As Kaiser model spreads, Kaiser itself looks to grow

(This story was updated at 8 p.m. ET.)

Kaiser Permanente's northern expansion should come as little surprise after a year of deals creating bigger, more integrated health systems. Many want to be more like Kaiser, and Kaiser CEO Bernard Tyson wants to give people more Kaiser.

The Oakland, Calif.-based system announced it will acquire the Seattle-based Group Health Cooperative, expanding Kaiser's geographic reach and boosting its health plan membership by 6%.

The deal, which is expected to close next year, will be the first under Tyson's leadership that takes the system into a new market, and Tyson says he has identified growth in existing and new markets as a key strategy.

“We believe our model is the best way to provide care and coverage to populations and individuals,” Tyson said in an interview. “We want to demonstrate to everyone in this country that our model is more relevant today than ever before.”

That model—a single organization that combines health plans, hospitals and physicians—is one being pursued by more healthcare organizations that have historically operated in one or two sectors.

“We're seeing a collision of all three of those elements,” said Kit Kamholz, an expert in healthcare transactions and a managing director for healthcare consultants Kaufman Hall. How that shakes out, he said, will “determine who is going to be controlling the healthcare dollar.”

Some of the nation's largest hospital operators have steadily acquired medical groups and expanded into health insurance in recent years, including Catholic Health Initiatives, Englewood, Colo., and Ascension Health, St. Louis.

The consolidation underway is also driven by an expectation that larger scale will be an advantage as households, employers, state legislatures apply pressure on health spending. “The entire healthcare environment is expanding from local geographies to regional geographies,” Kamholz said.

WellStar Health System in Marietta, Ga., for example plans to spend about $660 million to gain a foothold in Atlanta and acquire five Atlanta hospitals from Tenet Healthcare Corp.

Kaiser, meanwhile, is moving “from being more of a regional player to more of a national player,” Kamholz said.

Kaiser operates across several states, although its heaviest presence is in California. As of December 2014 it owned and operated 38 hospitals and more than 600 clinics and outpatient buildings. It ended that year with revenue of $56.4 billion.

With the deal for Group Health, Kaiser will add an eighth market to its operations in California, southern Washington, Colorado, Georgia, Hawaii, Maryland, Oregon, Virginia and Washington, D.C. Kaiser left Ohio in 2013.

Group Health is one of the three largest managed care plans in Washington, tied for No.2 with 25% for the market behind Molina Healthcare, which is the largest HMO with 35%. Group Health's insurance plans have 590,000 members and its operations, which also include clinics, specialty medical centers and one hospital, generated $3.7 billion in revenue last year.

The financial terms of its deal with Kaiser call for Kaiser to fund a $1.8 billion healthcare foundation. Kaiser did not promise any capital investments but will likely finance capital projects “pretty immediately” after the deal's close, Tyson said. Investments will likely focus in technology and medical office buildings.

Kaiser will look to transfer successful strategies from its other operations to Group Health, such as the use of technology to expand patient access, worksite clinics or retail locations in Target stores, Tyson said.

Kaiser is also eyeing Michigan, Crain's Detroit Business reported in October. Kaiser spokesman Ted Carr responded to the reports by saying the company regularly looks for deals, but would not comment on speculation.

“As part of our ongoing operational improvement work and our efforts to improve the quality of healthcare, we regularly evaluate opportunities to engage with other healthcare organizations. This work can range from informal collaboration around a narrow scope to more broad, structured and cooperative affiliations,” he said.

The activity among providers and insurers is unlikely to ebb in the coming year, said Paul Keckley, a managing director with Navigant. “Investors and lenders are anxious about growing cost containment facing the industry in all sectors,” he said. And insurers face a shrinking market for their core business of risk-sharing agreements with employers.