The Kaiser Papers A Public Service Web SiteIn Copyright Since September 11, 2000
This web site is in no manner affiliated with any Kaiser entity and the for profit Permanente
Permission is granted to mirror this web site -
Please acknowledge where the material was obtained.



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
Productive and Allocative Inefficiency.........................................................................................................................
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

Kaiser Permanente membership growth that was too fast to keep the patients safe.

     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

Kaiser Community Benefit spending 2001.

     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.
 
 

References

"A National Agreement for PC's Reduces Buying Costs. (Kaiser Permanente's
     computer and commodity purchasing contracts)" Purchasing 12 Feb. 1998.
      http://www.findarticles.com/cf_0/m3148/n2_v124/20320838/print.jhtml

"A Positive financial Performance for 2001 Prepares Kaiser For Future Challenges."
     PR Newswire 28 Feb. 2002. 5 Nov. 2002
     http://www.findarticles.com/cf_0/m4PRN/2002_Feb_28/83345985/print.jhtml

Anders, George. Health Against Wealth:  HMOs and the Breakdown of Medical Trust.
     New York:  Houghton Mifflin Company, 1996.

Colliver, Victoria.  "David M. Lawrence; CEO led Kaiser through HMO Storm."
     The San Francisco Chronicle  31 March 2002. 6 Nov. 2002.
     http://www.consumerwatchdog.org/healthcare/nw/nw002337.php3
    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2002/03/31/BU1983.DTL&hw=David+Lawrence+CEO+led+
     Kaiser+through+HMO+Storm&sn=001&sc=1000

---."Lawsuit disputes Truth of Kaiser Permanente Ads."  San Francisco
     Chronicle 7 Jan. 2002. 1 Nov. 2002 http://www.consumerwatchdog.org/
      healthcare/nw/nw002149/php3
      http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2002/01/07/BU178030.DTL&hw=
       Lawsuit+disputes+Truth+of+Kaiser+Permanente+Ads&sn=001&sc=1000

---."Kaiser Profit Rises, Boosted by Increase in Premiums: Kaiser Turning
     a Health Profit." The San Francisco Chronicle 1 March 2002.  5 Nov. 2002.
     http://www.sfgate.com/cgibin/article.cgi?file=/c/a/2002/03/01/BU166644.
     DTL&type=printable
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2002/03/01/BU166644.DTL&hw=Kaiser+Profit+Rises+
Boosted+by+Increase+in+Premiums+Kaiser+Turning&sn=001&sc=1000

"Corporate Health Care - For Profit, Not for Profit, or Not for Patients: Kaiser
     Permanente." 1 Nov. 2002. http://www.calnurse.org/cna/kaiser/booklet

"Do monster mergers threaten managed care?" Business & Health October 1999.

Fredenheim, Milt. "Kaiser Permanente Is Shutting down Its HMO in the Northeast."
     New York times 19 June 1999. 3 Nov. 2002
     http://www.calnurse.org/cna/news/ny061999.html

"Kaiser Permanente Announces 1998 Financial Results"  Business Wire 19 Feb. 1999.
     http://www.findarticles.com/cf_0/m0EIN/1999_Feb_19/53910521/print.jhtml
     http://ckp.kp.org/newsroom/releases/98results.html

Kaiser Permanente.  Welcome to Kaiser Permanente 29 Oct. 2002.
     http://www.kaiserpermanente.org

Makeover, Michael E. Mismanaged Care: How Corporate Medicine Jeopardizes Your
     Health. New York: Prometheus books, 1998.

Managed Care and the Capital Coast Health Draft business Plan. ASMS Publications.
     5 Nov. 2002.  http://www.asms.org/nz/publications/draftcch.html

"Medical Inflation."  The NewsHour with Jim Lehrer Transcript June 22, 1998.
     4 Nov. 200.  http://www.pbs.org/newshour/bb/health/jan-june98/costs_6-
     22.html

Meyer, Douglas L. "Fitch Ratings assigns debt and IFS ratings to Kaiser."
      National Underwriter Life & Health-financial Services Edition 22 July 2002
     v106 i29 p28(1).

Ornstein, Charles. "Kaiser Clerks Paid More for Helping Less." The Los Angeles
     Times 17 May 2002.  1 Nov. 2002  http://www.consumerwatchdog.org/
     healthcare/nw/nw002440.php3

Sawada, Kirsten.  "Kaiser Permanente to Raise Coverage Rates." Pacific Business
     News 19 Oct. 2001. v39 i32 p25, http://web7.orgtrac.galegroup.com/
     itw/infomark/875/837/2625709927/

Toledane, Jessica  "Troubled Kaiser Taking Steps to Return to the Black."  Los Angeles
     Business Journal  30 Nov. 1998 http://www.findarticles.com/cf_0/m5072/
     48_20/53449801/print.jhtml
 
 

APPENDIX A

Kaiser Permanente Regions
 
 

APPENDIX B





http://www.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/
 
 


 


Back to businesspractices.kaiserpapers.org 

To The Kaiser Papers