HMO giant Kaiser eyes expansion and agrees to buy Washington state insurer

Healthcare giant Kaiser Permanente has agreed to acquire a big insurer in Washington state and signaled the pursuit of similar deals across the country.

The nonprofit HMO and health system said Friday that it was buying Seattle-based Group Health Cooperative, which insures nearly 600,000 people. Because the deal involves two nonprofit organizations, Kaiser said
it would contribute $1.8 billion to a new foundation in Washington to complete the transaction.

Analysts say Kaiser appears eager to take its unique model of integrated care to new markets as a consolidation wave ripples across the healthcare industry.

The Oakland company runs hospitals, physician groups and an HMO in eight states and the District of Columbia. But nearly 80% of its 10.2 million members are in California.

“Our approach, we believe strongly, is the right
approach for how healthcare should be delivered in the country,” Bernard Tyson, Kaiser’s chairman and chief executive, said in a conference call with reporters Friday. “This is a growth strategy we are after on how to continue to make healthcare more efficient, more effective and affordable.”

The company is different from most insurers in that it runs 38 hospitals across the country, owns hundreds of medical clinics and has nearly 18,000 doctors on salary. It collects an upfront premium from customers to cover all of their care and has an incentive to keep patients healthy as opposed to the conventional fee-for-service model that can trigger wasteful spending.

Tyson called Group Health “a natural fit” because the health plan operates a similar strategy of
using its own clinics and physicians to treat patients.

The Group Health acquisition is subject to approval by regulators.

Kaiser generates plenty of cash for potential deals. Its annual revenue was $56.4 billion last year, and operating income hit $2.2 billion. Group Health posted annual revenue of $3.7 billion.

In the past, Kaiser has stumbled at growth outside California. In the late 1990s, the company incurred heavy losses in the Northeast, North Carolina and Texas before closing those operations. In 2013, Kaiser sold off its health plan and medical practices in Ohio.

But industry analysts said Kaiser has learned from those missteps and the Group Health deal illustrates a different strategy. Instead of building a business from scratch, Kaiser may pursue deals with established health systems that already have market power in their region.

Steve Valentine, vice president and West Coast consulting leader at healthcare firm Premier Inc., said Kaiser and other companies face pressure from employers and new government-run exchanges to hold down costs. One strategy is to merge and then slash administrative expenses and overhead at the combined entity.

“You have to get better economies of scale,” Valentine said. “You have to get big to be relevant now.”

Another potential partner for Kaiser might be Detroit-based Henry Ford Health System, according to published reports. A spokeswoman declined to discuss specific names, but she said, “Henry Ford Health System regularly talks with other organizations both locally and nationally, looking for opportunities to collaborate.”

A Kaiser spokesman said the company won’t comment on speculation.

Increasingly, Kaiser’s rivals are getting larger and trying to mimic much of what it offers.

Nationwide, hospitals and large physician practices have been consolidating at a rapid pace. Then a series of mega-mergers ensued this year among the nation’s biggest health insurers that could create three industry giants.

This drive to get bigger and expand has come in response partly to opportunities and pressures brought on by the Affordable Care Act.

Kaiser pointed out that the Group Health deal would fortify its presence on the West Coast, stretching from San Diego to Seattle. That could be a key selling point to major employers with workers spread out across that region.

Kaiser routinely receives high marks for its preventive care and overall performance from Medicare, outside experts and patient-safety advocates. Policymakers hold up the company as a model for how it coordinates care across its hospitals and physician offices. It was a pioneer at using electronic medical records.

The federal health law pushes other insurers and medical providers to collaborate in much the same way in hopes that will lead to better care at a lower cost.

In recent years, however, some big employers have complained that Kaiser is no longer the bargain it once was, and the company refuses at times to fully explain why its premiums keep increasing. Kaiser maintains that it still offers great value and superior care.

Kaiser has also come under fire recently for inadequate treatment of mental health patients. Last year, the company paid a $4-million fine imposed by California regulators over the issue.

Outside California, Kaiser’s biggest presence is in Colorado, the Mid-Atlantic region and the Pacific Northwest.

chad.terhune@latimes.com