KAISER PERMANENTE: Posts $270 Million Loss For 1997
After posting a $265 million surplus in 1996, "Kaiser Permanente on Friday reported a startling $270 million loss for 1997, the first time that the pioneering HMO has lost money in its half-century history," the Los Angeles Times reports. The magnitude of the loss was more than five times greater than expected and "caught industry watchers off guard" (Olmos, 2/14). According to Kaiser CEO Dr. David Lawrence, "Kaiser was far off in forecasting rising costs, especially in its big Southern California unit." A major problem was that the HMO was unprepared to handle its surging membership -- which grew 19.8% last year -- which required it to send patients to more expensive hospitals outside of its system, the New York Times reports (Freudenheim, 2/14). In addition, Lawrence said Kaiser "missed the price turn in the industry" and, as a result, underpriced its products, with premiums that were 5% to 20% cheaper than those of competitors. Lawrence said, "When competitors began to raise prices, we didn't think they would raise them as much as they did." Other pressures included "rising medical costs, especially for pharmaceutical products," and a series of nurses' strikes (Los Angeles Times, 2/14). The San Jose Mercury News reports that "Kaiser covered the losses out of its ample cash reserves, which remained at $1.1 billion after the losses at the end of 1997" (Thurm, 2/14).
The Washington Post reports that "Kaiser's financial results mirrored the turbulence and uncertainty that has gripped many of the nation's health plans." Lawrence said it "served as 'a wake-up call for our organization.'" He said the HMO "is considering selling troubled business units, including money-losing regional health plans in Texas, North Carolina, Ohio and parts of New England" (Hilzenrath, 2/14). According to the San Francisco Chronicle, "[p]lans are being laid now to reduce the red ink for 1998 and beyond. But the HMO did not disclose how long it might take to deal with the problems --or even if another loss might follow in 1999." Cost-cutting strategies for 1998 include raising premiums, cutting executive pay, putting building projects on hold and scaling back outlays for costly pharmaceuticals (Hall, 2/14).