Largest HMO gearing up for HSAs, expansion

Modern Healthcare

Industry stalwart Kaiser Permanente is gearing up for what it hopes will be a new chapter of membership growth even as it works to keep a read on rising costs and close the book on its troubled foray into kidney transplantation.

Over the past 18 months, Oakland, Calif.-based Kaiser has attracted almost a half-million new members, propelling its nationwide enrollment to an eight-year high of 8.6 million members as of June 30. And the company, already the nation’s largest not-for-profit HMO, continues to spend heavily on new construction designed to accommodate what it believes could be the addition of up to 2 million members by 2014.

Kaiser is banking in large part on the success of a new suite of consumer-driven products, called Custom Care, which it has been slowly rolling out over the past year in various regions.

On Aug. 15 the company is expected to unveil a new federally qualified health savings account for California, by far its largest market. The HSA, which will be available in January, follows the launch of a health reimbursement account in May.

Consumer-driven healthcare is a major departure for Kaiser, which has operated as a staff-model HMO since its founding in 1945. But much like the rest of the industry, the company is being forced to evolve to meet the changing demands of its customers, says Kaiser spokeswoman Beverly Hayon.

“We’ve been a one-product organization for all of our 60 years, so this represents a very big change for us,” Hayon said. “It’s a new business strategy for us, to be much more responsive to the marketplace in terms of what our employers need and what individual consumers are looking for.”

Kaiser‘s new product push comes less than two months after its chairman and chief executive officer, George Halvorson, returned to work after recovering from surgery following a heart attack suffered April 14 (May 1, p. 10).

The effort also comes just days after the company agreed to pay a record $2 million fine for endangering hundreds of patients enrolled in its Northern California kidney-transplant program during and after its startup in 2004. Kaiser closed the fledgling program in May amid allegations that a lack of administrative and clinical oversight resulted in delays in giving care to patients on the national transplant waiting list.

The fine, announced Aug. 10, is the largest to be levied by the state Department of Managed Health Care in its five-year history. Kaiser held the previous record of $1 million, imposed in 2002 after regulators determined that delays in emergency care led to the death of a patient in Hayward, Calif.

Under the settlement, Kaiser is also required to donate $3 million to a not-for-profit organ registry program. “The amount of this fine… reflects the extremely serious nature of Kaiser‘s oversight failures,” DMHC Director Cindy Ehnes said in a news release, adding that state regulators have broadened their investigation to determine whether Kaiser‘s entire Northern California operation routinely ignores or mishandles patient complaints.

Some consumer advocacy groups, however, dismissed the size of the fine as a mere slap on the wrist. “This doesn’t send a message to Kaiser,” said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights. “Kaiser probably spends a couple million on coffee every year.”

Indeed, Kaiser is on track to post its fourth straight year of annual profits totaling $1 billion or more, industry analysts said. The company has remained squarely in the black since 2000, after battling back from three years of heavy losses (March 6, 2000, p. 14). “They continue to have very strong profitability, a low debt burden and a good overall financial profile,” said John Wells, an analyst with Fitch Ratings.

Wells and others, however, predict the company’s bottom line will come under strain within the next few years because of growing cost pressures and a slowing in the rate of premium increases that the company can charge in an increasingly competitive market.

The company may already be showing the first signs of strain. In the second quarter, its net income slipped 25% to $272 million, even as its revenue jumped 10% to $8.5 billion on premium hikes and membership gains. As a result, its net profit margin narrowed to 3.2% from 4.7% a year earlier.

Kaiser officials, though, attributed the dip primarily to beefed-up investments in new construction, expansions, seismic retrofitting and technology upgrades. Its capital spending totaled $630 million during the second quarter compared with $547 million a year before.

The company has invested between $1 billion and $2.5 billion annually in capital improvements since 2001, and plans to spend at least $18 billion more through 2014. All told, Kaiser has 27 major construction projects under way, including nine new hospitals, 12 replacement hospitals, and facility expansions in several regions where it’s seeing significant membership and population growth.

Kaiser wants to avoid the capacity crunch it faced in the late ’90s, when a rapid surge in enrollment forced the company to send members to providers outside its own system, boosting costs and cutting deeply into its profit margins, says Bob Eisenman, Kaiser‘s director of strategy and external relations. “Our strategy is to build capacity… with an eye on anticipated growth so that we don’t run into problems down the road,” he said.