History of the Kaiser Permanente Medical Care Program

The Permanente Foundation Hospital in Oakland after 1942 rebuild

The Permanente Foundation Hospital in Oakland after 1942 rebuild. (attribution: Kaiser Permanente)

Kaiser Permanente is a not-for-profit integrated health care organization based in Oakland, California, that serves as an umbrella for a federation of for-profit medical groups. The organization was founded in 1945 by industrialist Henry J. Kaiser and physician Sidney R. Garfield.

Today, Kaiser Permanente operates in nine states and the District of Columbia, and is the largest not-for-profit health maintenance organization in the United States, with 8.3 million health plan members, 134,000 employees, 11,000 physicians, 30 medical centers, 431 medical offices, and annual operating revenues of $22.5 billion.

Kaiser’s not-for-profit status is often challenged by critics since 50% of the umbrella organization’s profits go back to its for-profit medical groups.

Table of Contents

Introduction

Perhaps the best introduction to the Kaiser HMO and Kaiser Permanente Medical Care Program is the summary by Edgar Kaiser that the less Kaiser does for patients the more money it makes. To get the full context one can go to the University of Virginia* and review the presentation Mr. Kaiser (then Kaiser CEO) made to President Nixon through John Erlichman — the less they do the more they earn. This convinced President Nixon to go forward with the HMO Act of 1973 with Kaiser as the template. The conversation is recorded below within the Nixon White House Tapes:

John D. Ehrlichman: “On the … on the health business …”

President Nixon: “Yeah.”

Ehrlichman: “… we have now narrowed down the vice president’s problems on this thing to one issue and that is whether we should include these health maintenance organizations like Edgar Kaiser’s Permanente thing. The vice president just cannot see it. We tried 15 ways from Friday to explain it to him and then help him to understand it. He finally says, ‘Well, I don’t think they’ll work, but if the President thinks it’s a good idea, I’ll support him a hundred percent.'”

President Nixon: “Well, what’s … what’s the judgment?”

Ehrlichman: “Well, everybody else’s judgment very strongly is that we go with it.”

President Nixon: “All right.”

Ehrlichman: “And, uh, uh, he’s the one holdout that we have in the whole office.”

President Nixon: “Say that I … I … I’d tell him I have doubts about it, but I think that it’s, uh, now let me ask you, now you give me your judgment. You know I’m not to keen on any of these damn medical programs.”

Ehrlichman: “This, uh, let me, let me tell you how I am …”

President Nixon: [Unclear.]

Ehrlichman: “This … this is a …”

President Nixon: “I don’t [unclear] …”

Ehrlichman: “… private enterprise one.”

President Nixon: “Well, that appeals to me.”

Ehrlichman: “Edgar Kaiser is running his Permanente deal for profit. And the reason that he can … the reason he can do it … I had Edgar Kaiser come in … talk to me about this and I went into it in some depth. All the incentives are toward less medical care, because …”

President Nixon: [Unclear.]

Ehrlichman: “… the less care they give them, the more money they make.”

President Nixon: “Fine.” [Unclear.]

Ehrlichman: [Unclear] “… and the incentives run the right way.”

President Nixon: “Not bad.”

*The preceding transcript is from the University of Virginia for the clearest possible presentation (pathway discovered by Vickie Travis). Check – February 17, 1971, 5:26 pm – 5:53 pm, Oval Office Conversation 450-23. Look for: tape rmn_e450c.

Kaiser brags elsewhere that the HMO Act of 1973 was largely designed around its model. In many ways all of the US HMOs are Kaiser clones. Most, like Kaiser, have the hidden incentive formula whereby the physicians get a large benefit — really kickback — for every premium dollar saved (unspent).

Structure

Kaiser Permanente provides care through eight regional divisions. Each of these regions are comprised of three codependent organizations, a structure which has endured since Kaiser physicians and leaders agreed to this framework, known as the Tahoe Agreement, in 1955.

The organization defines its eight regions, or divisions, as:

  • Northern California
  • Southern California
  • Colorado
  • Georgia
  • Hawaii
  • Mid-Atlantic (vicinity of Washington, D.C. including Maryland and Virginia)
  • Northwest (Northwest Oregon and Southwest Washington)
  • Ohio

The three organizations which make up each regional entity are:

  • Kaiser Foundation Health Plans work with employers, employees, and individual members to offer prepaid health plans. The health plans are not-for-profit, public benefit corporations.
  • Kaiser Foundation Hospitals operate medical centers in three states and outpatient facilities throughout the Kaiser Permanente footprint. The hospital foundations are not-for-profit, public benefit corporations.
  • The Permanente Medical Groups are for-profit partnerships of physicians, which have responsibility for providing and arranging medical care for Kaiser Foundation Health Plan members in each respective region. The first medical group, The Permanente Medical Group, formed in 1948 in Northern California.

History

The history of Kaiser Permanente dates to 1933 in Eagle Mountain / Desert Center, California. There, Garfield opened the Contractors General Hospital, with twelve beds, to treat construction workers building the Los Angeles Aqueduct in the Mojave Desert. The hospital was in a precarious financial state, fueled by Garfield’s desire to treat all patients regardless of their ability to pay. Harold Hatch, an insurance agent, proposed that the insurance companies pay the hospital a total amount, in advance, for each worker covered. The financial relationship between the insurance companies and the hospital was efficient, and allowed Garfield to focus on a new idea: preventative health care.

Intrigued by the concept developed by Hatch and Garfield in the Mojave Desert, Henry Kaiser persuaded Garfield to open a prepaid practice for his construction workers building the Grand Coulee Dam in Washington state in 1938. Coverage was later extended to the families of the workers. In 1942, Kaiser established health plans for workers and families at shipyards in Richmond, California and Vancouver, Washington, and at a steel mill in Fontana, California. In 1945, Kaiser membership was opened to the public, as membership had dropped to 11,000 following World War II. When the shipyards closed in 1946, membership dropped to 25,000, from a height of 200,000.

Between 1952 and 1955, membership grew to 500,000, as Kaiser worked with union leaders to extend healthcare to all unionized employees. In 1958, Kaiser added Hawaii to its original three regions in Northern California, Southern California, and Oregon. Membership reached one million in 1963. In 1969, Kaiser added regions in Colorado and Ohio. Nine years later, in 1976, membership reached three million. In 1977, four years after the signing of the Health Maintenance Organization Act of 1973, all six of Kaiser’s regions became federally-qualified HMOs. In 1980, Kaiser acquired a non-profit group practice to create the Mid-Atlantic region, encompassing the District of Columbia, Maryland, and Virginia. In 1985, Kaiser added Georgia.

Kaiser has pulled out of four money-losing regions. Kaiser sold its Texas HMO in 1998. The problems in Texas were so severe that Kaiser directed its law firm to attempt to block the release of a Texas Department of Insurance report in 1997 – a report that prompted the state attorney general to threaten to revoke Kaiser’s license. In North Carolina, the Industrial Union Department of the AFL-CIO issued a 1996 report critical of Kaiser quality, and Kaiser closed health plans in Charlotte and Raleigh-Durham in North Carolina four years later. Kaiser closed its unprofitable Northeast division in 2000.

During the 1990s, Kaiser hired public relations firm Bain and Associates to position their brand in Washington, D.C. and gain influence with national opinion-makers. As a result, Kaiser executives were invited to participate in four White House special panels, and lead the testimony in both the Senate and House hearings. Kaiser spokespersons were also placed on MacNeil-Lehrer, First Business, and CBS Evening News to promote the Kaiser brand of HMO. A report by the California Nurses Association found that in 1995 Kaiser paid out $96.1 million to its top four management consultant firms alone.

In 1995, Kaiser celebrated its fiftieth anniversary as a public health plan. Two years later, membership reached nine million. In 1997, Kaiser established an agreement with the AFL-CIO to provide for a more positive relationship between management and labor, known as the Labor-Management Partnership.

In 1999, a number of groups sued the organization over its “In the Hands of Doctors” advertising campaign. The groups charged that doctors were not fully in control of decision-making, or that they were persuaded to limit care with financial bonuses. Kaiser Permanente pulled the ads, and in 2003 agreed to settle the claims by publicly publishing the guidelines under which its doctors make patient-care decisions.

In 2004, Kaiser launched a $40 million dollar ad campaign titled “Thrive”.  The television, radio, billboard, print, and web campaign focuses on the theme of preventive care. The television and radio spots feature voiceovers from actress Allison Janney. The campaign is the first since the organization pulled its “In the Hands of Doctors” campaign. Critics of the Thrive campaign accuse Kaiser of advertising fraud and racial profiling.

In 2005, The U.S. and state attorneys general penalized Kaiser Foundation Health Plan Inc., Kaiser Foundation Hospitals and the Hawaii Permanente Medical Group $1.9 million for making improper Medicare and Medicaid claims.

In 2005, the California Department of Managed Health Care (DMHC) levied an historic fine of $200,000 against Kaiser Permanente for disclosing patient information on a public web site.

Criticism

Kaiser’s policy of forcing patients with malpractice claims into arbitration has been highly controversial. Wilfredo Engalla died in 1991, after waiting 6 months just to have an arbiter appointed. The California Supreme Court found that Kaiser had a financial incentive to wait until after Engalla died; his spouse could recover $500,000 from Kaiser if the case was arbitrated while he was alive, but only $250,000 after he died. Patients and attorneys continue to fight for the right to sue.

Critics also charge Kaiser with decreasing service accessibility, accomplished by “managing” the information provided to patients regarding available services and how to access them. For example, Kaiser promotes less-costly preventive procedures while suppressing information about other elective and/or expensive services. Moreover, services are arranged to make them easy (e.g., primary care) or difficult (e.g., specialists) to utilize. Kaiser also uses delays for cost containment strategy. Kaiser implements delays through the need for referrals, limiting the number of contracted specialists, restricting appointment availability (or making appointments inconvenient), and by increasing office visit waiting periods.

In 2004, a patient sued Kaiser for elder abuse and was awarded $100,000 in arbitration. Other quality concerns include long ER wait times, that have resulted in a number of deaths. There are also concerns that doctors get bonuses for providing inferior care. In 2002 Kaiser call center reps were given bonuses for limiting doctor visits. There is also some concern about bias in quality measures, since the main measuring organization (NCQA) is funded and overseen by a coalition of HMOs, and doctors are paid bonuses to meet the measured criteria.

Critics have also accused Kaiser of exploiting patients for medical experiments. From 1989 to 1991, Kaiser along with the L.A. County Department of Health and the CDC, injected over 700 mostly minority babies with unlicensed experimental vaccines with fraudulently-obtained consent from the parents. Kaiser uses information from all patients to build proprietary population-management databases.

Kaiser’s Labor-Management Partnership has been criticized as an arrangement that dis-empowers workers. Union leaders bargain with management, and then present the outcome to workers as a non-negotiable fait d’accompli.

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