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Case Study: Kaiser Permanente

A top-down ultimatum to force faster change at the HMO has been bitter medicine. Has the cure been worse than the disease?

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 units—comprising 29 medical centers, 11,000 doctors and the insurance company that pays for it all—were, 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 companies—and consumers—more 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 regions—California, Colorado, Georgia, Hawaii, the Mid-Atlantic, the Northwest and Ohio—had 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 initiative—a long-standing project aimed at digitizing all 8.2 million patient medical records—did 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 spending—and direction."


Bitter Medicine

What he needed was to dismantle the regional IT offices—fast. So Lawrence did something dramatic and rather unorthodox in the conservative, consensus-driven healthcare culture: He announced that IT at Kaiser would be centralized. Goodbye, regional control and cultural autonomy. Each unit would now report to a national CIO. And local executives who refused to go along? They'd get no more IT funding. Lawrence appointed Tim Sullivan, the ex-CIO of First Interstate Bank, to be Kaiser's first national CIO. The immediate goal: savings in the millions and a break in the cultural logjam surrounding IT at Kaiser. "If you look at the history of IT rollouts," Lawrence says, "you see moments where the leadership had to act this way to get anything done."

Kaiser, five years and some $2 billion in IT investments later, is still trying to make progress, and the cultural uproar triggered by Lawrence's no-holds-barred ultimatum still rankles. For some, Lawrence's decision was akin to a declaration of war. "Up until the time of his decision," says Henry Neidermeier, a Kaiser IT executive in charge of Web development, "Kaiser was run as a collegial organization, not like a corporation. Physicians had been making all the decisions." Lawrence, a former physician himself, says it was the toughest management decision of his career. "It was a unilateral action," he says. "I was deeply criticized and resented. I had several very, very uncomfortable conversations with physician leaders."

Lawrence says he remembers more than one shouting match with physicians he had known for years, including several calls by some physicians for his ouster. Andy Wiesenthal, a doctor in Kaiser's Colorado region recalls: "There was open dissent…it was a very difficult time." Almost overnight, Wiesenthal, who was critical of Lawrence's mandate at first, suddenly found he no longer had an IT department to generate his analytical reports—it had been dismantled and most of the IT workers were relocated to Kaiser operations in California. "All the people were gone. The rooms were empty. The mainframe was removed," Wiesenthal says. "The message was impossible to miss."

While he understood the need for a national CIO, Wiesenthal, like many other doctors at Kaiser, also worried that centralization would cause service to suffer: In 1997, an error made by an IT programmer caused Kaiser to inadvertently send confidential health information for 858 patients to the wrong e-mail addresses, fueling charges of privacy violations that made headlines and only bolstered resistance among many Kaiser physicians to Lawrence's technology mandate.

His decision also spurred a flurry of discussion outside the company. For years, the medical industry, considered a technology laggard, had tried but failed to digitize operations. Like Kaiser, most have had to struggle against cultural barriers, administrative complexity, legacy systems, cost constraints and regulations governing the exchange of patient information to make any progress—and usually came up far short: According to Gartner Inc., fully 85 percent of hospitals and other healthcare providers say they still don't know if they have the equipment or infrastructure to accommodate e-health, and budgets are too slim to realize change anytime soon. "Anyone who tries to do the right thing IT-wise in healthcare today is running huge cultural and financial risks," says Uwe Reinhardt, a health economist at Princeton University.

Indeed, the Kaiser experience shows how difficult IT reform can be. Since embarking on its Net effort in 1997, the HMO has fallen nearly two years behind schedule. It now expects to have back-office, insurance and patient records fully digitized by 2005 or 2006, rather than by the end of this year. Cultural battles have triggered long delays in the launching of some pilot programs, doctors in many regions still resist change, and spirited arguments continue over which technologies should be purchased—and from whom. Says John Glaser, vice president and CIO of Partners HeathCare System Inc. in Boston: "When I first heard about Kaiser's move to nationalize the IT department, I knew it would be tricky." Dozens of doctors resigned rather than work through the changes. "We may have underestimated the complexity of this undertaking," Lawrence admits.

Still, Kaiser is starting to see results. Among them: a 20 percent drop in drug costs at some clinics, thanks to an in-house network that doctors tap into from keyboards and flat-panel screens attached to the wall in each examining room that suggests cheaper drug alternatives. In addition, a digital records system in Colorado has cut the number of emergency-room visits by up to 10 percent because nurses staffing call center desks are able to summon updated patient records in seconds, discouraging unnecessary visits which, in the past, might have been based solely on incomplete knowledge of the caller.

Kaiser also has started to reform purchasing, building separate sites so doctors and administrators can order everything from bandages to CAT-scan machines over the Net for volume discounts. Waste and errors are also on the mend: In Kaiser's Northwest region, for example, doctors used to have to repeat 10 percent to 15 percent of patient tests because of lost paperwork or illegible doctors' handwriting. Not anymore. Says Lawrence: "We're just now seeing the first glimmers of the impact IT is going to have on the delivery of healthcare."

But cultural challenges remain—and not just for Kaiser, but throughout the healthcare industry. Technology progress, Lawrence insists, cannot remain the sole call of physicians—a traditionally independent, authoritative group at continuous cross-purposes with IT projects aimed at creating tighter accountability, efficiency, and caps on doctor fees and drug prices. "You can't have IT unless you have strong leadership," says Keith Fraidenburg, vice president of education at CHIME, the College of Healthcare Information Management Executives. "Many hospitals and health systems use IT, but their effectiveness is often hampered by dated technology, disparate systems that can't be integrated to achieve efficiencies, and people and processes that undermine IT's potential. This is an industry steeped in tradition and known for physicians with strong resistance to change."

To be sure, at Kaiser, some doctors and nurses continue to balk. When a pilot patient Web site launched in Portland, Ore., Shirley Corbari, a registered nurse and consultant, feared that a patient somewhere with a 103-degree fever or shortness of breath would send a "nonurgent" e-mail message to a Kaiser nurse asking for advice—when what he or she really should have been doing was calling for an ambulance. Specialized training of nurses and doctors on the systems has diminished such fears, along with new Web site designs that promote electronic messaging only for members interested in preventive care. But hurdles remain. Says Lawrence: "Much of this IT rollout has had to go one doctor at a time."

The IT staff also has had to take its lumps. CIO Sullivan had to impose strict project management controls on a crew that—whether because of the cultural resistance to change or in spite of it—had been largely held unaccountable for cost and time overruns, a situation not unlike other IT operations at other medical centers. Says Princeton's Reinhardt: "IT folks have always so overpromised what IT will do, that everyone feels let down. It is really a story of a great dissonance in the health field between promise and delivery. Healthcare IT people tend to be like drunken lovers at a bar: big talk, modest follow-through."
 Source:  Case Study: Kaiser Permanente
By Eric Pfeiffer CIO Insight

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