Kaiser
Permanente
Con
Perspective
Stacy
Ellyson
Jacquelyn Nesbitt
November
13, 2002
Prepared
for
Dr. Han Vo
ECON 693
Winthrop University
Table of Contents
List
of Illustrations....................................................................................................................................................
|
iii |
Abstract....................................................................................................................................................................... |
iv |
Introduction................................................................................................................................................................ |
1 |
History.......................................................................................................................................................................... |
1 |
Discussion.................................................................................................................................................................. |
3 |
Structure............................................................................................................................................................ |
3 |
MarketShare...........................................................................................................................................................
|
3 |
Membership............................................................................................................................................................
|
4 |
Integration...............................................................................................................................................................
|
5 |
Barrier
to Entry........................................................................................................................................................
|
5 |
Conduct........................................................................................................................................................................ |
6 |
Mergers..................................................................................................................................................................
|
6 |
Non-Price
Competition.............................................................................................................................................
|
8 |
Legal
Tactics..........................................................................................................................................................
|
8 |
Performance............................................................................................................................................................... |
10 |
Profits
and Losses..................................................................................................................................................
|
10 |
Product
Price..........................................................................................................................................................
|
11 |
Product
Quality.......................................................................................................................................................
|
11 |
|
12 |
Technical
Progress..................................................................................................................................................
|
13 |
Conclusions................................................................................................................................................................ |
14 |
References.................................................................................................................................................................. |
15 |
List
of Illustrations
|
|
Figure 1:
Kaiser Membership
................................................................................................................................ |
4 |
Figure
2: Kaiser Operating Revenues
................................................................................................................. |
4 |
Figure
3:
Community Benefit Spending 2001
................................................................................................... |
9 |
Appendix
A: Kaiser Permanente Regions
......................................................................................................... |
17 |
Appendix
B: Kaiser Permanente Medical Care
Program: The Money Trail .............................................. |
18 |
Abstract
Kaiser
Permanente is
one of the largest integrated
delivery systems in America as well as
the nation's
largest HMO. The quick growth the
organization experienced
was potentially
harmful to
its customers. The question we examined,
is being
the largest always the best. We
look at
Kaiser Permanente from a con perspective and point
out how
this organization is not
beneficial
to the consumer of healthcare. It also
inhibits the
physician-patient relationship.
Kaiser has
had cost problems that have affected its profits
but in
turn the patient care and
satisfaction
have been affected. The organization
places too
much emphasis on reducing costs
than it has
on patient satisfaction. The conclusion
drawn is
for improvement Kaiser needs to
develop
better treatment guidelines with it doctors and
patients and
allow more freedom of
choice among
the patients and providers.
Introduction
As
we enter the twenty-first century,
managed care has become an integral part
of the U.S. health care system. One of the most
traditional forms
of managed care is the
Health Maintenance Organizations (HMO's). Kaiser
Permanente is
an industry leader
and the largest non-profit Health Maintenance Organization
(HMO) in
the United
States. As HMOs such as Kaiser continue to
penetrate the markets
in which we live,
it's imperative that we evaluate Kaiser Permanente's system
that so
many Americans
depend on for their health care.
Our report
will illustrate how Kaiser Permanente
inherently damages the doctor-
patient relationship and interferes with the practice of
good, quality
health care in
America. An analysis of Kaiser Permanente's
structure, conduct,
and performance will
be presented using economic theory from a con perspective.
History
Kaiser Permanente is
an integrated health delivery
system that provides
healthcare through its health plans, hospitals and physician
medical
groups. Kaiser
started in the late 1930's as an industrial healthcare
program for
construction, shipyard
and steel-mill workers for the Kaiser Industrial
companies.
Dr. Sydney Garfield
established the first prepayment healthcare coverage for
workers.
At 5 cents per day
workers were provided with healthcare coverage for work
related problems.
For an
additional 5 cents per day workers could receive coverage for
non-job
related problems
(Kaiser, 2002).
With the
end of World War II and the workers
coming to an end at shipyards,
employees needing healthcare coverage steadily
decreased. This
in turn decreased Dr.
Garfield's medical staff from 75 to about a dozen.
Garfield did
not want to stop his new
form of healthcare delivery and Henry Kaiser wanted to help
him continue
this. In 1945
the Permanente Health Plan officially opened for community
enrollment.
Within ten
years of being available to the public the enrollment
surpassed 300,000.
At that point
the success of Permanente Health was largely due to the
unions enrolling
in the Los
Angeles area.
Kaiser
quickly grew and by 1982 had reached
membership of over four million
and expanded across the country to the north east including
Connecticut
and New York
and spread as far south as Virginia. Today Kaiser
has over eight
million members, 30
medical centers, 423 medical offices and employs over 11,000
physicians
and is
America's largest not-for-profit health maintenance
organization (Kaiser
2002). It is
divided into seven regions: California, Colorado,
Georgia, Hawaii,
Mid-Atlantic,
Northwest and Ohio.
During the
mid-1990's, Kaiser lost control
of its costs and posted three
consecutive years of losses. The losses had a
negative impact
not only financially but
also on patient care and satisfaction. during this
time Kaiser
backed out of several of
its' regions and dropped down to the current seven listed
previously.
The affect this had
on Kaiser economically is analyzed further in this
paper. In
recent years Kaiser's
financial situation has significantly improved.
Discussion
Structure
Market
Share
Kaiser
Permanente is a non-profit health maintenance
organization and
America's leading integrated health care
organization.
Kaiser's central offices are
located in Oakland, California, and serves members in nine
states and
the District of
Columbia. Appendix A displays the regions Kaiser
Permanente's
serves in the United
States. Kaiser Permanente comprises of Kaiser
Foundation Hospitals,
Kaiser
Foundation Health Plan, Inc., and the Permanente Medical
Groups (Kaiser,
2002).
Kaiser
Permanente has gained significant market
share during the years through
its consolidations and acquisitions. These mergers
will be discussed
in more detail
under the conduct section. Kaiser's 8.4 million
members represents
about 12 percent
market share of HMO members nationally.
Approximately five million
of those
members are located in California alone (Corporate Health
Care).
Kaiser is
characterized as an oligopolistic
firm due to the large market share it
holds in most of its markets. As an oligopoly,
Kaiser has considerable
negotiating
control over doctors, hospitals, employers, and patients,
which effectively
controls the
supply of healthcare. However, in some of Kaiser's
markets, there
is substantial market
share in which you find the organization bordering monopoly
power.
Membership
Membership
growth at Kaiser has increased significantly
over the years. Figure
1 displays the rise in membership at Kaiser with 8.4 million
members
as of June 2002.
Many analysts suggest that Kaiser under priced their products
in order
to gain market
share and increase membership during the early and mid
1990's.
Their low rates did
increase membership dramatically. With the increase
in membership
many surveys
shows that dissatisfaction with managed care has also risen
(NewsHour,
1998).
Figure
1 and Figure 2
With the
increase in membership, their operating
revenues have also increased
over the
years. Figure 2 displays the increase in
revenues with
$19.7 billion reported
for
2001. Additional information regarding their
performance
related to profits and
losses will
be discussed in more detail under the performance
section.
Integration
Kaiser
Permanente is the model for vertical
integration in the health care
industry. The organization includes the delivery
and financing
of health care by
integrating hospitals, physicians, home health, support
functions,
and insurance in their
system. Kaiser believes that having all these
together helps
to achieve better economies
of scale. This is achieved by the reduction in
costs that occur
by not having to pay
outside physicians. Having to use outside medical
care proved
costly for Kaiser by
contributing to the losses in the late 1990's. (This is
discussed further
under
Performance.)
Kaiser
operates the largest integrated health
care delivery system in the U.S, and
ranks among the five largest managed care firms in terms of
total membership.
Kaiser
sustains a strong market position, especially in California,
based
on its strong brand
name and reputation, significant operating scale as the
largest HMO
operator in the
state, and integrated approach to health care delivery and
financing.
while Kaiser's
integrated business model does carry intrinsic operating
challenges
and increased
intricacy, their model does provide the company selected cost
advantages,
a point of
differentiation in the market, and a sustainable competitive
advantage
(Meyer, 2002).
Barriers
to Entry
Kaiser has
experienced barriers to entry in
some markets in the country. For
example, on January 1, 2000 Kaiser was forced to close its
Northeast
division due to
operating losses. This shut down affected 575,000
members in
four states (New York,
Connecticut, Vermont, Massachusetts). The HMO was
unsuccessful
in attracting
enough Northeast customers to support its "West Coast style"
of managed
care. A
spokeswoman for Kaiser stated "We do best in urban, densely
populated
areas." In
1999, Kaiser sold its Texas HMO and closed its Charlotte and
Raleigh
Durham
operations in North Carolina. A consultant with
Kaiser reported
that the Northeast
region area of the country is not ready for Kaiser
Permanente's mode
of HMO
(Fredenheim, 1999).
Conduct
Mergers/Contracts
Most of HMO
mergers and acquisitions in 1996
involved for-profits, however in
the third quarter of 1996, 95 percent of all acquired
hospitals were
non-profits. More
notably, 80 percent of the buyers were non-profits.
Kaiser merger
and acquisition
activities from late 1996 to the present include:
-
Community Health Plan, Inc.,
Lathan, New York: 350,000
members.
- Humana Group Health Plan, Louisville,
Kentucky: 118,000 members
($60 million purchase price).
- Group Health Cooperative in Washington: 675,000
members.
- George Washington University Health Plan, based
in Washington,
D.C.:
88,000 members.
- Health Insurance Plan of Greater New York: 1,100,000
members.
The 1996 national health care
merger fury involved
close to 1,000 deals. In the
health
maintenance organization sector the average price paid
per health
plan enrollee
was around
$558. Kaiser paid $60 million - about
$508 per enrollee
- in its purchase of
Humana Group
Health (Corporate Health Care).
As a result of these
mergers you will find
an increase in patient dissatisfaction
and an increasing need for government to regulate the
activities of
Kaiser to prevent
deceitful activities (ASMS, 2002).
The idea
for an HMO to make more profits is
one of the main reason mergers
took place so fast. Some of these ventures faired
negative for
Kaiser in the '90's. They
tried to expand to fast into markets they didn't know very
well and
had trouble
managing care in these markets. They were finding
it more difficult
in these new
markets than in the markets where they'd been around a while
(Business
& Health Oct.
1999). In the past couple of years Kaiser has not
been merging
and actually backed out
of the Northeast market and it was taken over by an New York
based
HMO, Capital
District Physicians' Health Plan Inc.
There is
also the danger that all these mergers
and consolidation will limit the
competition among HMO's and allow them to impose price
increases at
will.
Another
side of merging for Kaiser was in the
form of reducing costs by forming
partnership with several suppliers. Several years
ago the organization
was looking for
ways to reduce costs and it began efforts to centralize the
purchasing.
It formed
national purchasing agreements with companies like Office
Depot and
Compaq
Computers. These agreements helped Kaiser save
about $100 million
in costs over two
years (Purchasing Feb. 12, 1998). Having agreements
like these
helps Kaiser form good
supplier-buyer relationships.
Kaiser
refers to this method of purchasing
as strategic sourcing. This is not
necessarily a negative item for the company unless due to
having these
contracts the
organizations may not be purchasing all products at the
lowest prices.
This may occur
because Kaiser is locked into a contract and may have to keep
purchasing
a specific
product even though it may be cheaper from a different
supplier.
Overall Kaiser feels
this is the best cost saving option for them.
Non-Price
Competition
Kaiser
Permanente has engaged in non-price
competition in the past by running
advertisements declaring medical decisions were "in the hands
of the
doctors." A
consumer group has taken Kaiser to court of the
false-advertising saying
it lured
thousands of new members by leading them to believe that all
medical
decisions were
made by the doctors they see (Colliver, January 7,
2002). This
is an example where
Kaiser's conduct (non-price competition) directly affected
their structure
(membership).
Legal
Tactics
As a
non-profit organization, Kaiser has taken
advantage of a legal technicality
to achieve
market dominance. Non-profit means that
they operate
on funds that are
used for
operating their business; they do not pay dividends
to stockholders
or make
distributions
to investors. They devote a higher
percentage of
their premiums to patient
care than
for profits. In addition, for Kaiser this
means that
they are free from paying
any federal
income taxes. However, the Internal
Revenue Service
does require them to
contribute
services to the community as a condition of its
non-profit
status. Figure 3
displays
Kaiser Permanente's 2001 community benefit spending.
Figure
3
Even with
$343 million going to community spending,
Kaiser brought in net
income of
$681 million. It seems Kaiser can be very
profitable
to the executives, who
are paid
high salaries (Makeover 62). Appendix A,
"The Money
Trail", demonstrates
how premiums
are entered in through the systems going to
Kaiser's Foundation
Health
Plans and
hospitals, distributed through for profit
operations such
as mergers and
acquisitions
and then has a significant amount of undisclosed
profits.
In our
evaluation, we found that Kaiser does
not differ much from the for-profit
health care organizations. Kaiser uses the same
economic and
management consultants
as many of the large for-profit corporations, implements the
same downsizing
strategies, uses the same care denial and standard of care
lowering
programs as the for-
profit health care sector, and makes the financial empires of
almost
all other health care
organizations look diminutive compared to Kaiser (Corporate
Health
Care). Many have
criticized Kaiser for trying to imitate the structure of
for-profit
HMOs and drifting off
course with overly aggressive expansion plans (Colliver,
March 31,
2002).
Performance
Profit
or Losses
Kaiser's
quick growth to almost nine million
members did not necessarily prove
profitable for the company at all times. Kaiser was
unprepared
for this growth and
could not accommodate the patients and had to send these
patients outside
the system
(Toledano 1998). These "outside claims" contributed
to $180 million
of Kaiser's 1997
loss. In 1997 Kaiser recorded $14.2
billion in operating
revenue and incurred a net loss
of $266 million (Business Wire, Feb. 19, 1999).
This trend continued
for the company
through the ninety's. during the mid-1990s, Kaiser
lost control
of its costs and posted
three consecutive years of losses. The worst, in
1998, was a
$288 million net loss
(Colliver, March 1, 2002). The company states that
a large part
of these losses were
due to a shortage of nurses and available beds as well as the
cost
to provide patient care
was greater than expected. These include
pharmaceuticals, price
of new drugs and
therapies and hospitalization costs (Business Wire, Feb. 19,
1999).
Kaiser's
financial situation has significantly
improved. According to Kaiser's
2001-2002 report, their operating revenues for 2001 were
$19.7 billion
and net income
$681 million. If Kaiser Permanente were a
for-profit company
they would rank 103 on
the 2001 Fortune 500 list (Kaiser, 2002).
Product
Price
Like most
other HMO's Kaiser has continuously
raised rates for its customers.
In Hawaii, Kaiser is the states largest health maintenance
organization
and for 2002
rates increase over 8 percent. This is the largest
increase in
over four years. Kaiser
cited the increase as being due to rising medical costs, new
technology
and investing in
new medical facilities (Sawada 2001). These rising
costs mainly
affected the small
businesses with fewer than 100 employees. In order
for these
businesses to survive they
will pass the majority of the increase on to the consumer or
ask the
employee to carry a
larger portion of the cost. These continued
increases in healthcare
costs are a
contributing factor to the large percentage of Americans
uninsured.
Product
Quality
Through our
research of Kaiser, we found example
after example of Kaiser's
negligence of good quality health care. As a Kaiser
customer,
you are limited to what
physician you can see and what hospital you can go
to. A tragic
example of Kaiser's
limitations of product quality was a six-month old boy that
had become
acutely ill.
After a long approval process from the Kaiser call center the
parents
were informed to
take their son to a hospital that was 45 minutes away from
their home.
The parents
passed three other hospitals on their way to the Kaiser
hospital, one
of which was a
renowned pediatric center. Once they arrived at the
Kaiser hospital
the doctors decided
to transfer the baby to the renowned pediatric center they
had passed
earlier. Their son
eventually had both hands and feet amputated due to Kaiser's
negligence.
The Adams'
sued Kaiser for medical negligence and the son was awarded
$40 million
and the
parents $5.5 million. As a Kaiser customer, lack of
freedom to
choose the best hospital
or the best doctor for you or your family can be a matter of
life or
death (Anders, 6-11).
Productive
and Allocative Inefficiency
Kaiser's
effort to be more efficient certainly
hasn't been in the best interests of
its consumers. The company implements strategies to
save money
and in turn has
negative implications to the people it serves. For
example, in
January 2000 Kaiser
implemented an incentive program for their telephone clerks
at their
call centers. The
clerks earned a bonus up to 10 percent of their salary if
they spent
less than three
minutes and 45 seconds on the phone and if they arranged
appointments
for 15 percent
to 35 percent of callers. Kaiser claimed this was a
pilot program
and discontinued it in
December 2001. A chief executive at Kaiser
explained that "we
choose not to provide
our patients with what they desired." Furthermore,
Kaiser documents
suggested the
program was implemented to "control demand" and save money
(Ornstein,
2002).
Another
example shows that due to the high
cost of emergency care, Kaiser
tightened up their definition of a covered
emergency. Kaiser
Permanente came up with
an especially artful definition of a covered emergency:
"medically
necessary health services for unforeseen illnesses or injuries that
require
immediate medical attention as
determined by Health Plan." Under that definition,
Kaiser can
be as liberal or as stingy
as it wants. It both administers and defines the
benefit, case
by case (Anders 137).
Technical
Progress
A positive
advancement for Kaiser is in the
technology field. the organization
invested over $2 billion in an electronic medical record
system.
This system is being
gradually phased in this fall starting with Northern
California.
The national clinic
information system is to encompass not only medical record
keeping
but also clinical
guidelines and is expected to enhance the clinical visit for
patients
(PR Newswire
Feb. 28, 2002). The concern with this new
advancement is that
it is sensitive to keeping
patient information secure. This could be a
positive advancement
for Kaiser but it is
important to ensure with the open access of the internet that
patient
confidentiality is
protected.
Conclusions
Our analysis illustrates that Kaiser focuses
more on managing money and
rationing care than on focusing on providing true quality
health care.
Kaiser sets limits on
a customer's ability to see specialists and tightly controls
their
usage of medical
services. In addition, Kaiser limits physicians in
giving quality
care by requiring them
to use the most cost-effective use of medicine.
Kaiser Permanente
is putting people's
lives at risk by ensuring their own financial success.
In order to
improve operations, Kaiser must
join forces with doctors,
employers, and regulators to develop treatment guidelines
that people
can trust.
Doctors must challenge Kaiser's managed-care-rules without
fear of
being fired.
Physicians and nurses must be free to practice their
profession to
the fullest level of
quality for the sole benefit of the patient.
Consumers must be
in charge of their own
care and their own lives. Freedom of choice must be
included
in the formula for Kaiser
to be a truly successful organization.
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financial Performance for 2001 Prepares
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28 Feb. 2002. 5 Nov. 2002
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APPENDIX
A
APPENDIX
B
https://kaiserpapershawaii.org/kpmoneytrail.htm
Source:
"Corporate Health Care - for
Profit, Not for Profit, or
Not for Patients: Kaiser
Permanente,." 1 Nov. 2002
Originally
located at:
http://www.calnurse.org/cna/kaiser/booklet/
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