Kaiser to Sell Operations in Northeast U.S.

In a surprising turnaround, Kaiser Permanente, the nation’s largest health-maintenance organization, plans to sell its money-losing operations in the Northeast.

By selling these medical networks, which serve 575,000 members in New York and New England, the nonprofit health-care giant is acknowledging that its efforts to branch out from the hospital-based, closed-network systems for which it is best known have not succeeded.

It represents a significant change of heart for Oakland-based Kaiser, which has poured $200 million into the Northeast division since 1996 and just four months ago made turning the operations around a keystone of its financial plan.

“While the region has made some improvements as a result of a go-forward plan announced in February, longer-term sustainability would require further investments that we are not prepared to make at this time,” David Lawrence, chairman and chief executive of Kaiser Foundation Hospitals & Health Plans, said in a statement Friday.

The HMO did not reveal the asking price for the operations, which include networks in Connecticut, Massachusetts, New York and Vermont. But Lawrence said Kaiser is in talks with potential buyers in each of the states where the Northeastern division operates.

By exiting the Northeast, Kaiser is leaving behind a model of health care in which a plan contracts with broad networks of doctors instead of providing its own doctors and hospitals for patients to use.

Instead, spokeswoman Beverly Hayon said, the HMO will continue to concentrate on the form of health care Kaiser pioneered: a version of the so-called staff model in which a single large group of doctors provides all kinds of care, often based in clinics and hospitals owned by the health plan.

“This is a financial decision, but it’s also philosophical,” Hayon said. “We have learned some lessons and are acknowledging that we do need to get back to our core system of health care.”

Kaiser expanded rapidly in the mid-1990s, buying or establishing physician practices in several states as part of an attempt to compete for the then-lucrative and less restrictive network model.

But since the expansion, Kaiser has lost more than $500 million, and the resultant financial squeeze has forced it to postpone needed upgrades of some hospitals and clinics in California.

“We need to go back to our core system so we can really concentrate what we do well and polish it up so that it really gleams,” Hayon said.

The staff model, although more restrictive in that patients generally must go to the company’s own hospitals, is widely regarded as the best way to control costs in managed care. Members can actually have greater access to services under such a plan, because the HMO’s costs are fixed. If the doctors and facilities are very good, the theory goes, patients will join the plan because they will trust that they are getting superior care.

Kaiser’s decision is further evidence of financial strains on the network model, which dominates the for-profit sector of managed care. In that model, plans often rely on middlemen to pay doctors and serve as gatekeepers to specialist care. In California, one of the nation’s largest middleman companies is in bankruptcy, and another has made plans to leave the populous San Fernando Valley market.

The Northeast is the third market Kaiser has decided to leave in the last year and is by far the largest. Its operations in Texas were sold to Sierra Health Services earlier this year, and medical networks in North Carolina are also slated for sale.