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Kaiser faces walloping new financial loss. (Kaiser Permanente)
San Francisco Business Times
| October 23, 1998 | Bole, Kristen | Copyright

Report pegs deficit near half a billion

Kaiser Permanente could face a bigger loss this year than 1997's deficit of $266 million, dashing hopes of a quick turnaround at the Oakland-based health system.

Kaiser officials said they have not yet projected final third quarter results, but spokeswoman Beverly Hayon acknowledged that the HMO expects "significant" losses. She called a report in Modern Healthcare that the annual loss may approach $500 million "fairly accurate."

Kaiser's losses have apparently been accelerating since June. For the first six months, Kaiser posted a loss of $33 million on $8.4 billion in revenues, a result that included $129 million in investment income. Just two years ago, Kaiser posted a $265 million profit.

Kaiser Permanente
Year             Revenues            Net Income
               (in billions)        (in millions)
1994                $12.3                $816
1995                $12.3                $550
1996                $13.4                $265
1997                $14.6              ($266)
1998(*)             $ 8.4               ($33)
* Through first six months
Source: Kaiser Permenente annual and half-year reports.

The red ink comes as Kaiser CEO David Lawrence has been tightening operations to turn around the managed care giant. Efforts so far include:

* Selling off its troubled Texas division this summer.

* Hiring CFO Dale Crandall in late April from APL Ltd., to bring private sector financial acumen to the nonprofit.

* Seeking out projects to cut or expand to improve profitability.

* Asking all staff to help trim costs.

"We are scrutinizing every operation, as is every health plan across the country," Hayon said, adding that efforts could include further sales like the Southwest division.

While outsiders say the system has made a good start, it clearly hasn't been enough yet to turn that big a ship.

"I think Kaiser has underestimated to some extent - and this shows up in their financials - the difficulty of making major changes in any large setting, particularly health care," said Glenn Smith, a consultant at Watson Wyatt & Co., in San Francisco. "It's going to take them a while to get that profit line back up."

The losses are partly due to Kaiser's early success in managed care, which enabled it to offer much lower rates than its competitors, especially in large contracts like the California Public Employees' Retirement System (CalPERS). Now, those contracts no longer cover the cost of care for its fast-rising 9.1 million patients.

That leaves the health plan struggling to renegotiate its prices, and proposing double-digit hikes to several key clients, including CalPERS and the Pacific Business Group on Health, which represents 32 of the largest employers in this area.

Added to the financial pressure on Kaiser, sources said, is its $2 billion, five-year investment in information technology, which it started last year. That project, which aims to set up long-term cost savings, has allegedly cost far more than expected. But Hayon said that was only one of the many converging factors involved, and one that can only be cut at the expense of future strength.

"You've got health-care costs going up, and they will always go up, and you've got operations that have already cut out all the obvious costs," she said. "Finding a way to balance that and still provide quality care, and do it in the black - those are the fundamental challenges of health care for the next century."