At risk of being toppled from its perch as the king of health care, Kaiser Permanente plans to slash expenses in Southern California by more than $800 million over five years in a dramatic restructuring aimed at fending off its rivals, according to a confidential business plan.
The changes are outlined in the 213-page internal plan for Kaiser's 2.2-million-member Southern California operations. The plan, a copy of which was obtained by The Times, offers an extraordinary glimpse at how marketplace competition is forcing the nation's largest health care plan to remake itself.
For example, Kaiser said it is considering closing or consolidating some Southern California hospitals and sending some patients to outside hospitals--a major cultural shift in an organization where for decades members have been treated exclusively by "Kaiser doctors" and "Kaiser hospitals."
Kaiser also plans to increase the bonuses paid to doctors for holding down costs, such as sending patients home earlier from the hospital. Similar financial incentives are widely used by other health insurers, which contend they are necessary to discourage costly over-treatment.
Kaiser's most glaring problem is an erosion of its California membership, which includes 2.4 million members in Northern California. Kaiser lost a total of nearly 100,000 members in Southern California in 1993-94, but membership is up a modest 30,000 in 1995, Kaiser executives said. Meanwhile, rival, for-profit HMOs such as Health Net, CaliforniaCare and PacifiCare have been enjoying brisk overall growth rates of about 15% annually.
Moreover, Kaiser executives concede that the HMO has been far less successful at controlling costs than its competitors. For years, Kaiser built its business by promising employers quality care and the lowest medical premiums in the market. Now many other health plans--eager to gain market share--commonly underbid Kaiser.
"We are a high-fixed-cost organization and we can't continue to survive if we keep losing members," said Hugh Jones, executive vice president for Kaiser's Southern California operations.
Kaiser is "being picked apart by much leaner, quicker, more flexible" HMOs, said Peter Boland, a Berkeley health care consultant.
Unlike Kaiser, which owns its own hospitals and clinics, most other HMOs contract with hospitals and medical groups to supply services. In a hotly competitive market such as Southern California, that gives so-called network model HMOs such as Health Net or PacifiCare the flexibility and leverage to negotiate steep discounts with doctors and hospitals.
