Kaiser Plans Cost Cutting of $800 Million : Health care: Internal document shows nonprofit HMO is considering closing some hospitals. Critics fear reduction in patient care.

At risk of being toppled from its perch as the king of health care, Kaiser Permanente plans to slash expenses in Southern California by more than $800 million over five years in a dramatic restructuring aimed at fending off its rivals, according to a confidential business plan.

The changes are outlined in the 213-page internal plan for Kaiser’s 2.2-million-member Southern California operations. The plan, a copy of which was obtained by The Times, offers an extraordinary glimpse at how marketplace competition is forcing the nation’s largest health care plan to remake itself.

For example, Kaiser said it is considering closing or consolidating some Southern California hospitals and sending some patients to outside hospitals--a major cultural shift in an organization where for decades members have been treated exclusively by “Kaiser doctors” and “Kaiser hospitals.”

Kaiser also plans to increase the bonuses paid to doctors for holding down costs, such as sending patients home earlier from the hospital. Similar financial incentives are widely used by other health insurers, which contend they are necessary to discourage costly over-treatment.

Kaiser’s most glaring problem is an erosion of its California membership, which includes 2.4 million members in Northern California. Kaiser lost a total of nearly 100,000 members in Southern California in 1993-94, but membership is up a modest 30,000 in 1995, Kaiser executives said. Meanwhile, rival, for-profit HMOs such as Health Net, CaliforniaCare and PacifiCare have been enjoying brisk overall growth rates of about 15% annually.

Moreover, Kaiser executives concede that the HMO has been far less successful at controlling costs than its competitors. For years, Kaiser built its business by promising employers quality care and the lowest medical premiums in the market. Now many other health plans--eager to gain market share--commonly underbid Kaiser.

“We are a high-fixed-cost organization and we can’t continue to survive if we keep losing members,” said Hugh Jones, executive vice president for Kaiser’s Southern California operations.

Kaiser is “being picked apart by much leaner, quicker, more flexible” HMOs, said Peter Boland, a Berkeley health care consultant.

Unlike Kaiser, which owns its own hospitals and clinics, most other HMOs contract with hospitals and medical groups to supply services. In a hotly competitive market such as Southern California, that gives so-called network model HMOs such as Health Net or PacifiCare the flexibility and leverage to negotiate steep discounts with doctors and hospitals.

A consumer group and union officials blasted the Kaiser document, saying the cost-cutting plans demonstrate that Kaiser is putting profits ahead of patients. They warned that the cuts will jeopardize the quality of medical care and potentially endanger patients.

“The document clearly articulates the fact that Kaiser’s interest is in a business plan, not a health plan,” said Rose Ann DeMoro, executive director of the California Nurses Assn.

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Harvey Rosenfield, executive director of Consumers for Quality Care, a Los Angeles consumer group, said the Kaiser plan “exposes an anatomy of managed care in which even nonprofit HMOs like Kaiser are driven by profit at the expense of quality.”

Rosenfield’s group was particularly critical of a Kaiser program to pay doctors up to $3,600 in yearly bonuses for keeping patients out of the hospital, prescribing less-expensive prescription drugs and meeting certain “patient satisfaction” guidelines.

Kaiser spokeswoman Kathleen Barco said any incentive for an individual doctor to deny necessary care for personal financial gain is “diffused” because the payments are based on group performance rather than individual performance.

Kaiser officials contend that cost cuts don’t necessarily harm patient care and could actually improve it.

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Kaiser’s plan calls for more procedures now performed in the hospital, such as gall bladder operations, mastectomies and lumpectomies, to be done at outpatient clinics. Rosenfield’s group criticizes such efforts as examples of Kaiser’s “reckless cost cutting.”

Zendle, however, noted that technological advances have made it possible for many surgical procedures to be performed safely and more effectively in less costly outpatient clinics.

According to the Kaiser plan, the Oakland-based health giant intends to sharply reduce hospital stays of its members--a trend throughout health care. Kaiser says it wants to cut hospital utilization from 232 days per 1,000 members in 1994 to 164 days per 1,000 by 1997.

Rather than being an ambitious goal, the Kaiser plan instead suggests how far behind the competition the giant HMO is. Even Kaiser executives point out that some California HMOs now boast of hospital usage rates as low as 130 days per 1,000 members. The hospital rate is considered a measure of an insurer’s thriftiness and success at shortening hospital stays and eliminating unnecessary hospitalizations.