Case Study: Kaiser Permanente
Transforming Banks for a Digital Future: The Winners, The Losers, and the Strategies to Beat the Odds
Corporate Headquarters | Oakland, Calif.
Year founded | 1945
CIO | Clifford Dodd
IT employees | 5,000
Business units | 29 medical centers, 423 medical offices, 11,345 physicians
Revenue | $19.7 billion in 2001, up 11.3% from $17.7 billion in 2000
Net income | $681 million in 2001, up 16.6% from $584 million in 2000
IT budget| 5% to 7% of operating revenues
For CEO David M. Lawrence, 1997 was the year to seriously entertain the notion of staging a palace coup. Nothing seemed to be going right for his nonprofit, Kaiser Permanente, the largest HMO in the United States. For the first time in its 52-year history as a healthcare innovator, Kaiser was bleeding money: In 1998, it would post a $288 million net loss on sales of $15.5 billion. One reason was that the HMO was forced to send many patients to costlier, non-Kaiser specialists because it had underestimated demand.
Yet like the rest of the hypercompetitive healthcare industry, Kaiser also was suffering from red tape, mind-boggling complexity, rising drug and care costs, and excessive overhead: Of the $1.2 trillion Americans spend annually on healthcare, some $250 billion to $450 billion is spent on administrative costs.
Kaiser was also stymied by its far-flung and decentralized culture, which stretched over a geographical area of some 10,000 square miles, from Washington to Honolulu. Its three unitscomprising 29 medical centers, 11,000 doctors and the insurance company that pays for it allwere, for the most part, calling their own shots, without any central oversight regulating the purse strings. "The [competitive] pressures of healthcare became so great that the organization panicked," says Robert Pearl, CEO of The Permanente Medical Group, the unit of Kaiser that represents the HMO's doctors. "Everyone closed wagons around each of the separate parts. The entire fabric of the organization got torn asunder."
CEO Lawrence saw the need to give Kaiser emergency tech care. Patient records were still being kept on paper and carted around in fleets of trucks from one doctor's office to another. IT, Lawrence believed, would not only digitize those records, but also streamline time-consuming administrative procedures, cut error rates and greatly enhance the quality of Kaiser's medical care. Keeping doctors more up-to-date on the latest medical information via the Web, he believed, also would give companiesand consumersmore of a reason to pick Kaiser over other HMOs.
There was just one problem: Kaiser's IT department was as balkanized as the rest of the organization. Each of the nonprofit's seven regionsCalifornia, Colorado, Georgia, Hawaii, the Mid-Atlantic, the Northwest and Ohiohad its own CIO and its own IT agenda. Adding to those layers of red tape, the nonprofit also had 27 different financial ledgers and 13 different data centers. Even Kaiser's most important IT initiativea long-standing project aimed at digitizing all 8.2 million patient medical recordsdid not have a coherent project, vendor strategy or implementation plan. Each region was spending millions to devise its own digital records system, paying no heed to what anyone else was doing. "I began to get really nervous about the amount of money each region was spending on this," says Lawrence. "Everyone was doing their own thing. I needed more control over spendingand direction."
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