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Rising Costs Put Pressure on Kaiser

Insurance: System faces aging membership and increased competition. The way it meets the challenges may shape the direction of health care.

September 29, 2002|DON LEE | TIMES STAFF WRITER

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.

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