Kaiser Foundation Health Plan, Inc.

1933–2001

Total Assets: $17 billion (2001)

NAIC: 524114 Direct Health and Medical Insurance Carriers; 621999 All Other Miscellaneous Ambulatory Health Care Services

Kaiser Foundation Health Plan, Inc., providing its services under the Kaiser Permanente name, is the largest not-for-profit HMO in the United States. It now serves about 8.2 million members in 9 states and Washington, D.C. The Oakland, California-based organization underwrites the Permanente Medical Groups, which, through the care of over 11,000 physicians, furnish medical care to Kaiser Permanente subscribers. Describing itself as "an integrated health delivery system," Kaiser Permanente provides an array of services to its membership: it organizes and coordinates or provides its subscribers' health care (including preventive medicine), and it also provides other medical and pharmacy services through its network of Kaiser Foundation Hospitals and their subsidiaries.

1933-40: First Prepaid Health Insurance Plan Is Developed

What would eventually evolve into Kaiser Permanente initially began with no affiliation with the Kaiser Foundation. It was the creation of Dr. Sidney R. Garfield, a young surgeon who, during the Great Depression, saw a way to help the thousands then at work constructing the Los Angeles Aqueduct. To help accommodate the health-care needs of the workers, Garfield set out to build a small hospital in the Mojave desert. The result was Contractors General Hospital, an unassuming 12-bed facility located six miles from a small town called Desert Center.

Garfield faced problems, however, including insufficient funds to keep the hospital solvent. Among other things, insurance companies were slow to pay his patients' bills. Furthermore, some of the workers had no insurance at all, so the good doctor was often obliged to treat patients without any payment at all. He was helped out of his dilemma by Harold Hatch, a former engineer who became an insurance agent in the financial vicissitudes of the times. Hatch conceived of a plan whereby insurance companies would pay Garfield a fixed per diem up front based on the number of patients covered by their policies. That arrangement, the first prepayment plan, allowed Garfield to fund sufficiently the hospital's operation and focus much of his attention on preventive medicine. Thousands of workers entered the program at a great bargain price of just five cents a day, or ten cents if the workers elected to also gain coverage for medical problems arising from non-job related causes. The plan proved a tremendous success. However, when the aqueduct project neared completion, Garfield began making preparations for returning to private practice.

Enter Henry Kaiser, the founder of Kaiser Aluminum and one of the nation's last, self-made, old-school captains of industry. Kaiser had undertaken the responsibility of finding adequate health care for the 6,500 workers then building the Grand Coulee Dam, a major construction project that would take several years to complete. Contacted by Kaiser, Garfield took up the challenge of adopting his prepayment plan approach to the needs of the Grand Coulee Dam workers. He recruited doctors to work under the plan and saw to the renovation and modernization of an old hospital that could serve the construction workers.

Moreover, its net income fell off, from $848 million in 1993 to $550 million in 1995.

1941–1970

1940s-50s: Garfield's Health Plan Is Made Available to the Public

Like the Los Angeles Aqueduct project health-care plan, that undertaken at the Grand Coulee Dam was a major success. But when this construction project neared completion in 1941, it looked as if Garfield's innovative system of funding medical care was again going to be terminated. The events of December 7, 1941 soon changed the plan's prospects, however. World War II turned the United States into the "arsenal of democracy," and it gave Henry Kaiser another important role to play. Thousands of workers migrated to the Kaiser Shipyards in Richmond, California, where they were building everything from Liberty Ships to aircraft carriers. Kaiser again called on Garfield, this time to fill the healthcare needs of 30,000 workers and their families. Garfield, whose military obligation was deferred for the purpose, met those needs and in the process entered into a formal association with Kaiser that became the cornerstone of Kaiser Permanente.

At the war's industrial peak, with prepayment health-care plans in effect at Richmond and other Kaiser-run yards and factories in California, the plans served about 200,000 members. Membership quickly dropped, though, when the war ended. In order to keep the plans viable, in 1945 they were opened to the general public. Yet membership still fell to 25,000.

1960s: Kaiser Permanente Is Restructured and Expands

It would take a few years before the membership reached levels held during the peak of the war, but, by 1952, it had grown to over 250,000, thanks in part to major help from Los Angeles-region management and labor groups, including support from the International Longshoreman's and Warehousemen's Union and the Retail Clerks Union. Membership in the health plan doubled over the next three years, reaching the 500,000 mark in 1955. That year, Kaiser Permanente was reorganized. Its goal was to become more effective in facilitating partnerships with medical professionals and to provide physicians with a financial stake in its program. In its restructuring, the organization laid the foundation for what would be its mode of operation into the next century.

At the time of its restructuring, Kaiser Permanente had just its three west coast regions: northern California, southern California, and Oregon. In 1958, it establish a fourth region in Hawaii. It also continued to increase its membership at a steady pace. By 1963, it had enrolled over one million members, and, by 1968, two million members. In the next year, 1969, it also added two more regions: Colorado and Ohio.

1970-96: Steady Growth Despite Stiffening Competition

1976–1997

Kaiser Permanente's growth continued throughout the 1970s. By 1976, it membership climbed over the three million mark. Also, in the following year, all six of its regions gained federal qualification as HMOs, and three years later the organization again began expanding its geographic coverage when, in a joint venture with the Prudential Insurance Company of America, it established a group-practice prepayment plan in Dallas. The plan would later become Kaiser Permanente's seventh region.

In 1980, the organization established its first region in the eastern United States, in the Washington, D.C., area. At that time, it acquired a nonprofit practice prepayment plan that, in addition to the nation's capital, covered parts of Maryland and Virginia. The new region brought the organization's total number to eight. Two years later, after reaching an enrollment of four million members, Kaiser Permanente established a ninth region in the greater Hartford area in Connecticut. That region would later expand to include Fairfield County in Connecticut, Westchester County in New York, and the I-91 corridor area of Massachusetts.

The organization expanded again in 1985, when it added three more geographic regions to its total: Georgia, Kansas City, and North Carolina. Altogether, at that time, Kaiser Permanente had plans in 12 regions. The expansion into new geographic areas resulted in additional memberships, which, in 1987, reached five million, and by 1990, 6.5 million.

Although Kaiser continued to grow its membership at a steady rate, competition from smaller HMOs began taking its toll by the early 1990s, and between 1991 and 1993 its total number of annual subscribers dropped slightly, from 6.72 million to 6.59 million in 1993, and it did not climb above the 1991 enrollment again until 1995. Moreover, its net income fell off, from $848 million in 1993 to $550 million in 1995. Led by CEO Dr. David Lawrence and COO Richard Barnaby, Kaiser's management decided that the giant needed to pursue more aggressive growth. Accordingly, the company began seeking new acquisitions.

In 1996, the year following its 50th anniversary, Kaiser Permanente enrolled health plan membership reached 7.4 million. The company also established an affiliation with Community Health Plan of Albany, New York, adding 398,000 more members. In the next year, it also entered an affiliation arrangement with Group Health Cooperative of Puget Sound, adding its 670,000 members to its roll. In addition, it purchased part of the assets of Humana Group Health, Inc., in Washington, D.C., and acquired another 117,000 members. These additions brought Kaiser's total membership close to nine million.

Late 1990s and Beyond: Meeting Financial Challenges

It was also in 1997 that the organization took a groundbreaking step when it established a partnership with the AFL-CIO, becoming the first health-care management program to partner management with labor. The partnership was created to improve health-care quality for the plan's members and the communities it served while, at the same time, provide employees with the best possible employment and income security as well as afford them and their unions the opportunity to participate in policy planing and decision making.

1997–2002

However, despite its membership growth, Kaiser Permanente faced some tough problems in 1997. One year after posting a $265 million profit, for the first time in its history it went into the red, recording a loss of $266 million. Its deficits continued in 1998, causing Kaiser, still under the leadership of Dr. Lawrence, to take remedial action. Among other measures, the company sold off its stagnant Texas division to Sierra Health Services, sought projects to cut back in marginal areas or expand in profitable ones, and encouraged belt-tightening efforts throughout its staff. It also hired Dale Crandall from APL Ltd. as its CFO, hoping to tap into his private sector experience as a means to improving operations and profits. In the search for more profitable markets to enter, in 1998 the company also undertook a partnership alliance with Miami-based AvMed Health Plan, thereby gaining a foothold in Florida.

Analysts attributed Kaiser's woes partly to its inexperience in adapting to major changes as well as its rates, which, historically, had been lower than those of its competitors--rates which were no longer covering ballooning healthcare costs. Also, Kaiser had begun a five-year, $2 billion investment in technology, discovering along the way that it was proving far more costly than anticipated. These factors soon forced Kaiser to seek rate increases with some of its large-contract membership groups. In 1998, for example, it sought a 12 percent premium hike for members in CalPERS (California Public Employees' Retirement System), but its request was rejected. Elsewhere, when it did succeed in getting premium increases, the company found that it risked losing contracts to stiffening competition.

In its ongoing assessment of its fiscal condition, Kaiser decided to sell off its North Carolina operations. It announced its attention to do so in 1999 and followed through with its sale in 2000. That same year, the company opted to seek rate increases for its Medicare HMO, Medicare+Choice, to compensate for reductions in federal reimbursements. By 2001, these measures had helped improve Kaiser's financial condition. In February 2002, the company announced that the Kaiser Foundation Health Plan Inc. and Kaiser Foundation Hospitals and their subsidiaries, for calendar 2001, garnered a net income of $681 million. Membership had also grown to 8.2 million, up 122,000 from the previous year.

In March 2002, Kaiser Permanente announced that it was naming George C. Halvorson as its new chairman and CEO. At the time of his selection, Halvorson was president and CEO of HealthPartners of Minneapolis. He took his post in May. To help in the transition, Lawrence agreed to serve as chairman emeritus and act in an a close advisory relationship with Halvorson through the close of the year.