Despite strong progress over the past two years, Kaiser Permanente still faces some big hurdles on its road to fiscal fitness.
The nation's largest not-for-profit HMO earned $142 million in the first quarter ended March 31, up 133% from net income of $61 million in the same period of 1999. Operating profit nearly tripled to $167 million from $56 million. Revenue inched up 2% to $4.3 billion.
Thanks largely to steep rate hikes and the sale of money-losing units in the East, the Oakland, Calif.-based plan almost broke even last year, after posting a net loss of $288 million in 1998. Kaiser hopes to achieve a 4% operating margin by year-end, said spokesman David O'Grady.
"We launched an aggressive, three-year turnaround plan in 1999, and we're starting to see the fruits of our labor," he said. "The latest quarter shows our strategies for operational improvement are taking hold and generating strong financial results."
Indeed, Kaiser's Northwest, Colorado, Georgia, Hawaii, Kansas City and Ohio units all finished the quarter in the black.
The company's core California market, home to nearly three-quarters of its 8.1 million members, gave the most cause for celebration. The unit earned $164 million on operations in the first quarter, up 273% from $44 million a year before.
Tom Debley, spokesman for Kaiser's California unit, chalked up the improvement to premium hikes of 10% to 12% and to a gain of 52,000 new members.
Paradoxically, healthy enrollment gains have posed a stumbling block for Kaiser's closed healthcare system, in which the health plan operates its own hospitals and clinics.
Enrollment growth in some California service areas, such as Sacramento, has outpaced hospital capacity, often forcing Kaiser to divert patients to competing, non-Kaiser facilities. And that cuts deeply into profit margins.
To ease the space crunch and hang on to more patients, Kaiser has opened two new California hospitals in the past year--in Baldwin Park and Roseville--and is expanding some of its facilities.
The company is tripling the size of the emergency ward at its 221-bed South Sacramento Medical Center and boosting its number of emergency beds to 23 from 11. It also recently expanded the intensive-care nursery at its 304-bed Sacramento Medical Center and hired 300 registered nurses in Northern California to handle its ballooning patient load.
Last month, Kaiser reversed a decision to close its 264-bed hospital in Oakland, following the settlement of a 2-year-old lawsuit filed by the California Nurses Association. The nurses union alleged that Kaiser was deliberately closing its facilities in low-income communities to reduce its indigent-care load (April 17, p. 22).
"Treating more of our members in our own facilities is a big part of our efforts to stay financially healthy," said Cinde Breedlove, spokeswoman for Kaiser's Sacramento area. "Adding Roseville, for instance, has significantly reduced our diversion rates."
But Kaiser's financial outlays don't end there. Like most other California hospital operators, it's forking out big bucks to comply with the state's Seismic Safety Act (May 1, p. 56).
The 1994 law requires California hospitals to meet strict earthquake standards by 2008. Many have had to renovate or completely rebuild their patient-care facilities. Kaiser, for one, will have to spend $60 million to $100 million to make its aging Sacramento hospital earthquake-proof. The Oakland facility will require costly upgrades, too.
"(Seismic compliance) is one of our main capital challenges. We have significant work to do in that area," Debley said. "It's a large part of what Kaiser's turnaround effort is all about, to be able to generate enough capital to meet these large-scale needs."
Meanwhile, Kaiser's mid-Atlantic division, which insures some 540,000 people in the District of Columbia, Maryland and Virginia continued to lose money. In February, the unit brought in a three-person turnaround team from the company's headquarters to help rein in outside medical expenses and rising pharmacy costs.
The unit's woes raise a question about whether Kaiser's group practice approach can be as successful in other regions as it has been in the West, where Kaiser was founded more than 50 years ago, said Glenn Smith, senior consultant at Watson Wyatt Worldwide in San Francisco.
One bone of contention, he said, has been that Permanente physicians don't contract with other plans. That means that if Kaiser members decide to switch insurers, they have to find completely new doctors.
"Kaiser's model doesn't seem to play as well in other parts of the country," Smith said. "It's a model that feels very confining to people, especially in the East, who are used to much larger networks."
Kaiser lost about 200,000 members in the first quarter, largely because of ongoing divestitures. Last year, the company announced it would pull out of five states--Connecticut, Massachusetts, New York, North Carolina and Vermont--where it covered a total of 695,000 lives.