Kaiser misses repeating a $1 billion operating gain . . . this quarter

Kaiser has a potent weapon beyond its size and economies of scale—it knows its patients and has regular contact with its 11.7 million health plan enrollees.

Kaiser Permanente failed to repeat the record $1 billion in operating income it posted in the first quarter.

But the Oakland, Calif.-based hospital and health plan giant didn’t do terribly, posting $772 million, 57% more than the prior-year quarter.

Kaiser Treasurer Tom Meier said the company expected operating income to be lower in the second quarter. The company sets premiums at the start of the year but medical costs increase throughout the year, eating slightly into margins. That’s why Kaiser did not reach the same milestone, while investor-owned hospital chains such as HCA, Community Health Systems and Universal Health Services all complained of falling hospital admissions and fewer newly insured members.

Kaiser has a potent weapon beyond its size and economies of scale, said Chief Financial Officer Kathy Lancaster. The nation’s largest integrated system can earn $1 billion in operating income in a quarter—an eye-popping number for any healthcare system let alone a not-forprofit—because it knows its patients and has regular contact with its health plan enrollees, Lancaster said.

“You have to have continuity of membership,” Lancaster said.

Said a different way, Kaiser has one of the highest rates of membership retention in the industry. Turnover among Kaiser’s 8.4 million health plan enrollees in California during the first quarter of 2017 was just 5.8%, far better than the next closest competitor, Anthem Blue Cross of California, at 8%, according to the California Department of Managed Health Care.

That retention across all lines of business, including commercial and Medicare managed care, allows Kaiser to promote preventive care and head off avoidable health problems that can cause medical costs to skyrocket, Lancaster said.

“A $1 billion quarter is quite remarkable,” said Allan Baumgarten, a Minneapolis-based health market analyst who writes reports on managed care and hospital market conditions in eight states.

But Baumgarten said he’s not surprised because Kaiser, with its annual revenue of about $71 billion, has a track record for quality and efficiency and a unique operating structure. Kaiser owns 39 hospitals and contracts exclusively with Permanente doctors to provide care for its members, 95% of whom are covered on a capitated basis.

Lancaster said Kaiser’s first quarter is usually the most lucrative from an operating standpoint because the company receives capitated payments for any new members upfront and it usually takes them a few weeks or months to seek medical care.

Lancaster said frequent contact with enrollees, many of whom have been with Kaiser for years, allows Kaiser to keep costs in check. For example, Kaiser can track enrollees with chronic conditions to ensure they are getting their prescribed checkups and adhering to medication schedules.

The health system also leaves times open on mammography and other diagnostic equipment at doctor’s offices so that an enrollee who comes in for a cold, for instance, but failed to get a mammogram can literally be walked down a hall for the test, Lancaster said.

“If we can catch a cancer at stage 1 instead of stage 4, the chances of survival increase and the costs decrease, she said.

Kaiser’s 11.7 million members had 100 million medical encounters with Kaiser clinicians last year, 52% of which took place by email, secure communication portal or telemedicine, said CEO Bernard Tyson.

Kaiser views those checkups as crucial to keeping enrollees healthy, Lancaster said.

The proof is in Kaiser’s medical cost trends vs. the competition. In each of the past three years, Kaiser’s expenses have increased under 2% a year, lower than general inflation and less than half that of overall medical inflation.

Baumgarten said Kaiser’s quality reputation is such that it doesn’t have to market itself as a discount brand. In fact, the reverse is true, he said.

Premiums for customers, about 80% of which are employers and commercial customers, are typically comparable to those of for-profit competitors in California, such as Anthem and Aetna.

Kaiser delivers good value for its prices, he said. And as a not-for-profit, the system invests substantially in the communities it serves, Baumgarten said. That includes spending not only for medical facilities but for uncompensated care and health-related education and programs, he said.