Kaiser's rising premiums spark employer backlash

By Chad Terhune

July 25, 2013 12 AM PT

For years, Kaiser Permanente has won accolades for delivering high-quality care at an affordable price.

The Oakland company’s unique HMO model kept a lid on costs, and big employers flocked to enroll their workers to the point that Kaiser has become the largest health plan in California, grabbing more than 40% of the market.

Now, some of Kaiser’s biggest customers are complaining that the company is no longer a bargain and, even worse, standing in the way of controlling healthcare costs. Critics say the company is so entrenched in the workplace that it refuses to negotiate rates or to fully explain why its premiums keep rising.

Kaiser rejects the criticism and says it remains a great value for employers and patients, offering superior care at rates that are often 10% below its rivals. It considers the mounting backlash a direct attack on the way it does business.

Employer frustration has flared up in recent weeks as officials in the city of Los Angeles, San Francisco and at the California Public Employees’ Retirement System bristled at Kaiser’s latest rate hikes.

At CalPERS, the nation’s third-largest healthcare buyer, Kaiser’s premiums have shot up 65% since 2007. In comparison, Blue Shield of California’s HMO rates have risen 50% and premiums for an Anthem Blue Cross preferred-provider plan have increased 43% for the same period.

For the city of Los Angeles, Kaiser’s premiums for a family have increased 34% in the last five years to $1,306 a month. Anthem Blue Cross charges the city 10% less, or $1,176 a month, for a family PPO plan.

“We are held hostage to Kaiser,” said Miguel Santana, the city’s top budget official and administrative officer. Like many workers, Santana is a satisfied customer himself, and three of his children were delivered at Kaiser hospitals.

But as an employer, he said that “Kaiser takes us for granted, and the frustrating thing is they are not willing to have a discussion about their increases.”

Many of Kaiser’s critics are rallying around state Senate legislation, SB 746, that would require the company to disclose more details on how it calculates rates and spends money. Some powerful interests are supporting the bill, including AARP, big labor unions and the Safeway grocery chain, while other health insurers and business groups have joined Kaiser in opposition.

Kaiser is different from most insurers because it runs 37 hospitals across the country, owns hundreds of medical clinics and has 17,000 doctors on salary. It collects an upfront premium from customers to cover all of their care and has an incentive to keep patients healthy as opposed to the conventional fee-for-service model that can produce wasteful spending.

Enrollment surges

The company sprang up during the Great Depression to treat laborers for five cents a day, a forerunner of the modern-day HMO. Enrollment boomed after World War II as Kaiser became the union plan for longshoremen, store clerks and other blue-collar workers.

“Low prices gave Kaiser its competitive edge with consumers and employers,” said Shana Alex Laverrada, director of health insurance studies at UCLA. “Now some of its luster is wearing off.”

All this comes as health insurers, hospitals and other medical providers nationwide face growing pressure from employers and policymakers to divulge more cost information. Amid that broader push, critics say, Kaiser stands out as a particularly impenetrable black box on rates.

Most health insurers give employers and regulators data showing what types of care -- such as hospitalizations, doctor visits or medical tests -- are rising the most in cost and whether it’s related to patients receiving more care or higher prices for those services. Employers consider those details crucial to identify alarming trends and figure out ways to rein in spending.

For its part, the HMO says it also provides employers detailed data on their medical costs, but it cannot be compared with other insurers because it operates so differently.

Employers and lawmakers are “trying to force us to report information in the same fashion as every other health plan, which basically breaks us apart at the seams,” said Teresa Stark, Kaiser’s director of government affairs. “It is undoing everything about Kaiser Permanente that does make us special. The message is Kaiser, you are doing it all wrong.”

Kaiser routinely receives high marks for its preventive care and overall performance from Medicare, outside experts and patient-safety advocates. Policymakers hold up the company as a model for how it coordinates care across its hospitals and physician offices.

The federal Affordable Care Act pushes other insurers and medical providers to collaborate in much the same way in hopes that will lead to better care at a lower cost.

“Kaiser’s health plan is one of the finest in the country, and it’s the model,” said Assemblyman Dan Logue (R-Marysville), who calls the legislation unnecessary.

The proposal would require all health insurers to submit more information to the state on rate increases for large employers. It has cleared the state Senate and awaits further action in the Assembly next month.

Some big customers defend Kaiser and say their rate increases are justified given Kaiser’s commitment to employee wellness and top-notch care.

William T Fujioka, L.A. County’s chief executive, said Kaiser gives patients unparalleled access to their doctors and that he personally enjoys swapping emails with his physician to book appointments and ask questions. Kaiser’s rates for the county have risen 7% annually, on average, the last five years.

“When we have asked Kaiser for information they have been forthcoming,” Fujioka said.

Kaiser’s critics insist additional disclosure isn’t an undue burden for a healthcare giant known for its electronic medical records and technology.

For its health plan, the San Francisco Health Service System found that Kaiser earned $87 million above its costs from 2010 to 2012, yielding a 15% profit margin. Kaiser disputes those figures.

“I believe Kaiser’s pricing is way beyond their costs,” said Lisa Ghotbi, chief operating officer for the San Francisco system. “Kaiser has profits that are higher than we can afford.”

Overall, the company reported $50.6 billion in revenue last year and net income of $2.6 billion.

Kaiser says that income is reinvested in its facilities and technology to the benefit of patients in addition to money spent on community projects that fulfill its nonprofit mission.

About 7 million of its 9 million customers are in California.

Despite vocal protests, the San Francisco health system, which includes 45,000 Kaiser members, approved a 5% rate increase from the company last month. Ghotbi said a decrease in premiums was warranted based on her analysis showing that Kaiser members have required significantly less care in recent years because of enrollment of younger, healthier families.

Ghotbi said the San Francisco plan’s use of Kaiser hospitals declined 36% since 2007, but Kaiser’s daily hospital charges rose 87% for the same period.

In contrast with Kaiser, Ghotbi said she meets regularly with executives of Blue Shield, area hospitals and physician groups to pinpoint worrisome trends in spending.

One recent problem was unnecessary ER visits. In response, San Francisco worked on the availability of urgent-care centers and promoted their use to employees.

“Kaiser is not willing to partner with employers who are paying the bill,” Ghotbi said. “It’s take it or leave it with Kaiser.”

Tough to change

Breaking up with Kaiser is hard to do for most large employers given the health plan’s sizable membership, popularity among workers and the upheaval that would ensue if every patient had to find a new doctor and hospital outside Kaiser.

“If we threw our current Kaiser members out, I think they would have our heads,” said J.J. Jelincic, a CalPERS board member who supports the state bill. “We are kind of stuck with each other. There is no one group that will be large enough to make Kaiser become more forthcoming. It has to be a collective effort.”

Two years ago, Jelincic said, he suggested closing new enrollment in Kaiser plans at CalPERS, but the idea failed to gain any support.

Workers are often shielded from Kaiser’s rising prices because of language in union contracts. Officials in Los Angeles and San Francisco want to change that.

Los Angeles city contracts with civilian employees say the “monthly subsidy for full-time employees shall increase by the increase, if any, in the Kaiser family rate.”

Santana, the city’s top budget official, said he wants the Kaiser reference removed and reimbursement tied to the lowest-cost plan to spur more competition over price.

Even unions, longtime Kaiser allies, have become some of the company’s toughest critics.

Several large unions representing hotel, casino and retail workers are backing the proposed legislation out of concern that Kaiser’s escalating costs are eating up money that could go into workers’ paychecks.

Up against this wide-ranging discontent, Kaiser acknowledges that it could do a better job of dealing with key constituents.

“To the extent we have fallen short with some customers,” said Wade Overgaard, a senior vice president at Kaiser, “I would say we have more work to do.”

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Twitter: @chadterhune

(BEGIN TEXT OF INFOBOX)

Rate increases for family plans, 2007 to 2014

Kaiser Permanente

64.8%

A $676 increase

Blue Shield

50.2%

A $569 increase

Anthem Blue Cross

42.7%