••Fall 1997 / Vol 1, No 2

Background
The winter of 1996-97 saw a rite of passage for Permanente Medical Groups (PMGs) and a landmark point in the history of KP: Between December and February, the 12 PMGs formed common governance structure (The Permanente Federation), created a new national business entity (The Permanente Company), and signed a memorandum of understanding with Kaiser Foundation Health Plan (the National Partnership Agreement) to resolve a broad set of internal issues. Why did this happen, and what does it mean for the future of our organization?

On the surface, the story is simple. Early in 1996, KP began a new cycle of geographic expansion involving either merger or acquisition of health plans. Examples include the merger with Group Health Cooperative of Puget Sound (in the Pacific Northwest), acquisition of Community Health Plan (in New York) and acquisition of Humana (in Washington, DC). The case for new geographic expansion was compelling: consolidation of regional competitors into large national for-profit managed care organizations could eventually marginalize Kaiser Permanente. A sound case was made that to be a truly national organization, we need to extend our presence to other large population centers, especially in the eastern US

The new expansion quickly raised basic questions: Was Kaiser Foundation Health Plan (KFHP) expanding, or was KP expanding? If expanding, then what should be the nature of the "Permanente" side of this effort? How could 12 independent PMGs manage such a national undertaking?

Another set of issues was also being formulated. In 1996, a combination of aggressive pricing and operational inefficiencies had already created operating losses for some KP Regions. Intermittent operating losses have adversely affected KP for years but in the new competitive environment were of more concern than ever. There arose a new need to fix underperforming areas quickly so that we all could thrive together.

Also, the outside world was becoming more hostile to so-called managed care organizations, a category into which we continue to be placed. As several well-publicized charges of poor quality of care have made clear, we are under a national microscope. If it was not true before, we now know that the reputations of all Permanente physicians are linked together in the national mind. The quality of care delivered at every site we call "Permanente" must be of a level that we all can "own" and be proud of.

Both these issues--improvement of performance and quality of care wherever needed--called for the 12 Permanente Medical Groups to help each other. In 1996, however, no demonstrable common will to do so was evident, and no defined organization or set of resources were available for this purpose. If organizations such as Phycor and MedPartners Mulliken could create national physician business entities, why not Permanente?

These were the issues facing the Permanente Medical Directors in 1996. To investigate the options and recommend a solution, the Executive Committee of the Medical Directors, chaired by Dr. Harry Caulfield, appointed a small group of physicians called the Business Support Work Group. The group included me, Dr. Allan Weiland (an obstetrician-gynecologist and Medical Director of KP-Northwest), Dr. Ian Leverton (a surgeon and Executive Director of Permanente Interregional Consulting), Dr. Irwin Goldstein (a pediatrician and Associate Medical Director of Southern California PMG), and Dr. Bruce Perry (a family practitioner and Executive Medical Director of Southeast PMG). We worked intensively during Summer and Fall of 1996, and in October presented to the Medical Directors a set of recommendations calling for creation of a PMG federation, a KP national business entity, and comprehensive negotiations with KFHP.

The Permanente Federation
A federation is hardly a new idea: Our country is governed by a federalist system in which certain authority is vested centrally and in which certain authority is retained locally. The question was, What central authority was needed to address common concerns, and what was best left to each PMG? The Work Group examined--and then rejected--the idea of creating a single medical group, an economic entity which would negotiate nationally with Kaiser Foundation Health Plan for our annual financial agreement (the basic contractual payment [BCP], which is contained within a Medical Service Agreement [MSA]). Creating a single, unified medical group was not thought to be either needed or desirable for solving the issues facing us in 1996.

Ultimately, on January 6, 1997, we created The Permanente Federation, whose "constitution"--the Articles of Federation--installed in the Federation governance central authority to further four purposes. They are:

Each of these purposes relates to solving the issues which faced the Medical Directors earlier that year: improving financial performance where needed, improving quality of care where needed, and creating new KP business competencies to support and expand the KP organization.

The Articles of Federation created for the new Federation a balanced and representative governing body--the Executive Committee--consisting of an Executive Director and four Medical Directors. Executive Committee decisions are subject to review by the Medical Directors (Fig. 1) as a group. All this and more is delineated in the Articles of Federation and in the Federation Operating Agreement, which were approved in December 1996 by all Medical Directors and Permanente Boards of Directors and are available for anyone to read.

 

Fig. 1. The Permanente Federation Medical Directors. From left to right. Including Medical Group (back row) W. Harry Caulfield, MD, TPMG [Executive Committee member]; William Gillespie, MD, Texas; Melvin Mulder, MD, Ohio; Francis (Jay) Crosson, MD, Permanente Federation [Executive Committee member]; Adrian Long, MD, Mid-Atlantic [Executive Committee member]; (middle row) Donald McGuirk, MD, Mid-America; Peter Lee, MD, North Carolina; Oliver Goldsmith, MD, Southern California [Executive Committee member]; Stacy Lundin, MD, Northeast; Bruce Perry, MD, Southeast; Allan Weiland, MD, Northwest [Executive Committee member]; (front row) Toby Cole, MD, Colorado; Michael Chaffin, MD, Hawaii

The first meeting of the Executive Committee was convened on February 5, 1997. The first four members of the Executive Committee were Dr. Oliver Goldsmith (Chair), a gastroenterologist and Executive Medical Director of Southern California PMG; Dr. Harry Caulfield, a cardiologist and Executive Director of The Permanente Medical Group (TPMG); Dr. Allan Weiland; and Dr. Adrian Long, an emergency physician and Executive Medical Director of the Mid-Atlantic PMG. In April 1997, I was appointed and approved as Executive Director and fifth member of the group.

The Permanente Company
Early in the planning of the Federation came the realization that managing both governance and business issues would be too complex for a single organizational unit. A national Permanente business would need to serve the needs of the sponsor PMGs while maintaining a degree of independence not typical of physician-directed businesses. Thus was born The Permanente Company (PermCo); a limited-liability company owned by the Federation's member PMGs and registered in January 1997. PermCo has a separate Board of Directors who are confirmed by vote of the Medical Directors. As Executive Director of the Federation, I serve as the Chair of the PermCo Board. Other current members are Irwin Goldstein and Bruce Perry; Toby Cole, an internist and Executive Medical Director of the Colorado PMG; and Robert Ridgley, Chairman of Northwest National Gas Company and a member of KFHP's Board of Directors. PermCo's Chief Executive Officer (CEO) and one additional Board member remain to be appointed.

What is the difference between the Federation and PermCo? They are separate but related entities, each with a distinct purpose (Fig. 2): The Permanente Federation develops policy and provides governance and oversight for the purposes outlined in the Articles of Federation; PermCo builds and manages the business functions of the Federation.

 

Fig 2.

What business functions was PermCo intended to build? First, PermCo will build physician practice management capabilities--services (such as supplied by Phycor or MedPartners Mulliken) needed to improve Permanente practice and to create new Permanente delivery systems in expansion areas. PermCo teams initially began helping to improve Permanente practice in North Carolina and Ohio. Working with KFHP, PermCo teams began exploring expansion opportunities in Chicago and New York in March 1997.

Second, PermCo will build a new capability to enable PMGs to explore business diversification opportunities. An advisory group including physicians from each PMG began working last Fall to examine sound business opportunities which could strengthen Permanente capabilities, further the mission of our organization, and provide new employment opportunities for PMG physicians and an opportunity for them to build value over time.

Third, PermCo will be the place where Permanente physicians build information systems to provide the clinical and business support we will need in the future. In partnership with KFHP, a team of Permanente medical informatics specialists will direct the multiyear national project designed for this purpose. We will hear more from PermCo in the future.

The National Partnership Agreement
Our 50 year partnership with KFHP in recent years has been strained: Kaiser Permanente has not been immune from market pressures, and this has taxed the patience of both partners. Some felt that mutual exclusivity was threatened by KFHP'S acquisitions. By mid-1996, the processes for coordinated national decision-making were not functioning smoothly. In the Fall of that year, Harry Caulfield as Chair of the medical directors and David Lawrence as CEO of KFHP Health Plan commissioned a group--the National Partnership Agreement Group (NPAG)--to create an agreement which would revitalize the partnership and lead to a more confident organization, improve organizational performance, and help reestablish Kaiser Permanente as the standard for health care delivery in this country. The group consisted of myself, Goldstein, and Weiland representing Permanente; and Jerry Fleming, Robert Crane, and Jim Williams, all Vice Presidents of KFHP. NPAG met intensively over a three month period from mid-November 1996 to early February 1997.

On February 4 and 5, 1997, the leaders of both the Permanente Federation and KFHP met in San Francisco to receive NPAG's recommendations. On February 5, all parties (Fig. 3) signed a memorandum of understanding which, in May 1997, led to a final agreement and contract between the parties.

 

Fig. 3. Signatories to the National Partnership Agreement Memorandum of Understanding, February 5th, 1997. From left to right, including titles: Back Row: Jerry Fleming, Senior Vice President, Administrative Services, California Division, Kaiser Foundation Health Plan; Jim Williams, Senior Vice President, Strategic Development & Human Resources, Kaiser Foundation Health Plan; Toby Cole, MD, Executive Medical Director, Colorado Permanente Medical Group; Allan Weiland, MD, Medical Director, Northwest Permanente; Richard G. Barnaby, President and Chief Operating Officer, Kaiser Foundation Health Plan; Irwin Goldstein, MD, Associate Medical Director, Southern California Permanente Medical Group; Ian Leverton, MD, Executive Director, Permanente Interregional Consultants; Adrian Long, MD, Executive Medical Director, Mid-Atlantic Permanente Medical Group. Front Row: Susan Porth, Senior Vice President, Corporate Services and Chief Financial Officer, Kaiser Foundation Health Plan; Francis J. Crosson, MD, Executive Director, The Permanente Federation; David M. Lawrence, MD, Chairman & Chief Executive Officer, Kaiser Foundation Health Plan; W. H. Caulfield, MD, Executive Director, The Permanente Medical Group; Oliver Goldsmith, MD, Executive Medical Director, Southern California Permanente Medical Group; Robert Crane, Senior Vice President, Interdivisional Services, Kaiser Foundation Health Plan.

The National Partnership Agreement established:

The National Partnership Agreement became effective on June 1, 1997. KPPG began to meet in July
1997, and most of the joint decision-making bodies will be in place by Fall. As strange as it might seem for an organization as large and as old as ours, this agreement marks the first time that many of these issues have been formally addressed and codified. It is an important start to an improved Kaiser Permanente.