Rising Costs Put Pressure on Kaiser

Kaiser Permanente is having one of its brightest financial years ever, but beneath the rosy numbers lies a harsh reality: The company is facing a challenge that threatens the survival of the managed-care model that it pioneered decades ago.

The nation’s leading nonprofit HMO and hospital system and its 11,000 doctors are being confronted by the rising costs of treating its aging membership, while more bare-bones health plans are drawing away the coveted young and healthy consumers.

Kaiser has long commanded strong consumer loyalty, but many of its 8.3 million members, particularly the 6.3 million in California, have now grown old with the HMO health-maintenance organization and are entering prime health-spending years. Kaiser has California’s largest Medicare HMO enrollment, exceeding 620,000 members, and some analysts estimate that its overall membership may be 10 to 15 years older than those in other major health plans.

With age comes a greater risk for developing costly, chronic illness. Kaiser says, for example, that 7.1% of its members have diabetes. That’s almost a full percentage point higher than the prevalence rate in the United States, according to the American Diabetes Assn., whose estimate includes people who are not aware they have the disease.

Outside Kaiser, the pressures may be even greater. As the nation heads into the third straight year of double-digit health-cost increases, with no relief in sight, the insurance industry is devising more plans with skinnier benefits and fatter member co-payments and deductibles. Employers want them because they minimize premium increases, and the plans are especially appealing to young, healthy individuals who don’t want to pay higher premiums for comprehensive coverage they don’t think they’ll ever use.

These changes will be increasingly visible to millions of Americans at open enrollments this fall. Many will be offered so-called consumer-driven plans, which will allow employees to tap into a savings account to pay for medical services as needed.

Kaiser officials see all this as a direct assault on its decades-old tradition. The Oakland-based health system has been a model of managed care, providing a basic full-coverage plan for all members, with a primary care doctor serving as a gatekeeper to help control costs.

But like those of other HMOs and health plans, Kaiser’s premiums have soared in the last couple of years. That raises the question of whether Kaiser can maintain its one-shoe-fits-all approach and its competitive edge, and avoid segmenting the membership.

Kaiser’s outcome could help shape the direction of health care in California and elsewhere, not to mention the future of HMOs. The managed-care industry, despite enjoying a run of strong profits recently, continues to roil under tremendous financial and public pressure. Just a few days ago, some of the nation’s biggest HMOs were in the limelight again as a federal judge in Florida issued a key ruling that gave doctors, but not patients, class-action status in a landmark case accusing HMOs of fraud and denial of care.

Although WellPoint Health Networks Inc., Health Net Inc. and PacifiCare Health Systems Inc.--the three leading for-profit managed-care companies in California--were named as defendants in that case, Kaiser was not. That underscores one advantage of Kaiser’s integrated approach to health care: Because its doctors are salaried employees of Kaiser, there are no conflicts over payments between bill payer and provider. (The other major nonprofit health player in the state, Blue Shield of California, also was not a defendant because it has reached accommodations with doctors on its own.)

That’s not to say that Kaiser has not had its share of criticisms and lawsuits over finances and patient care. Consumer advocates have accused Kaiser of practicing assembly-line medicine, and the HMO is trying to resolve a long-running complaint of alleged patient-care lapses that led to a $1.1-million fine from regulators.

Even so, regulators and others say Kaiser has established itself as a leader in preventive care. And many still regard Kaiser, with its large working-class membership and social mission, as a strong countervailing force to giant investor-owned insurance companies.

“In those areas like smoking cessation, Kaiser is at the vanguard in efforts to keep people healthy,” said Daniel Zingale, director of the California Department of Managed Health Care, which regulates HMOs.

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Shift Is Beginning

In a recent memo to the staff, George Halvorson, Kaiser’s new chief executive, laid out the dilemma this way: “Those shifts [in the marketplace] will cause many of our healthiest members to leave us for lower-cost, lower-benefit plans. At the same time, employers will save money if their sicker patients voluntarily migrate to us.”

Halvorson said he already sees signs of this happening, although he reckons that these shifts won’t be felt for a couple of years.

He said Kaiser will be offering more-flexible benefit designs, with slightly higher deductibles and co-payments, which will cost users of medical services and drugs more out of pocket. This year, Kaiser added a hospital co-payment and set an annual cap on Medicare drug benefits.

But Halvorson and other members of Kaiser’s board don’t want to go too far in that direction. Nor do they think national expansion or big volume growth will be the answer. Although its membership in the last year is up about 200,000, in recent years Kaiser has pulled out of New England, Texas and some other states.

Halvorson is looking instead to get much more out of Kaiser’s uniquely large integrated health system. Although there are a few others like Kaiser in the nation, none comes close to matching its size--with annual revenue of about $20 billion, 30 hospitals--mostly in California--and a staff of 126,000 in nine states, including Hawaii, Colorado and Oregon.

Its huge size has made it harder to coordinate care and communicate with patients. But Kaiser is putting the finishing touches on a $1-billion automated medical records system that will have every member’s health history. And Halvorson is counting on making significant advances in developing proven protocols to treat large groups of patients with chronic conditions.

“We’re competing against an inefficient, splintered and somewhat disorganized health-care system, so we start with an advantage,” said Halvorson, 55, who was recruited this spring from HealthPartners, a nonprofit HMO in Minneapolis.

While other insurers are battling with hospitals and doctors over rates, Kaiser doesn’t have those obstacles and costs. Halvorson merely strides down the hall if he wants to chat with his counterpart at the Permanente Medical Group, Dr. Jay Crosson.

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Care-Cost Squeeze

Even so, analysts and stakeholders say the Kaiser team faces daunting challenges. Managed care continues to come under attack from consumer advocates. Big employers, knowing Kaiser’s inherent advantages over other insurers, are expecting more savings from Kaiser--and hence, smaller premium increases.

“Can Kaiser effectively treat a chronically ill care population as opposed to getting rid of the population by cleverly underwriting around it?” asked Peter Boland, a health-care analyst and consultant in Berkeley. And even if Kaiser can, will it be enough? “They don’t know,” Boland said of Kaiser’s leadership. “But unless they take a chance and roll the dice, they know they won’t survive.”

Statewide, HMO enrollment has been declining in the last couple of years, and part of that may be a reflection of the market shifts Kaiser is worried about.

Brokers say enrollment in cheaper, bare-bones coverage is rising. And increasingly, large employers are offering consumer-driven health plans in which an employer typically contributes a set amount for a worker’s medical needs and allows unused funds to roll over to the next year.

“I think it’s going to appeal to younger people and those who don’t expect to use a lot of health-care services,” said John Cammidge, executive director of human resources at Stanford University, which is making such a plan available next year to its 10,000 employees. He estimated that 5% to 10% will sign up for it. Like most big employers, Stanford also offers Kaiser.

It’s unlikely that large numbers of Kaiser members will defect to one of these new plans any time soon. With big enrollments at major employers such as pension fund CalPERS, Kaiser’s retention rate is high. Still, it needs new young members to balance its aging membership.

The average tenure of Kaiser’s 3.1 million members in Southern California is 17 years, and many have been with the HMO much longer.

Albert and Patricia Corey of Marina del Rey joined Kaiser Permanente in 1971, and when they turned 65 a few years ago, they stayed with Kaiser by enrolling in its Medicare-Plus Choice plan. Albert Corey is taking medication to control high cholesterol and blood pressure. His wife has had surgery for bladder cancer, and her chronic conditions include diabetes and arthritis.

“Whatever we have is coming down to age,” said Patricia Corey, who is 70.

The Coreys are among the roughly 950,000 Kaiser members, of 11.5%, who have one or more of five chronic conditions--asthma, depression, diabetes, heart failure and coronary artery disease.

Kaiser doctors say it’s hard to determine whether that’s a higher percentage than in the general population or their competitors. Measurement techniques vary, and many other health insurers haven’t collected such statistics on their members.

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Diabetes Program

At Kaiser’s sprawling Woodland Hills campus, Dr. Frederick Ziel is leading one of Kaiser’s regional efforts to care for patients with diabetes. One of the toughest challenges, he said, was identifying the 6,500 members who have diabetes in his area of the West San Fernando Valley.

Most of those patients are seen by Kaiser doctors at offices in other locations. But through a central registry, Ziel can track their conditions, treatments, and whether they are getting needed tests. Ziel and other medical staff also can see how individual clinics--and doctors--compare on these measures. Screening reminders are sent to patients and doctors.

Ziel said the goal of the screenings is to spot trouble early and take aggressive action through medication, diet and other forms of intervention. His computer shows some things are working: The annual retinal screening rate is in the 70% range, among the highest in the nation.

And how much are these programs saving Kaiser through reduced spending for complications and hospitalization?

Dr. Paul Wallace, who heads Kaiser’s Care Management Institute, which supports local programs such as the one in the Valley, said he doesn’t know. But, he said, “Our obligation is to make sure we’re getting the best possible outcomes for the money spent.”

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Proof of Care Results

Proof of that is exactly what many employers are demanding. Allen Feezor, health benefits administrator for CalPERS, which has about 400,000 Kaiser members, has little doubt that Kaiser is tops in disease management. But when it came to rate negotiations this spring, he said, Kaiser could not justify why it should get a 23% premium increase.

“The really frustrating thing was that the documentation of their trend costs have been rather abysmal,” said Feezor, adding that he wants to see care outcomes for his membership.

Dr. David Lawrence, Kaiser’s chief executive until April, said, “CalPERS has been looking under the hood with us for years.”

Their frustration, he said, was like that of every employer faced with the rate of medical cost increases running several times higher than the rate of inflation.

Lawrence led Kaiser through a disastrous period in 1997 and 1998, when it lost more than $500 million, largely because it took on too many new members and miscalculated the costs of contracting services to outside providers. Kaiser has recovered nicely since then, reporting net income of $458 million in the first six months of this year, a solid 4% margin of revenue.

Lisa Zuckerman, who follows Kaiser for Standard & Poor’s, which has a favorable A rating on Kaiser bonds, said the health-care system is well-positioned but not as a low-price leader, as it has been in the past. “I think their challenge is to compete on quality outcomes rather than low cost, to show that their model is better than others.”