However, the nonprofit provider and health plan warned subsequent quarters may be less profitable as expenses are projected to climb.
Dive Brief:
Nonprofit hospital and health plan giant Kaiser Permanente reported a $7.4 billion net gain for the first quarter ended March 31, compared to an income of $1.2 billion reported in the same period last year.
The Oakland, California-based operator’s earnings were boosted by its completed acquisition of Geisinger Health, which netted Kaiser a one-time operating gain of $4.6 billion.
Kaiser reported a quarterly operating margin of 3.4%, but noted the first quarter tends to be its strongest due to the timing of the open enrollment cycle. Kaiser predicts revenues will remain steady during subsequent quarters but expenses will likely rise.
Dive Insight:
Kaiser operates 40 hospitals, according to its website, and serves nearly 12.6 million health plan members as of the first quarter.
During the quarter, Kaiser subsidiary Risant Health — a nonprofit health network created last year to independently buy and operate other nonprofit health systems — completed its purchase of Geisinger Health. Kaiser received a one-time payment, boosting earnings. Net income for the quarter excluding the Geisinger transaction was $2.7 billion.
Kaiser increased its operating income year over year by more than 300% to total $935 million. Still, the nonprofit provider said that figure fell short of income logged prior to the pandemic.
Continued cost pressures from high utilization, care acuity and rising prices of goods and services drove quarterly expenses up 6% year over year to total $26.5 billion.
Kaiser has conducted at least three rounds of layoffssince the fall. It most recently cut 76 employees at the beginning of this month, a spokesperson confirmed to Healthcare Dive.
The cuts were done to “reduce costs across our organization,” and primarily impacted information technology and marketing roles, the spokesperson said via email.
Kaiser is not on a hiring freeze, the spokesperson noted. The organization has increased headcount by 5% since 2022 and has open positions currently listed online.
The Wall Street Journal also reported this weekend that Kaiser is attempting to sell $3.5 billion of its private investment holdings due to liquidity issues, citing sources familiar. Kaiser may attempt to sell further holdings later in 2024, according to the report.
Kaiser did not respond to requests for comment by press time about the possible sale.
Kaiser Permanente built on 2023’s strong start with $2.08 billion of net income during the quarter ended June 30, bringing its midyear total to about $3.29 billion, the integrated system announced late Friday.
Operating income was also strong at $741 million (2.9% margin) and raised the organization’s six-month performance to $974 million (1.9% margin).
The numbers are both a sequential improvement and a stark turnaround from 2022. By the midpoint of that year, Kaiser Permanente was reporting a $1.3 billion net loss for the quarter and an $89 million operating gain (0.4% margin). Across 2022’s first half, the system had been down a total of $2.26 billion and added just $17 million from operations (0.0% margin).
The Oakland, California-based nonprofit is likely safe from repeating the nearly $4.5 billion net loss and $1.3 billion operating loss of full-year 2022.
Leadership, however, noted that the integrated system historically sees higher operating margins during the first half of the year “due in part to the annual enrollment cycle and seasonal care.”
“Our second-quarter financial results reflect operational improvements that, together with our ongoing expense reduction efforts, will help us face additional financial pressures in the second half of the year,” Kathy Lancaster, executive vice president and chief financial officer at Kaiser Permanente, said in a release. “The process of building our financial performance back to pre-pandemic levels requires that we continue to redesign our cost structure to support investments in our facilities, technology and people while staying competitive in a dynamic healthcare marketplace.”
Kaiser Permanente reported $25.17 billion in operating revenues for the second quarter, a 7.2% increase year over year. Operating expenses increased 4.5% year-over-year to $24.42 billion.
“Like all health systems, Kaiser Permanente is experiencing ongoing cost headwinds and volatility driven by inflation, labor shortages, and the lingering effects of the pandemic on access to care and service,” the system wrote in a release.
Kaiser Permanente’s membership has increased by more than 81,000 members since the start of the year and sits at almost 12.7 million as of June 30. The organization noted that it has kicked off an outreach campaign for Medicaid members “to ensure they have critical enrollment information as states go through the mandated process of eligibility redetermination.”
The largest impact on Kaiser Permanente’s bottom line came from investments. Owing to “favorable financial market conditions,” the organization recorded $1.34 billion in “other income and expense,” nearly a full reversal of the $1.39 billion loss on the same line item it’d logged during the same period last year.
The system’s capital spending reached $824 million for the quarter, which was up from $789 million during the second quarter of 2022 but a pullback from the first quarter of 2023’s $930 million.
“The post-pandemic financial pressures have led many in the industry to cut back on care and service,” CEO Greg Adams said in an accompanying statement. “At Kaiser Permanente, we remain focused on improving access and affordability for our patients, members and communities, which requires continued investment in care and coverage. … I want to thank all employees and physicians for turning the disruptions and challenges of the past three years into opportunities to make our healthcare system stronger and more equitable, with improved outcomes for all.”
Kaiser Permanente is the largest nonprofit health system in the country by revenue with more than $95 billion in annual revenues. As of June 30, it spanned 39 hospitals, 622 medical offices and 43 clinics in addition to its millions of covered health plan members.
Earlier in the year the system highlighted efforts to trim administrative and discretionary spending as well as a workforce push that improved clinical hiring by 15% year over year. It is in the midst of negotiating a new labor contract covering 85,000 unionized healthcare workers who are seeking workforce development investments and higher staffing levels across clinical settings.
The organization is also working toward its high-profile acquisition of fellow integrated nonprofit Geisinger Health, which Kaiser Permanente said would be the first step toward a cross-country value-based care organization called Risant Health.
For decades, research studies and news stories have concluded the American system is ineffective,
too expensive and falling further behind its international peers in important measures of performance: life expectancy, chronic-disease management and incidence of medical error.
As patients and healthcare professionals search for viable alternatives to the status quo, a recent mega-merger is raising new questions about the future of medicine.
In April, Kaiser Permanente acquired Geisinger Health under the banner of newly formed Risant Health. With more than 185 years of combined care-delivery experience, Kaiser and Geisinger have long been held up as role models of the value-based care movement.
Eyeing the development, many speculated whether this deal will (a) ignite widespread healthcare transformation or (b) prove to be a desperate attempt at relevance (Kaiser) or survival (Geisinger).
Whether incumbents like Kaiser Permanente and Geisinger can lead a national healthcare transformation or are displaced by new entrants will depend largely on whether they can deliver value-based care on a national scale.
In Search Of Healthcare’s Holy Grail
Value-based care—the simultaneous provision of high quality, convenient and affordable medical care—has long been the aim of leading health systems like Kaiser, Geisinger, Mayo Clinic, Cleveland Clinic and dozens more.
But results to-date have often failed to match the vision.
The need for value-based care is urgent. That’s because U.S. health and economic problems are expected to get worse, not better, over the next decade. According to federal governmental actuaries, healthcare expenditures will rise from $4.2 trillion today to $7.2 trillion by 2031. At that time, these costs are predicted to consume an estimated 19.6% of the U.S. Gross Domestic Product.
Put simply: The U.S. will nearly double the cost of medical care without dramatically improving the health of the nation.
For decades, health policy experts have pointed out the inefficiencies in medical care delivery. Research has estimated that inappropriate tests and ineffective procedures account for more than 30% of all money spent on American medical care.
This combination of troubling economics and untapped opportunity explain why value-based care has become medicine’s holy grail. What’s uncertain is whether the transformation in healthcare delivery and financing will be led from inside or outside the healthcare system.
Where The Health-System Hopes Hang
For years, Kaiser Permanente has led the nation in clinical quality and patient outcomes based on independent, third-party research via the National Committee for Quality Assurance (NCQA) and Medicare Star ratings. Similarly, Geisinger was praised by President Obama for delivering high-quality care at a cost well below the national average.
And yet, these organizations, and many other highly regarded national and regional health systems, are extremely vulnerable to disruption, especially when their strategy and operational decisions fail to align.
Kaiser, for its part, has struggled with growth while Geisinger’s care-delivery strategy has proven unsuccessful in recent years. Failed expansion efforts forced KP to exit multiple U.S. markets, including New York, North Carolina, Kansas and Texas. More recently, several of its existing regions have failed to grow market share and weakened financially.
Meanwhile, Geisinger has fallen on hard times after decades of market domination. As Bob Herman reported in STAT News: “Failed acquisitions, antitrust scrutiny, leadership changes, growing competition from local players, and a pandemic that temporarily upended how patients got care have forced Geisinger to abandon its independence. The system is coming off a year in which it lost $240 million from its patient care and insurance operations.”
Putting the pieces together, I believe the Kaiser-Geisinger deal represents an industry undergoing massive change as health systems face intensifying pressure from insurers and a growing threat from retailers like Amazon, CVS and Walmart. This upcoming battle over the future of value-based care represents a classic conflict between incumbents and new entrants.
Can The World’s Largest Companies Disrupt U.S. Healthcare?
Retail giants, including Amazon, Walmart and CVS, are among the nation’s 10 largest companies based on annual revenue.
They have a broad geographic presence and strong relationships with almost all self-funded businesses. Nearly all have acquired the necessary healthcare pieces—including clinicians, home-health services, pharmacies, insurance arms and electronic medical record systems—to replace the current medical system.
And yet, while these companies expand into medical care and financing, their core businesses are struggling, resulting in announced store closures and layoffs. As newcomers to the healthcare market, they have been forced to pay premium dollars to acquire parts of the delivery system. All have a steep learning curve ahead of them.
The Challenge Of Healthcare Transformation
American medicine is a conglomerate of monopolies(insurers, hospitals, drug companies and private-equity-owned medical practices). Each works to maximize its own revenue and profit. All are unwilling to innovate in ways that benefit patients when doing so comes at the sacrifice of financial performance.
One problem stands at the center of America’s soaring healthcare costs: the way doctors, hospitals and drug companies are paid.
The dominant payment methodology in the United States, fee-for-service, rewards healthcare providers for charging higher prices and increasing the number (and complexity) of services offered—even when they provide no added value.
The message to doctors and hospitals is clear: The more you do, and the greater market control you have, the higher your income and profit. This is the antithesis of value-based care.
The alternative to fee-for-service payments, capitation, involves paying a single, up-front sum to the providers of care (doctors and hospitals) to cover the total annual cost for a population of patients. This model, unlike fee-for-service, rewards effectiveness and efficiency. Capitation creates incentives to prevent disease, reduce complications from chronic illness, and diminish the inefficiencies and redundancies present in care delivery. Capitated health systems that can prevent heart attacks, strokes and cancer better than others are more successful financially as a result.
However, it’s harder than it sounds to translate what’s best for patients into everyday decisions and actions. It’s one thing to accept a capitated payment with the intent to implement value-based care. It’s another to put in place the complex operational improvements needed for success. Here are the roadblocks that Kaiser-Geisinger will face, followed by those the retail giants will encounter.
3 Challenges For Kaiser-Geisinger:
Involving Clinical Experts. Kaiser Permanente is a two-part organization and when the insurance half (Kaiser) decided to acquire Geisinger, it did so without input or involvement from the half of the organization responsible for care-delivery (Permanente). This spells trouble for Geisinger, which must navigate a complex turnaround without the operational expertise or processes from Permanente that, in the past, helped Kaiser Permanente grow market share and lead the nation in clinical quality.
Going All In. To meet the healthcare needs of most its patients, Geisinger relies on community doctors who are paid on a fee-for-service basis. Generally, the fee-for-service model is predicated on the assumption that higher quality and greater convenience require higher prices and increased costs. With Geisinger’s distributed model, it’ll be very difficult to deliver consistent, value-based care.
Inspired Leadership. Major improvements in care delivery require skilled leadership with the authority to drive clinical change. In Kaiser Permanente, that comes through the medical group and its physician CEO. In Geisinger’s hybrid model, independent doctors have no direct oversight or central accountability structure. Although Risant Health could be an engine for value-based medical care, it’s more likely to serve the role of a “holding company,” capable of recommending operational improvements but incapable of driving meaningful change.
3 Challenges For The Retail Giants:
More Medical Offerings. Amazon, Walmart and CVS are successfully acquiring primary care (and associated telehealth) services. But competing with leading health systems will require a more wholistic, system-based approach to keep medical care affordable. This won’t be easy. To avoid ineffective, expensive specialty and hospital services, they will need to hire their own specialists to consult with their primary care doctors. And they will have to establish centers of excellence to provide heart surgery, cancer treatment, orthopedic care and more with industry-leading outcomes. But to meet the day-to-day and emergent needs of patients, they also will have to establish contracts with specialists and hospitals in every community they serve.
Capitalizing On Capitation. Already, the retail giants have acquired organizations well-versed in delivering patient care through Medicare Advantage, a capitated alternative to traditional (fee-for-service) Medicare plans. It’s a good start. But the retailers must do more than dip a toe in value-based care models. They must find ways to gain sufficient experience with capitation and translate that success into value-based contracts with self-funded businesses, which insure tens of millions of patients.
Defining Leadership. Without an effective and proven clinical leadership structure, the retail giants will be no more effective than their mainstream competitors when it comes to implementing improvements and shifting the culture of medicine to one that is customer- and service-focused.
Be they incumbents or new entrants, every contender will hit a wall if they cling to today’s failing care delivery model. The secret ingredient, which most lack and all will need to embrace in the future, is system-ness.
For all of the hype surrounding value-based care, fragmentation and fee-for-service are far more common in American healthcare today than integration and capitation.
Part two of this article will focus on how these different organizations—one set inside and one set outside of medicine—can make the leap forward with system-ness. And, in the end, you’ll see who is most likely to emerge victorious.
HENRY KOTULA 