U.S. Healthcare Has a “nugget of good practice:” Kaiser Permanente

It is not often that European visitors come to the U.S. and complement our healthcare. There is a brief article in the Economist indicating that there are areas in which we deliver healthcare effectively and efficiently.

“Europeans have long thumbed their noses at America’s bloated health-care system. It is true that parts of it are convoluted, cruel and much too costly. But Sir Richard Feachem, a health expert and the former boss of the Global Fund to Fight AIDS, Tuberculosis and Malaria, argues that such a view ignores ‘nuggets of good practice’. The best such nugget, he reckons, is Kaiser Permanente (KP), a not-for-profit health insurer and hospital chain which last year took in $2 billion more than the $40 billion it spent.”

“For the most part, the American health system is dominated by cream-skimming health insurers and the myriad ‘fee for service’ providers they do business with, which drive up costs by charging high prices for piece work. KP’s business model integrates fixed-price health insurance with treatment at its own hospitals and clinics. This has led to big efficiency gains, making KP one of the cheapest health-care providers in most of the regional markets in which it competes. Thanks to Mr Obama’s reforms, over 30m Americans will enter the health-insurance market over the next few years—and KP’s low prices should make it a big beneficiary.”

“Moreover, KP’s medical results are as good as its financial ones. By many clinical measurements, it is the best-performing health-care outfit in the regions it covers. The firm’s success obviously holds lessons for its American rivals, but given that KP serves some 8.6m patients—more than the population of Austria—and has come up with some world-beating innovations, Sir Richard believes that there is ‘much that Europe can learn too’.”

A note of disclosure seems appropriate here. KP has been my healthcare provider for the last 36 years. Having 36 years experience with a healthcare provider would not usually bias one in that provider’s favor. However, I like KP. Even 36 years ago it was obviously the way to go.


KP is referred to as an integrated service provider. This means it provides the hospitals, doctors, clinics, and laboratories as apart of the package. A clinic is basically a hospital without an emergency room or overnight care. When you make an appointment to see a doctor you have the labs, radiology, pharmacy, and access to a large suite of out-patient procedures all under one roof—one stop shopping.


KP’s organization provides enormous advantages of scale. They have a large enough patient population to be able to perform their own research on treatment outcomes. With multiple facilities within convenient driving distance, they do not have to duplicate expensive, but not fully utilized devices at all facilities. Nor do they have to provide a full range of specialists at each facility. They can scale their facilities to the actual needs of their population. I have at least six facilities within an hour drive.


All of their doctors are on salary. That means they are ranked according to patient satisfaction rather than how many patients they can squeeze into an hour. Since all of the work is in-house there is little marginal cost whether a bed is filled on a given night, or if a procedure is deemed necssary or not. You encounter doctors who work eight hours a day and have lives. They can be doctors and not corporations.


With KP’s computerized system you can make appointments with your doctor on-line. If you leave the doctor’s office and think of several things you wished you had asked, you go home and send him, or her, an email with carefully thought out questions. Usually you will have a reply the same day. If you have blood work done in the morning, by evening you will be getting emails saying the results are available on-line. All your results are stored on line so you can look yourself at the results over time.

“Many health systems, including Britain’s National Health Service (NHS), have tried unsuccessfully to implement comprehensive computer systems; patients and doctors often hate them. But studies published in the journal Health Affairs and elsewhere show that KP’s embrace of technology (its doctors conducted nearly 9m electronic consultations last year) has resulted in fewer frivolous visits, better medical outcomes and soaring patient satisfaction. Patients can even send doctors photos of worrisome moles or slow-healing wounds by e-mail for remote diagnosis.”

Most of KP’s patients seem to be happy. They leave only when circumstances require it.

“KP’s third big advantage is that its integrated approach and incentive structure encourage investment in forms of long-term care such as the wellness classes.... The firm is in the midst of a ten-year, $30 billion capital-investment plan. In March it completed the rollout of its computer system—the biggest one in the world for private health care.”

“Many other insurers and health systems avoid making such investments because of ‘churn’: patients switch insurers frequently, so any spending on preventive medicine, aimed in particular at avoiding expensive hospital visits in future, ends up benefiting a rival company. KP says its churn rate is well below that of its rivals, so it can invest for the long haul. It funds an innovation centre that perfected the telemedicine systems its doctors are now using for remote dermatology consultations, for example.”

“Clayton Christensen of Harvard Business School applauds the firm’s culture of innovation. He notes that KP’s dentists routinely apply a coating to children’s teeth that helps prevent cavities, a procedure that many other American dentists tend not to use. Why not? In an integrated system with incentives aligned properly, he argues, preventing future cavities saves the company money. In contrast, in a fee-for-service system, ‘future cavities represent future revenue’.”

Other organizations are following the same example, but on a much smaller scale. Why isn’t all of healthcare organized in this mode?

“The prevailing culture of health care in the country is difficult to overcome. Some American patients, used to having all the scans and consultations with exotic specialists they want, costs be damned, do not like KP’s frugal ways. By the same token, some freewheeling American doctors do not like KP’s rigid systems or fixed (albeit generous) salaries. Much the same applies in other countries: whether in politicised state-run systems or profiteering private ones, the incentives for doctors and patients are seldom as soundly aligned as they are at KP. ‘Most of its success is explained by culture,’ says Alain Enthoven, a health economist at Stanford University, ‘and that is simply not easy to replicate’.”