Kaiser’s Obamacare rates surprise analysts

By Chad Terhune
Los Angeles Times, June 12, 2013

In California’s new state-run health insurance market, Kaiser Permanente will cost you.

The healthcare giant has the highest rates in Southern California and some other areas of the state, surpassing rivals such as Anthem Blue Cross and other smaller competitors. The relatively high premiums from such a strong supporter of the federal healthcare law surprised industry analysts, and it has sparked considerable debate about the company’s motives.

Some experts say Kaiser intentionally bid high to avoid drawing too many customers next year who are sick or who have been uninsured for years and may be costlier to treat. Others suspect Kaiser was worried that lower premiums would bring an influx of newly insured patients that could overwhelm its in-house roster of doctors and hospitals.

“Kaiser is not as low cost as many people think,” said Glenn Melnick, a USC health policy professor. “They appear to be protecting themselves because the people signing up in the first year are likely to be the sickest ones.”

Overall, Kaiser is the state’s biggest health insurer with a 40% share of the market.

(Marian) Mulkey of the California HealthCare Foundation said Kaiser has regretted being the low-cost option at times in the past and being overrun by too many members at one time. Other insurers may have more flexibility to add doctors and hospitals to their network as enrollment builds.

Kaiser, on the other hand, could face the costly decision to contract with outside hospitals to absorb some of its overflow.

“We are focused on sustainable prices for the long haul,” (Bill Wehrle, Kaiser’s vice president of health insurance exchanges) said. “If you make a large mistake in this environment, it can be hard to recover.”


Kaiser Permanente was the prototype health maintenance organization (HMO) that sparked the managed care revolution, seeking lower costs supposedly without compromising quality. So why should a low cost leader come in with the highest premiums for Covered California – California’s new exchange that is being established under the Affordable Care Act (ACA)?

The strategies and negotiations were secret, so we don’t really know. But there are a couple of possible explanations. Initial enrollment may include more people with health problems who need insurance, whereas healthier individuals may opt out since initial non-participation penalties are very small, and they can always join later. By Kaiser setting premiums higher, this initial influx of less healthy but more expensive patients would be diverted to competing plans because of the attraction of their lower premiums.

Another possible reason is that the current Kaiser patient population is relatively stable at about 40 percent of the California insurance market. When patients change their PPO or HMO plans that use provider networks, they do not have as much disruption as they do when they move into or out of Kaiser Permanente. Such a move always entails a complete change of their physicians and hospitals. Since Kaiser realizes that they have not only dominant market share but also a stable group of satisfied patients who do not want any disruption in their care, they know that they can charge a little bit more for their plans since patients are willing to pay the modest differences to avoid such disruptions.

There is another reason that is perhaps the most important of all. Kaiser Permanente is a truly integrated health care delivery system with its own hospitals, clinics, health care professionals and other components of the health care delivery system. They can provide virtually all services to every one of their plan members. Carefully planning and executing system capacity is absolutely essential in the Kaiser model.

Large, abrupt changes in enrollment can be catastrophic from a business perspective. If they lose too many patients all at once they are sitting there with expensive excess capacity that is not generating revenues. On the other hand, if they have a sudden large influx of patients, especially patients who would require greater amounts of health care, they would strain their capacity, with overloads in their primary care clinics, with patients destined for admission waiting in the hallways because the hospital’s beds are full, and with intolerably excessive queues for patients waiting for high-tech and specialized services. Obviously, they would have very unhappy patients.

Instead of making large, abrupt changes in their system capacity to match large fluctuations in patient enrollment, Kaiser controls their patient enrollment, keeping patients out if there are too many, or increasing aggressive marketing if there are too few. Under our fragmented, dysfunctional system of financing health care, it is only natural that Kaiser would adjust its patient enrollment to fit its business model rather than adjust its business model to better accommodate patients.

This issue of capacity is important. The United States needs to improve central planning since we have amongst the worse maldistribution of capacity. We have too many regions with excess capacity, which causes wasteful over-utilization, and other regions with deficient capacity, which impairs access to needed care. As a major player, allowing Kaiser to have autonomy in its planning takes good care of Kaiser but at a cost of fragmenting the systemic planning that we need.

Most proposed single payer models include integrated health systems such as Kaiser Permanente. Presumably Kaiser, like other players in the system, would negotiate global budgets, fees and capitation rates, and negotiate separate budgets for capital improvements.

But what about patient choice? The new accountable care organizations (ACOs) would still ensure patient choice, especially since, under the ACA rules, patients may not even know that they have been assigned to a particular ACO. Should Kaiser, which, in essence, is a transparent mega-ACO, be allowed to lock their patients into their own system when other ACOs cannot?

Suppose their patients had the freedom to come and go as they please. Would  the patient choices be that be much different from choosing another primary care entity that has well established referral patterns for high-tech and specialized services, and established practice relationships with other hospitals? Isn’t the goal of expanded information technology to provide a similar level of interconnectedness between all providers that Kaiser has within its own system?

Instead of being a closed system, shouldn’t Kaiser just be another choice for patients within the health care delivery system? Under a single payer system, that choice would not be based on price since single payer eliminates the need to shop prices. Rather choice would be based on perceived quality. Wouldn’t it be better if the various elements of the health care delivery system were knocking themselves out to be sure that they have very contented, healthier patients?

(Changing the Kaiser Permanente model is controversial. Today’s comment should not be considered a specific recommendation, but should be used to get people thinking about what type of structural reforms would best serve the interests of patients – all patients, not just Kaiser’s).