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This is a working section of The Kaiser Papers focusing specifically on The Permanente Medical Group.
Lessons from Nicholas A. Cummings >>>

An early fan of the Kaiser Permanente System Paul de Kruif changes his mind
and the reasons why

Kaiser Foundation Health Plan also
has delegated risk and clinical

management responsibilities to the
Northern California Permanente Medical Group (TPMG)

Physician Workflow At Kaiser Permanente

August 1, 2002
Mindset To Not Order Tests

Because ORC contractually guarantees a 5% reduction in costs, the program is appealing on the basis of quality as well as cost reduction.
Due to the following contents importance it is being presented exactly as published.

Remember this is about medical care and not banking and that it puts at risk patient lives.

From The Collected Papers of Nicholas A. Cummings; Volume II: The Entrepreneur in Psychology -

The Best Way to Move Public Policy - pp17 - 18

"It was at Kaiser Permanente that I learned that often the best way to move public policy (or such slow-moving bodies as the APA) is to form an organization that accomplishes that which was previously regarded as impossible, or undesirable. This resulted in my founding of a series of organizations, all of them surprisingly effective and successful.  It is probably that not only the importance of establishing new organizations to move policy was learned at Kaiser Permaentne, but also the organizational techniques that made them successful in spite of conventional wisdom to the contrary.  These included (1) doing it backward, (2) finding a need and filling it, and (3) standing on one's head to see the matter differently.  Undoubtedly my early mentors indoctrinated me with the believe that failure is not an option."  

Page 22 -

"In one of my many futile visits with executives of the insurance industry during which AHCIRSD pleaded the cause of professional psychology, Rog introduced me to Red Halverson, the executive vice president of the Occidental Life Insurance Company.  Red and I became instand friends, and since he was based in Los Angeles, I visited him frequently over the next several weeks to seek his advice.  He was liberal with his time, and during a succession of lunches and dinners together, Red grew very sympathetic to our cause.  He arranged for us to get together with H. Paul Brandes, a key attorney in the office of the California Insurance Commissioner.  This resulted in the conceptual breakthrough I had been seeking.

At that meeting, 45 years ago, Paul Brandes and I bonded, and we have remained close friends ever since.  He is retired now, but at one point, when he expressed unhappiness with the state bureaucracy, I was able to help im join the large legal staff of the Kaiser Health Plan.

Red and Paul pointed out how three words inserted by amendment into the insurance codes of the states would make it mandatory for insurers to reimburse psychologists if they reimburses psychiatrists.  After the word "physician" would be inserted "which includes psychologists."  They also pointed out this would be relatively easy to do if a stealth campaign were mounted with lightning rapidity.  What we had failed to do by persuasion, and what was not possible judically, we could do legislatively.  

page 23 - 1968

......When the insurance chairs assembled the day before the convention, we were delighted to see that 42 states were represented.  I chared the panel of Red Halverson and Paul Brandes, who walked the group through a do-it-yourself legislative kit.

Positioning the Company
pp 168-169
There are essentially three ways to position a company, and this must  be done at the outset as it is difficult to change once the company has succeeded (or failed): a start-up with exit strategy, a start-up in perpetuity, or an options-only strategy.


Most start-ups have as their goal an initial public offering (IPO) within five years.  The VCs insist on this as their best means for cashing out.  It also makes the founders' stock liquid, establishes a war chest to use for acquisitions, finances expansion, and wipes out debt.  At this point, ownership shifts from a closely held private company to one that is publicly traded; in the health industry, usually on NASDAQ.  If this is to be a strategy, it should be positioned in the business plan with factors that would signal the successful initiation of an IPO, as will be discussed later in this section.


Although the preceeding strategy is sought in almost every start-up there is an unusual kind of group, seemingly limited to healthcare, where the goal is one of perpetuation without an exit strategy.  The outstanding examples are the several Permanente Medical Groups that contract with the nation's original and largest HMO, the Kaiser Health Plan.  The purpose is to provide a stable, practitioner-owned environment in which to practice for one's entire career.  This strategy, which is particularly attractive to the practitioner, is discussed more fully elsehwere (Cummings, 1996).  

By Paul de Kruif:

Author of Kaiser Wakes The Doctors - Published 1943 Harcourt, Brace and company
158 pages

De Kruif, Paul, 1890-1971

Mr. de Kruif changed his mind about Kaiser and the following explains his decision -  as written in Time Magazine.

Last week Writer de Kruif recanted. In GP, published by the American Academy of General Practice, he violently attacked group practice in general, and the Kaiser plan in particular. Wrote De Kruif: "[I was] sold a bill of goods, that the ancient, close, personal relation between doctors and their patients—that's the pride and the unique distinction of family physicians—was no longer necessary . . . The good old family doctor? He'd soon be a relic, replaced by integrated groups of specialists, all streamlined under an ultramodern hospital roof . . . It dazzled me to watch the plan's huge profits build and actually pay off beautiful hospitals. I fell for the plan's economics offering what seemed complete surgical and medical care for a few dollars a month.

"But now . . . I know that . . . its physicians are not servants of their patients—but, primarily, of the bookkeeping of the plan. It isn't the condition of his patient that dictates the time and care the doctor devotes to the sufferer; it's the red and black of the plan's economics . . . .[That] isn't the kind of medicine I'd pick for my family.",9171,891142,00.html
In yielding control over clinical care decisions, all HMOs but Kaiser have limited
themselves to an oversight role. Whereas Kaiser Foundation Health Plan also
has delegated risk and clinical management responsibilities to the Northern
California Permanente Medical Group (TPMG), the health plan remains
involved in the operations of its closely affiliated providers.
The five largest delivery systems that are key institutions for improving

Physician Workflow At Kaiser Permanente

In his paper (Sep/Oct 05), J.D. Kleinke incorrectly states that Kaiser Permanente controls the workflow of the physicians it employs.

In fact, Kaiser Foundation Health Plan and Hospitals sells health insurance and operates hospitals. Permanente medical groups, owned and operated by physicians with independent boards of directors, provide medical care to health plan members, and it is they, therefore, that employ the physicians.

The medical groups, rather than the health plan, control the physicians’ workflow. As a result, physicians designed, as well as put in place, a robust clinical health information technology (HIT) system. Although this distinction might seem a small one, it carries larger strategic and operational implications.

Both parts of Kaiser Permanente agree on the benefits of advanced HIT systems, but physicians are responsible for the metrics of physician workflow, and they are also accountable for quality, service, and access. As Kleinke points out, a prepaid, integrated medical care system is more capable of concerted economic action than the fragmented fee-for service system that prevails in most parts of the country. In addition, eliminating an incentive for increased coding levels alters workflow design in potentially beneficial ways. Although such an approach need not necessarily improve quality or efficiency, it is at least one way to implement quality and service improvements in an IT-driven comprehensive health care system.

George K. York and Robert M. Pearl
The Permanente Medical Group Inc.
Oakland, California
L e t t e r s
HEALTH A F FA I R S ~ Vo l u m e 2 5 , Nu m b e r 2 5 6 9

The Kaiser physicians (Permanente Medical Group) lose alot of cases like this one because of a mindset to not order tests.  This is not told to the physicians but it is part of the culture. I worked for them as a contract physician and can speak first hand about it.  This lack of chest s-ray cost them $1,782,570.  That would pay for alot of x-rays.  A female aged 24 began having left posterior rib pain for no good reason.  This continued for six months and she continued to complain of the pain to her physicians including the ED. The patient was just put on pain meds until an internist finally did an x-ray.  The patient had a mass which turned out to be a Ewing's Sarcoma.  The patient is not curable at this time.  Most of the award was future earnings.  Kaiser had the audacity to say it wasn't their fault since the patient had her recurrent disease due to a non type 1 EWS/FU transmutation gene, which is usually lethal.,_2002_legal.htm

The Permanente Journal/Optimal Renal Care
Interview with Ramon Hannah, MD & Joe Carlucci, conducted by Scott Rasgon, MD

ORC was formed as a Limited Liability Corporation in August 1997 as a joint venture between Fresenius Medical Care North America (FMCNA) and Southern California Permanente Medical Group (SCPMG). Shortly thereafter, SCPMG offered half its interest in ORC to PermCo, which subsequently began offering to the Permanente Medical Groups the opportunity to invest in ORC.

How does Medicare fund dialysis care for patients seen in managed care and fee-for-service practices? What percentage of the Medicare budget is used for ESRD care?

J. Carlucci: Medicare funding for ESRD is changing. In the past, Medicare funded ESRD care through a "cost" program in which Medicare and the insurer shared in the Part A (hospital/facility) and Part B (professional or other practitioner) component, with Medicare assuming up to 80% of the allowed charges. This payment mechanism is being phased out under the Balanced Budget Act of 1997. Patients are now being converted to a "risk" plan, in which Medicare calculates the average costs for Part A and Part B payments on a statewide basis (the so-called average annualized per capita cost, or AAPCC) and gives the managed care plan 95% of that amount annually for the total cost of the patient's care. The managed care organization (MCO) is therefore "at risk" for keeping the cost of care below an average of about $3700 per patient per month (PPPM), equivalent to $44,500 per year nationally.

Progressively shifting costs to the private sector has long been a Medicare strategy. The Balanced Budget Act of 1997 provided for extending the Medicare secondary-payer period to 30 months; this means that individual insurers or health plans must pay the total cost of care for 30 months after the patient begins dialysis. Actuarial data suggest that the mean annual cost of care for an ESRD patient is between $60,000 and $80,000 per patient per year, versus the mean annual Medicare reimbursement amount, $44,500. Although ESRD patients represent <1% of the Medicare population, their care accounts for >6% of Medicare costs.

How does ORC generate income?

J. Carlucci: To date, ORC has signed three contracts on a capitated (ie, case rate) basis and is paid a fixed sum each month per ESRD patient. In addition, the payer reimburses ORC on a fee-for-service basis for the pre-ESRD patient population enrolled in the program.

ORC has also signed contracts with commercial underwriters to mitigate outlier costs or to purchase stop-loss insurance.

ORC generates income in two distinct ways. The first is by operating an effective, high-quality ESRD care program which produces cost savings by improving the health of ESRD patients, thus ensuring that they subsequently require fewer resources. At the end of the operating year, total cost of care is subtracted from total income derived from capitated payments; the surplus is divided (according to a preset formula) by ORC. After costs have fallen below the Medicare AAPCC (revenue to health plan from Medicare, using a capitated formula), cost savings are passed on to the health plan.

Income is generated also by providing preESRD services such as availability of a multidisciplinary team and various patient education programs, for which ORC charges a per-patient-per-month (PPPM) fee.

Health plans have a difficult time determining the actual annual cost of care for an ESRD patient. Within the KP system, the number seems to be between $55,000 and $65,000 PPPY; other health plans have reported expenses as high as $70,000 PPPY. Because ORC contractually guarantees a 5% reduction in costs, the program is appealing on the basis of quality as well as cost reduction.


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