Pulling Kaiser's IT Out of Intensive Care

By Jeffrey Rothfeder  |  Posted 10-15-2005 Print Email
Kaiser Permanente's last attempt at transforming its IT suffered a horrible death. Here's how they're bringing the patient back to life.

If ever there was a company in serious need of alignment, it was Kaiser Permanente. Three years ago, the Oakland, Calif.-based HMO was among the most inefficient and least productive companies in the notoriously wasteful $1.6 trillion U.S. healthcare industry. At the time, Kaiser, which has nearly 9 million members in nine states and the District of Columbia, had just completed a $2 billion IT investment bonanza that was supposed to centralize the company's far-flung mishmash of networks and data.

The opposite occurred. A corporate turf war broke out, pitting region against region in disagreements as to what type of patient-record system to install companywide, and how much control over electronic information would have to be ceded by powerful regions such as Colorado and the Northwest—both of which jealously guarded their independent data networks.

Corporate executives barely had a say in the matter. Not surprisingly, the company's weak performance—which included losses from 1997 through 1999—continued, and by 2000 and 2001, Kaiser's net profit margin was a listless 3 percent.

Back to square one. Within the first six months of 2002, two significant personnel changes occurred at Kaiser. Clifford Dodd, former head of technology at telecom giants Ameritech Corp. and Qwest Communications, was named senior vice president and CIO, replacing Tim Sullivan, who had left two years earlier to get out of the crossfire.

And CEO David Lawrence retired; his position went to George Halvorson, former chief executive of Minneapolis-based HealthPartners, another HMO. Dodd recalls that, at least in terms of technology, there was nothing to salvage at Kaiser when he arrived.

"They had convinced themselves that building their own network was the only solution because anything off-the-shelf wouldn't be big enough to handle the massive information needs at Kaiser," Dodd says. "But by taking that position, every region got to put in their two cents on what this system should look like, how it should connect to what they're using already and numerous other smaller issues. The development process slowed to a standstill; it was a huge missed opportunity."

More than any company in its field, Kaiser is perfectly structured to take advantage of the rewards—cost cuts, revenue increases and labor performance improvements—that computerization has showered on virtually every industry except healthcare over the past few decades. Kaiser's closed-loop business model chiefly involves managing the three primary legs of healthcare—hospitals, doctors and insurance.

The company employs 11,000 physicians, owns 30 hospitals and offers a series of medical coverage plans.

So by installing an electronic patient-records system, for example, paperwork can be minimized and processing of bills sped up, while care at hospitals can be made less error-prone, and physicians, with instant access to patient histories on their terminals, will be able to treat more people in less time.

In turn, satisfied patients drive additional subscriptions. For Kaiser, computerization is, by default, a virtuous circle.

That's a far cry from what other healthcare companies face. More typical is the reluctance of hospitals and physicians, for instance, to implement computerized clinical records, because they tend to lower costs for insurers more than for clinicians.

Instead, hospitals would prefer to spend money on advanced diagnostic technology in an effort to entice more physicians with modern equipment, and thereby increase revenues by charging insurers exorbitant prices for these procedures.

"The business benefit [of computerization] for Kaiser is unique, since it is one of the very few staff-model HMOs that serves as both payer and provider," says Eric Brown, vice president and research director for healthcare at Forrester Research Inc. "Kaiser has a much clearer incentive than any of its competitors to make these systems work."

If this is so obvious, Dodd wondered when he took the job as CIO, then why doesn't Kaiser get it? The problem, he concluded, was an old culture war—an anachronism that infected the organization—and the only way to end it would be to, well, end it.

Working closely with new CEO Halvorson, Dodd and other top executives at the company began a wrenching reorganization of the $28 billion nonprofit. The main goal was to eliminate the regional "federations" that balkanized the organization, and reclaim strategic decision-making for the home office.

That would ensure that the choices made about which technology to acquire, and which areas of the business to build up, were synchronized with the company's overall growth plan—and not made willy-nilly at the whim of district management.

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On the business side, the makeover was announced in June 2002. Halvorson restructured the company so that the eight regions reported directly to headquarters, rather than to superregional division heads.

Dodd followed with a more stunning move, one that directly affected Kaiser's bottom line. He raised the white flag on the massive IT investment that was supposed to produce a centralized network, and took a $442 million write-off on the project. This move slashed net income by nearly 85 percent in 2002, to just $70 million.

Simultaneously, Dodd unveiled a $3.2 billion computerization project that would be bought, not built from scratch. "We're not a systems company," Dodd says. "It's a waste of our time to write our own programs. We can get what we need off the shelf." Dodd decided on medical records software from Madison, Wis.-based Epic Systems Corp.



 

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