Mega-mergers mean more competition for Kaiser.

Unihealth, Health Net, PacifiCare ride merger wave

Kaiser Permanente, the oldest and largest health maintenance organization in the country, remains king of the HMOs in Southern California, but it is slowly feeling the pains of competition.

Much of that competition is coming from two pending HMO mega-mergers. Burbank-based UniHealth America and San Francisco-based Blue Shield of America have announced plans to merge, as have Woodland Hills-based Health Net and its longtime rival QualMed Inc. of Pueblo, Colo.

In yet another deal, PacifiCare Health Systems Inc., a Cypress-based HMO that operates in several Western and Southwestern states, signed an agreement this month to acquire California Dental Health Plan of Tustin for an estimated $20 million.

"You need to assume that, as a leader in the industry, we won't sit by the roadside and do nothing," said Jerry Ashford, Kaiser's vice president and health plan manager for Southern California.

One of the options Kaiser is looking at, he said, is allowing its members to go to outside service providers at a higher cost. Kaiser's model of a "closed" HMO -- in which Kaiser patients only go to Kaiser doctors, hospitals and clinics -- has been a tradition for 50 years.

Kaiser Permanente, with headquarters in Pasadena and Oakland, is a nonprofit HMO whose roots can be traced to 1938, when industrialist Henry J. Kaiser established a prepaid health plan for Kaiser workers and their families. Because of its tight control of all aspects of health care service, Kaiser is one of the most profitable HMOs in the country, said health care experts. One benchmark of success for HMOs is the percentage of patients that don't need costly hospitalization, and Kaiser enjoys one of the lowest rates of hospitalization in the industry, health care experts said.

Other health care providers, such as preferred provider organizations, or PPOs, however, have lately been improving their hospitalization rates, thereby closing in on Kaiser, pointed out Linda Bergthold, a principal with William Mercer Co., a national benefits consulting firm active in health care issues.

"There are organizations out there giving Kaiser sort of a wake-up call," she said.

She said the new health care organizations won't "topple Kaiser out of first place," based on their number of enrollees. "But the new competition could affect Kaiser in the long term," Bergthold added.

The reason Kaiser has been able to remain king of the HMOs is that no other organization has had the money to be able to finance such an elaborate health care system, said health care experts. But new model of health care providers, such as physician groups, are getting Kaiser-like results.

Although Kaiser has a whopping 4.7 million members in the state and 6.6 million members nationwide, the new merged entities are encroaching on Kaiser's turf.

The Health Net/QualMed merger announced Aug. 30 would create a company with $1.8 billion in revenue, serving 1.2 million customers in six Western states.

Health Net, the second largest HMO in the state with 900,000 members, would be able to expand out of state if the merger goes through as planned. And QualMed, with half its 350,000 members in Northern California, would be given access to the lucrative Southern California market - home to 2.3 million Kaiser enrollees - if the merger goes through.

Kaiser's Southland turf would also be seriously enroached upon by the pending UniHealth/Blue Shield merger, which would create a new managed care company with more than 4.5 million members and $6.5 billion in revenue.

UniHealth, one of the nation's largest nonprofit health care systems, own 11 non-profit medical centers, three medical group affiliations and CareAmerica Health Plans, an HMO based in Chatsworth. UniHealth also holds a majority interest in PacifiCare Health Systems, an HMO based in the Orange County city of Cypress.

Blue Shield, one of the state's oldest providers of health coverage, serves 3.5 million clients. It also operates the state's largest preferred provider network -- with 44,000 physicians, 280 hospitals, 35,000 allied health professionals and 5,000 pharmacies.

Peter Scott, Blue Shield's president and chief executive officer, predicted that, over the next several years, close to 80 percent of the 1.4 million enrollees in Blue Shield's traditional indemnity (fee-for-service) plan would shift to its HMO.

Ross Goldberg, a spokesman for UniHealth, said the merged entity is expected to offer greater access and more choice in health care than Kaiser. He said for people who want to choose their own hospital or doctor, they can look in the UniHealth/Blue Shield directory and find that their doctor or hospital may already be participating in our system.

"That's the competitive advantage we offer over Kaiser," he said.

While Kaiser may be rethinking its HMO-only thinking, many health care experts expressed emphatic support for Kaiser and its ability to survive the future.

"Kaiser is the granddaddy of HMOs, and their model is stronger than ever," insisted Peter Boland, president of Boland Healthcare Inc., a consulting firm in Berkeley.

The beauty of Kaiser, as Boland put it, is that it is a "very stable, cost-effective model offering relatively good, quality care, and it appeals to all segments of the market."

The main challenge for competitor health care providers looking to two Kaiser enrollees, health experts pointed out, is that many Kaiser members are second- and third-generation enrollees who are quite content.

"The general reaction among our clients is that they are relatively happy with Kaiser," said Mark Straus, a consultant in the Sherman Oaks office of the Wyatt Co., an international human resources consulting firm.

The Wyatt Co. provides consulting services to such Southland giants as Rockwell International Corp., Coast Federal Bank, Times Mirror Co. and Kaufman & Broad Home Corp.

Straus said that, although some employers are considering switching out of Kaiser because its rates are increasing, such a switch might be met with opposition from the rank and file. Many employees like being members of Kaiser and, if their employer switched, they wouldn't be able to see their Kaiser doctors.

Far from being outdated, Straus said, the Kaiser model is the most efficient way of delivering health care.

"(Kaiser has) been able to deliver health care cheaper than anyone else, and their quality of care is just as good," he said.

Kaiser also has 50 years of experience delivering integrated health care.

"The lessons of integration aren't learned overnight," added Kaiser's Ashford. Even though various entities are being brought together under the UniHealth/Blue Shield merger, they will be operating separately and will need to learn the art of working together, he said.