Why Isn’t Kaiser Less Expensive?

(tedeytan: Flickr)

(tedeytan: Flickr)

The federal health law aims to tackle the problem of high health care costs by providing financial rewards to providers who do a better job coordinating patient care. But one shining example of that future has been here in California for decades. It’s Kaiser Permanente which is often touted as the nation’s best hope for bringing health care costs more in line with other developed nations.

Kaiser rose out of a utopian, industrialist dream. During the 1930s and 40s, Henry J. Kaiser wanted to make sure the workers at his Richmond shipyard were steady and strong.

George Halvorson, Kaiser’s CEO, draws a direct link between Henry Kaiser’s approach to building ships and his approach to designing a health system. “When Henry built things he tended to assemble an entire team to build all the parts,” he says. “So when he started providing health care to his workers, he used that model which was to have a Kaiser hospital, Kaiser clinics.”

“They got to where they are, in part, by being the cost leader in the market. And they no longer are.”
Kaiser Permanente opened its doors to the public in 1945 — and offered health coverage that was considerably less expensive than conventional insurers like Blue Cross.

The strategy worked because it owned and operated its own hospitals and clinics and directly employed physicians.

But Mark Smith, head of the California Health Care Foundation, says Kaiser Permanente is no longer the bargain it used to be. “They got to where they are, in part, by being the cost leader in the market. And they no longer are.”

Indeed, health care researchers and Kaiser’s biggest customers, say the price gap between Kaiser and other insurance companies has narrowed or closed altogether. One of those big customers is CalPERS, the state agency that manages benefits for current and retired public employees. In recent years, CalPERS has negotiated premiums with Blue Shield that are less expensive than Kaiser, something nearly inconceivable in the past.

Smith says because Kaiser is both the insurer and the health care provider, the company hasn’t faced much competition. “They’re not really pressed to be that much cheaper,” he says. “They’re kind of ‘shadow pricing,’ is what the economists would say. So if your competitor takes $4 to make a banana and it only takes you $2 to make a banana, you price your banana at $3.95 — and you pocket the rest.”

That’s a charge Halvorson vigorously denies.  “We’re at least 10 percent better everywhere. Sometimes we’re 15-20 percent less expensive.”

Kaiser sets its rates, says Halvorson, based on how much it spends on patient care. It has nothing to do with what other insurers are charging. And he adds, Kaiser offers richer benefits than other plans. “Everybody else is stripping their benefits package down. So they’re putting in higher and higher deductibles, and that’s just shifting the cost to the employee.”

Since negotiations between health plans and employers are largely confidential and each insurance plan offers different services, it’s difficult to discern just how Kaiser fares against other companies. In documents filed with state regulators, Kaiser Permanente says the cost of running its entire operation increases by about 5 percent each year.

But some of Kaiser’s biggest customers –- companies that are household names in California –- say their premiums have jumped much higher, in some cases 20 percent.

David Lansky heads the San Francisco-based Pacific Business Group on Health which represents large employers. “Kaiser seems to have difficulty of explaining why their price is what it is,” Lansky says. “So they can’t explain it well to the benefits manager at a large company who then can’t explain it to his or her boss. Why should we keep Kaiser? Why is this price legitimate? If Kaiser can’t document their internal cost structure and pricing, then there’s a whole chain of mistrust that gets generated because of the lack of transparency and clarity.”

The frustration seems to stem in part from the very trait that makes Kaiser so good at taking care of patients: it doesn’t price out procedures, tests and doctor’s visits on a menu of fees. These so-called fee schedules are often arbitrary. A procedure can cost a thousand dollars at one hospital and 10-thousand dollars elsewhere.

“Fee schedules are a very primitive way to buy care,” Halvorson says, adding that Kaiser’s focus on patient outcomes is what matters. “We have cut the rate of broken bones for our seniors by about 40 percent. And we do nine things for the seniors to cut the broken bones. Six of the nine things do not show up on the Medicare fee schedule.”

Still, large employers say because Kaiser doesn’t price out its services, it’s difficult to know why premiums rise every year. One large employer, who was not authorized to speak publically because negotiations are confidential, told me Kaiser’s rate increases don’t seem to reflect changes in the use of Kaiser services.

David Lansky says Kaiser is much more efficient than other insurers and providers. For example, patients can avoid unnecessary office visits by talking with doctors over email. But Lansky says employers — who pay the bills — aren’t yet seeing the savings.

“It’s a little bit of what we went through with the banks when they went to ATMs and stopped having tellers in the retail points of service. You’d think that would have lowered costs. Instead, we started seeing fees at the ATMs,” Lansky says. “A lot of us in health policy land have scratched our heads a bit and said, ‘Well, why can’t Kaiser be a heck of a lot cheaper?’”

Bob Kocher, now a partner at the venture capital firm Venrock, served as a health care advisor to President Obama. Kocher is a big fan of Kaiser’s highly coordinated system. He says the Kaiser model was in the back of many policy makers minds when they pushed to include in the federal health law financial enticements for hospitals and doctors to essentially form Kaiser look-a-likes.

Still, Kocher says he hopes the Kaiser model would deliver steeper savings. “How do we unleash that sort of pressure on price, to have them not be compelled to raise their prices by nine to 10 percent a year?”

Kocher and other health policy experts suspect the pressure to compete might come when –- and if –- those Kaiser mini-me’s get off the ground.

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