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Kaiser Seeks Cure for Its Ills

HMO to Take Measures to Stem Startling $270-Million Loss in 1997


Citing its own miscues and continued distress in the managed-care industry, Kaiser Permanente on Friday reported a startling $270-million loss for 1997, the first time that the pioneering HMO has lost money in its half-century history.

Kaiser said it will have to raise premiums for next year and take other steps to remedy its financial condition.

While a Kaiser loss had been expected, the magnitude was more than five times the firm's own projections and caught industry watchers off guard. Ironically, Kaiser traced its problems to its own success in attracting new members in California and being unprepared to handle them.

"It came as a surprise to us that losses were at this level," Dr. David Lawrence, Kaiser's chairman and chief executive, said at a news conference. Despite the loss, the nation's biggest HMO remains in "strong" financial shape, he said, while declining to predict whether the health plan would return to profitability in 1998.

Late last year, Kaiser officials had forecast a 1997 loss of about $50 million.

Kaiser also blamed the losses on problems that have struck other managed-care firms, including rising medical costs, especially for pharmaceutical products, and "industrywide competitive pressures." Kaiser has also conceded that nurses' strikes cost the company heavily last year.

In addition to boosting premiums for 1999, Kaiser said it will reduce hospital and pharmaceutical costs, scale back capital spending and expansion plans, and possibly sell off unprofitable health plans in several states.

"We have launched a series of initiatives that we believe are a prescription for improving our financial performance in the short term while at the same time laying the foundation for long-term stability into the next millennium," Lawrence said.

Industry observers said Kaiser's losses are particularly troubling because the HMO's nonprofit structure prevents it from raising capital in the stock market to cope with large deficits. Many of Kaiser's major competitors are for-profit managed-care firms.

Though Kaiser's HMO operations are nonprofit, it reports "earnings" annually. It says all earnings are reinvested in operations.

Kaiser rate hikes would be sour news for California employers who purchase medical insurance for their workers. Traditionally, Kaiser's premiums have been the cheapest--or nearly the cheapest--in the market. As the largest HMO in the state, Kaiser heavily influences pricing trends.

Lawrence said Kaiser will seek "moderate" rate increases in 1999 but he declined to give a specific estimate. An executive of a rival HMO predicted industry premium hikes of between 3% to 7% in 1999 as a result of Kaiser raising premiums.

Kaiser officials conceded that a misguided pricing strategy also helped get the company in trouble last year. But some competitors suggested privately that Kaiser deliberately undercut rivals' prices to grab market share, then found itself unable to make money on the new business.

"We missed the price turn in the industry," Lawrence said. "When competitors began to raise prices, we didn't think they would raise them as much as they did."

The result: Kaiser's premiums were 5% to 20% lower than the competition, according to industry sources. The cheap rates appealed to budget-minded employers. And that helped drive up Kaiser's U.S. membership by a record 20%, to 8.97 million last year.

Lawrence said Kaiser's network of hospitals and clinics were unable to keep up with the demand for medical services, and Kaiser's emergency rooms were particularly overburdened. Due to overcrowding, Kaiser frequently had to place its emergency rooms on "diversion" status, meaning ambulance drivers took patients to other community hospitals for treatment.

Kaiser said it failed to accurately forecast the cost of providing medical services to members treated outside its own clinics and hospitals, such as emergency room patients.

The resulting problems were especially acute in California, where membership boomed thanks to low prices and a recovering state economy, Kaiser officials said. Of the $270-million loss nationwide, Kaiser attributed about $180 million to deficits in California, with most of that total linked to Southern California losses.

Peter Boland, a Berkeley managed-care consultant, says Kaiser management was "asleep at the wheel" for failing to recognize that prices were headed upward in 1997--a trend predicted by many health-care forecasters.

But a Kaiser nurses union challenged the company's explanation of its losses.

The California Nurses Assn., which has been locked in a protracted contract dispute with Kaiser, accused the HMO of "hiding its real financial picture while cutting patient access to services and pushing its most experienced registered nurses and doctors out the door."

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