future.
Among the activities now occurring under the Federation umbrella, Lawrence likes to trumpet its ability to practice disease management through PermCo's Care Management Institute. Its new organizational structure, he says, enables Kaiser "to take advantage of our intellectual scale (and) bring together the best scientists to share best practices for specific illnesses."
Lawrence has pledged to spend $2 billion on new information technology (its partnership with Healtheon/WebMD is an example), so that everyone at Kaiser can "share, learn, and leverage our knowledge and expertise across the entire organization . . . through a national information technology organization" expected to be completed in 2002.
Indeed, Kaiser is uniquely positioned to practice disease management, says Bettina Kurowski, president of Kurowski & Co., a Los Angeles managed-care consulting firm. Through its group model physician structure and its new approach to centralized information sharing, Kaiser "offers a much greater likelihood that disease management will be executed well and . . . succeed in its goals of improving outcomes at lower costs," she says.
Another thing PermCo does is almost radical, given the physicians' prior history as salaried employees: It allows them to become, in effect, entrepreneurs, who can boost their incomes through their own initiative. It permits Permanente doctors to treat non-Kaiser patients and pocket the resulting fees.
For example, at Kaiser's Hayward, Calif., medical center, Permanente plastic surgeons advertise directly to non-Kaiser members to perform nose jobs and tummy tucks, with Permanente and the physician each getting a share of the proceeds.
PermCo similarly is engaged in what Lawrence calls "joint ventures" via the creation of new specialized companies, like Optimal Renal Care, HEARx West, and the Laser Co., that cater to non members with specific illnesses.
Such undertakings inject a financial shot in the arm to Permanente doctors.
Baxter, the internist, likes the fact that PermCo "figured out a way to bring money in (to Permanente) and use it, which had never happened before." He says he is glad "money (that) always went back into the big Kaiser pot" is expected to be available to him and his colleagues.
Thus far, Kaiser's efforts seem to be paying off, and pundits no longer are predicting major crashes or breakups. "Kaiser was there first, and when all is said and done, Kaiser will be there last, too," says Berkeley, Calif., healthcare analyst Peter Boland.
Hill Physicians's McDermott says rosy may be too strong a word to describe Kaiser's future, "but certainly, in terms of their size, scale, and learning curve, Kaiser is in the best position to really distance itself from the pack."
Morale has "dramatically improved," says Crosson, although he admits that one Kaiser region, the Washington, D.C., corridor and surrounding mid-Atlantic states, still is having problems with profitability.
Nonetheless, important questions remain. One is whether Kaiser's group model will stay. The consensus is yes, and not only because the group model is in Kaiser's bones. Having multiple facets of care under one roof confers advantages on Kaiser, whether it's keeping costs under control or doing disease management.
Other systems--those built around contracted networks rather than a group model--"cannot reach anywhere near Kaiser's efficiencies of delivery," says San Francisco healthcare futurist Wanda Jones, because those systems have no synergies.
While it has made forays into networked arrangements with non-Kaiser hospitals in California, in almost every instance the moves proved disastrous, and Kaiser seems likely to remain dominantly a group model on the West Coast and in Hawaii. (In other regions, it has always contracted with local hospitals.)
A second question is whether Kaiser will remain not-for-profit. Certainly it will as long as Lawrence remains at the helm because he is personally committed to it. His contract is guaranteed until 2002.
A future devastating run of bad financials and declining membership might just drive Kaiser to do what so many other California HMOs did in the 1990s: Change its tax status and flee into the waiting arms of Wall Street.
The third issue is whether Permanente will strike out on its own. But since it still is very much a work in progress, it is difficult to predict what it will do.
The most likely scenario, Boland and Johns believe, is that one of these days, Permanente will sever its exclusive ties to Kaiser.
Watson Wyatt's Smith sees how it could come about. "The driver could be a desire by the doctors to gain control over the purchaser dollar. Now, they have to negotiate with Kaiser over their reimbursements, and they might like to see that flipped, to where they pay Kaiser for hospital (use) and infrastructure."
Lawrence has repeatedly ruled out that possibility. When asked how he would react if Permanente told him they wanted to bail out, he says only, "Well, that would certainly be a lively discussion."
Yet internist Baxter says a recurrent theme that pops up in conversations around the Permanente water cooler is, "Maybe we should go our separate way."
With their newfound autonomy and clout, not to mention the fact that a younger generation of Permanente physicians do not share their elders' loyalty to Kaiser, these independently minded doctors increasingly think about their own security and happiness, and not just that of the organization.
Still, executive director Crosson says those who are waiting for Permanente to walk needn't hold their breath. "If you look at the problems physicians have in other organizations dealing with multiple payers, there would be little reason for Permanente physicians to prefer that environment," he says. Then he adds confidently, "At the moment, this partnership is sound."
Steven H. Heimoff is an Oakland, Calif.-based writer who specializes in healthcare business topics.