California inks sweetheart deal with Kaiser Permanente, jeopardizing Medicaid reforms

California Gov. Gavin Newsom’s administration has negotiated a secret deal to give Kaiser Permanente a special Medicaid contract that would allow the healthcare behemoth to expand its reach in California and largely continue selecting the enrollees it wants, which other health plans say leaves them with a disproportionate share of the program’s sickest and costliest patients.

The deal, hammered out behind closed doors between Kaiser Permanente and senior officials in Newsom’s office, could complicate a long-planned and expensive transformation of Medi-Cal, the state’s Medicaid program, which covers roughly 14 million low-income Californians.

It has infuriated executives of other managed-care insurance plans in Medi-Cal, who say they stand to lose hundreds of thousands of patients and millions of dollars a year. The deal allows KP to limit enrollment primarily to its previous enrollees, except in the case of foster kids and people who are eligible for both Medicare and Medi-Cal.

“It has caused a massive amount of frenzy,” said Jarrod McNaughton, CEO of the Inland Empire Health Plan, which covers about 1.5 million Medi-Cal enrollees in Riverside and San Bernardino counties. “All of us are doing our best to implement the most transformational Medi-Cal initiative in state history, and to put all this together without a public process is very disconcerting.”

Linnea Koopmans, CEO of the Local Health Plans of California, echoed McNaughton’s concerns.

Insurance plans got wind of the backroom talks when broad outlines of the deal were leaked days before the state briefed their executives Thursday.

Dr. Bechara Choucair, Kaiser Permanente’s chief health officer, argued in a prepared written response on behalf of KP that because it operates both as a health insurer and a healthcare provider, KP should be treated differently than other commercial health plans that participate in Medi-Cal. Doing business directly with the state will eliminate complexity and improve the quality of care for the Medi-Cal patients it serves, he said.

“We are not seeking to turn a profit off Medi-Cal enrollment,” Choucair said. “Kaiser Permanente participates in Medi-Cal because it is part of our mission to improve the health of the communities we serve. We participate in Medi-Cal despite incurring losses every year.”

His statement cited nearly $1.8 billion in losses in the program in 2020 and said KP had donated $402 million to help care for uninsured people that year.

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Kaiser Permanente, the state’s largest managed-care organization, is one of Newsom’s most generous supporters and close political allies.

The new, five-year contract, confirmed to KHN by administration officials and expected to be announced publicly Friday, will take effect in 2024 pending approval from the legislature — and will make KP the only insurer with a statewide Medi-Cal contract. It allows KP to solidify its position before California’s other commercial Medi-Cal plans participate in a statewide bidding process — and after those plans have spent many months and considerable resources developing their bidding strategies.

Other health plans fear the contract could also muddle a massive and expensive initiative called CalAIM that aims to provide social services to the state’s most vulnerable patients, including home-delivered meals, housing aid for homeless people, and mold removal from homes. Under its new contract, KP must provide some of those services. But some executives at other health plans say KP will not have to enroll a large number of sick patients who need such services because of how it limits enrollment.

Critics of the deal noted Newsom’s close relationship with KP, which has given nearly $100 million in charitable funding and grant money to boost Newsom’s efforts against homelessness, COVID response, and wildfire relief since 2019, according to state records and KP news releases. The healthcare giant was also one of two hospital systems awarded a no-bid contract from the state to run a field hospital in Los Angeles during the early days of the COVID pandemic, and it got a special agreement from the Newsom administration to help vaccinate Californians last year.

Jim DeBoo, Newsom’s executive secretary, used to lobby for KP before joining the administration. Toby Douglas, a former director of the state Department of Health Care Services, which runs Medi-Cal, is now Kaiser Permanente’s vice president for national Medicaid.

Still, many critics agree that Kaiser Permanente is a linchpin of the state’s healthcare system, with its strong focus on preventive care and high marks for quality of care. Many of the public insurance plans upset by the deal subcontract with KP for patient care and acknowledge that their overall quality scores will likely decline when KP goes its own way.

Michelle Baass, director of the state Department of Health Care Services, said Medi-Cal had risked losing KP’s “high quality” and “clinical expertise” altogether had it been required to accept all enrollees, as the other health plans must. But she said KP will have to comply with all other conditions that other plans must meet, including tightened requirements on access, quality, consumer satisfaction, and health equity.

The state will also have greater oversight over patient care, she said.

“This proposal is a way to help ensure Kaiser treats more low-income patients, and that more low-income patients have access to Kaiser’s high-quality services,” Baass said.

Though Kaiser Permanente has 9 million enrollees, close to a quarter of all Californians, only about 900,000 of them are Medi-Cal members.

Under the current system, 12 of the 24 other managed care insurance plans that participate in Medi-Cal subcontract with KP to care for a subset of their patients, keeping a small slice of the Medi-Cal dollars earmarked for those patients. Under the new contract, KP can take those patients away and keep all of the money.

In its subcontracts, and in counties where it enrolls patients directly, KP accepts only people who are recent Kaiser Permanente members and, in some cases, their family members. It is the only health plan that can limit its Medi-Cal enrollment in this way.

The new contract allows KP to continue this practice, but it also requires Kaiser Permanente to take on more foster children and complex, expensive patients who are eligible for both Medi-Cal and Medicare. It allows KP to expand its geographic reach in Medi-Cal to do so.

Baass said the state expects KP’s Medi-Cal enrollment to increase 25% over the life of the contract.

KP defended the practice of limiting enrollment primarily to its previous members, arguing that it provides “continuity of care when members transition into and out of Medi-Cal.”

The state has long pushed for a larger KP footprint in Medi-Cal, citing its high quality ratings, its strong integrated network, and its huge role on the broader healthcare landscape.

“Kaiser Permanente historically has not played a very big role in Medi-Cal, and the state has long recognized that we would benefit from having them more engaged because they get better health outcomes and focus on prevention,” said Daniel Zingale, a former Newsom administration official and health insurance regulator who now advises a lobbying firm that has Kaiser Permanente as a client.

But by accepting primarily people who have been KP members in the recent past, the health system has been able to limit its share of high-need, expensive patients, say rival health plan executives and former state health officials.

The executives fear the deal could saddle them with even more of these patients in the future, including homeless people and those with mental illnesses — and make it harder to provide adequate care for them. Many of those patients will join Medi-Cal for the first time under the CalAIM initiative, and KP will not be required to accept many of them.

“Awarding a no-bid Medi-Cal contract to a statewide commercial plan with a track record of ‘cherry picking’ members and offering only limited behavioral health and community support benefits not only conflicts with the intent and goals of CalAIM but undermines publicly organized healthcare,” according to an internal document prepared by the Inland Empire Health Plan.

The plan said it stands to lose the roughly 144,000 Medi-Cal members it delegates to KP and about $10 million in annual revenue. L.A. Care, the nation’s largest Medicaid health plan, with 2.4 million enrollees in Los Angeles County, will lose its 244,000 KP members, based on data shared by the plan.

The state had been scheduled on Wednesday to release final details and instructions for the commercial plans that are submitting bids for new contracts starting in 2024. But it delayed the release a week to make the KP deal public beforehand.

Baass said the state agreed to exempt KP from the bidding process because the standardized contract expected to result from it would have required the insurer to accept all enrollees, which Kaiser Permanente does not have the capacity to do.

“It’s not surprising to me that the state will go to extraordinary means to make sure that Kaiser is in the mix, given it has been in the vanguard of our healthcare delivery system,” Zingale said.

Having a direct statewide Medi-Cal contract will greatly reduce the administrative workload for KP, which will now deal with only one agency on reporting and oversight, rather than the 12 public plans it currently subcontracts with.

And the new contract will give it an even closer relationship with Newsom and state health officials.

In 2020, KP gave $25 million to one of Newsom’s key initiatives, a state homelessness fund to move people off the streets and into hotel rooms, according to a KHN analysis of charitable payments filed with the California Fair Political Practices Commission. The same year, it donated $9.75 million to a state COVID relief fund.

In summer 2020, when local and state public health departments struggled to contain COVID spread, the healthcare giant pledged $63 million in grant funding to help contract-tracing efforts.

KP’s influence extends beyond its massive charitable giving. Its CEO, Greg Adams, landed an appointment on the governor’s economic recovery task force early in the pandemic, and Newsom has showcased KP hospitals at vaccine media events throughout the state.

“In California and across the U.S., the campaign contributions and the organizing, the lobbying, all of that stuff is important,” said Andrew Kelly, an assistant professor of health policy at California State University-East Bay. “But there’s a different type of power that comes from your ability to have this privileged position within public programs.”

Kaiser Health News is a national health policy news service. It is an editorially independent program of the Henry J. Kaiser Family Foundation which is not affiliated with Kaiser Permanente.