Group Health Courts Survival -- Kaiser Alliance Could Rejuvenate Co-Op's Democratic Values, Culture

AS GROUP HEALTH Cooperative ponders a marriage to Kaiser Permanente, voting members must decide just how genetically compatible these two health-care pioneers would be - and which parent the offspring would favor. This would not be the first such liaison in Group Health's volatile history.

Remember health-care reform?

Just four years ago, it was the defining issue in American politics. Everyone agreed something had to be done about soaring costs, dwindling benefits and shrinking access, and everyone had their pet plan - single-payer, managed competition, health-care IRAs, you name it.

The promise of action helped to elect Bill Clinton and former Gov. Mike Lowry, and they followed through by making health care their top legislative priority.

In 1993, of course, the Clinton plan died in a political nursery terminally contaminated by the insurance industry's "Harry and Louise" TV commercials and the Clinton administration's own malpractice. Lowry managed to deliver a comprehensive though delicate set of reforms in 1993, but a newly elected conservative Legislature threw out the baby with the bath water two years later.

Health-care reform survived as an issue, as demonstrated by last year's Kassenbaum-Kennedy bill mandating "portability" of coverage for employees changing jobs, for experimental health savings accounts, and statutes specifying minimum maternity hospital stays and other standards. Beyond these political tweaks, the health-care industry has been undergoing a dramatic economic restructuring driven by the cost consciousness of major employer-funded plans, competition among providers, and anticipation of the actuarial train wreck when the baby boom collides with Medicare and its own mortality.

Without broad consensus on the social values of health care and enforceable standards and expectations, the bottom line now sets the ceiling for service delivery and quality of care, and corporate bean counters and marketeers are now the attending physicians in "healing" the health-care system. Against this backdrop of aggressive cost-cutting and cut-throat competition, the executives of Group Health Cooperative and Kaiser Permanente have proposed forming a new regional hybrid company to oversee both programs in the Northwest.

One critic, veteran activist and former Group Health trustee Lyle Mercer, likens the new alliance to "a salmon trying to mate with a sea lion," and the cooperation managers and trustees have pursued a correspondingly cautious courtship. Next month, Group Health's 40,000 voting household members (they're the ones - out of 700,000 individual members - who've paid a $25 membership fee for that right) will decide whether or not to sanction the union. They must decide just how genetically compatible these two health-care pioneers are, and which parent the offspring would favor.

Kaiser's Northwest roots

Kaiser traces its roots back to the construction of the Grand Coulee Dam beginning in 1938 and its prime contractor, Kaiser Permanente. Dr. Sidney Garfield convinced industrialists Henry J. and Edgar Kaiser to offer their 15,000 employees a low-cost, prepaid health plan staffed by a group practice of doctors. The logic was more economic than altruistic: Healthy workers were more productive and a comprehensive health service run by staff physicians was cheaper than contracting with solo practitioners working for fees.

It was nonetheless a radical step for a major corporation, and the innovation was extended during World War II to workers in Kaiser's Columbia River shipyards and other West Coast industries. Kaiser Permanente formalized the system as a set of nonprofit foundations in 1945, and has since expanded to serve 7 million enrollees in 17 states and the District of Columbia. Along the way, it became a national leader in disease prevention and what is now called managed care.

Group Health Cooperative also emphasizes prevention, health maintenance, group practice, prepaid comprehensive care, and a nonprofit corporate culture. For this reason, it and Kaiser Permanente have been compared to "twins" separated at birth, but in truth, they make about as credible a pair of siblings as Danny Devito and Arnold Schwarzenegger in the film comedy of the same name. The Co-op's conception and evolution were more political than economic, and therefore much more complicated. It also anticipated and reflected the great debates and power struggles that would shape American health care in the last half of the 20th century.

The seed for Group Health was planted by Dr. Michael Shadid, a Lebanese-born socialist who founded the nation's first cooperative hospital in EIk City, Okla., in 1928. He then went on the road, evangelizing for consumer ownership and control of health care. On Aug. 14, 1945, his message was received in Seattle by an enthusiastic audience made up of activists from the Aeromechanics union, Washington State and King County Granges, Puget Sound Consumer Cooperative (not to be confused with today's PCC) and similar groups.

They had collaborated in promoting major political reforms during the New Deal and World War II, and most fervently believed in citizen-owned cooperatives as a "middle way" between state socialism and laissez-faire capitalism that could cure virtually every social or economic ill. Inspired by Shadid, these reformers incorporated Group Health in December 1945 and dedicated it to the development of hospitals, prepaid services and preventive medicine "to serve the greatest possible number."

Although Group Health was not chartered as a true cooperative in which members own equal shares, it was a consumer democracy in which the membership elects the Board of Trustees and votes on bylaw changes.

Such "radicalism" immediately set off alarms at the King County Medical Society and its Blue Cross affiliate, and they frustrated Group Health's first attempt to buy a surplus federal hospital in Renton. The Co-op might have been aborted but for a happy accident on March 14, 1946, when Co-op attorney Jack Cluck met an idealistic young pediatrician, Dr. William "Sandy" MacColl, at a health-care forum in Kirkland.

MacColl worked at the Medical Security Clinic, one of Seattle's few doctor-owned group practices (Virginia Mason was the most prominent example), which specialized in offering prepaid "contract care" to labor unions and large employers. With the war effort winding down, Medical Security needed new enrollees as much as the fledgling cooperative needed doctors, and both organizations believed that traditional fee-for-service medicine was a national disgrace. For Cluck and MacColl, the match between Group Health and Medical Security seemed made in heaven.

Ideological purists at Group Health did not agree. They distrusted the motives of the new physicians, and even the sainted Dr. Shadid warned that consumer-members would get the short end of the stick in this first alliance.

The choice was clear: Group Health could survive by joining with an outside partner, or it could perish with its virginity intact. Most of Group Health's 350 charter members chose the former, but they and their successors would revisit this fundamental issue many times.

On Jan. 1, 1947, Group Health's new staff began serving members in Medical Security's former downtown clinic and tiny St. Luke's Hospital on Capitol Hill. The worst fears of skeptics were not realized, but it took nearly five years for the medical staff, unions, membership and elected Board of Trustees to hammer out a workable constitution that balanced their rights and powers.

A common enemy

The Co-op might have spun apart on more than one occasion but for the uniting force of a common enemy, the medical establishment. In 1952, after suffering five years of professional exile, Group Health finally won a landmark decision from the State Supreme Court, which found the King County Medical Society guilty of a monopolistic conspiracy to destroy the Co-op by refusing membership and assistance to its physicians.

Although whispers about "Group Death" and "communist doctors," persisted, Group Health's membership grew steadily to reach 75,000 by the 20th anniversary of its founding. Its appeal was comprehensive coverage that, while not cheap, emphasized prevention, family medicine, and efficient use of hospitals and specialists.

During this time, Group Health focused on recruiting active members who shared its values and repeatedly voted on their own to raise dues in order to maintain comprehensive benefits. The Co-op consciously chose to ignore growing employer-provided health plans, but when Kaiser Permanente began to show interest in this untapped market, Group Health's trustees got the hint. At nearly the same moment, in 1966, Medicare became available and created a huge new pool of potential enrollees. Group Health met both challenges by pioneering the model of what became known as "health maintenance organizations," or HMOs, and its membership swelled to 200,000 within a decade.

Such rapid growth exacted a price: the camaraderie and communal intimacy of the early cooperative movement were trampled underfoot by the hordes of new enrollees. Procedures, rules and layers of bureaucracy multiplied and intruded between patients and their family doctors. A new class of professional health-care managers arose within Group Health and demanded parity (some would say supremacy) with physicians, organized labor and consumer-trustees. Old-line cooperators lamented the subordination of social ideals to market realities, doctors grumbled over lost privileges, and nurses and other union workers walked out on their first strikes.

Group Health tried to put on the brakes by closing corporate enrollment, but then it discovered that too little growth was worse than too much. Even as national studies validated Group Health's quality and effectiveness in 1985, the Co-op lost enrollment for the first time, and it continued to bleed members for two more years. The reasons were simple: the Co-op no longer had a monopoly on prepaid comprehensive care, and employer plans and individual consumers would no longer tolerate ever-increasing dues. Cost control and competitiveness became the rules of the health-care game.

Group Health took steps to stay in the game: It slashed expenses, modernized administrative and information systems, expanded statewide through new affiliates and subsidiaries, and diversified its coverage options.

Membership growth resumed, topping half a million in 1994, but Group Health's leaders knew it was not enough. The arrival of large, low-cost competitors and the demands of the new state health-care reform for provider alliances (a plan that Group Health had helped to write) meant that the Co-op could no longer go it alone. The search for partners became a matter of survival.

The Virginia Mason connection

Group Health had long collaborated with other health-care institutions, notably the University of Washington School of Medicine and Children's Hospital, but Virginia Mason held a special position of esteem. Its doctors had aided Group Health during the dark days of the Medical Society blackball, and they were the leading exponents of group practice.

Virginia Mason also faced the same problems: It had added too many facilities and employees during the 1980s and was now under tremendous competitive pressure to economize and streamline.

The proposed strategic alliance with Virginia Mason horrified Group Health's loyal left-wing opposition, which feared that doctors would displace consumers in the governing hierarchy. Labor also had serious grievances with Virginia Mason's tradition of non-union staffing. As in the 1946 debate over the Medical Security Clinic, the choice was framed as change or die. Former Co-op President Hilde Birnbaum put it bluntly: "Group Health must survive as a business in order to survive as a cooperative, not the other way around."

Two-thirds of voting members ultimately agreed.

While the Virginia Mason-Group Health alliance has largely achieved its objectives, it is not large enough to meet demands by major employers and plan managers for further cost reductions and regional, if not national, coverage.

The new pool of joint capital is also too small to finance new technologies, information systems, and strategies to treat and manage a growing population suffering from costly chronic diseases such as diabetes.

So Group Health executives went a-courting for a new and bigger partner. The quest led quickly, perhaps inevitably, to the Kaiser Permanente's Foundation Health Plan.

The alliance plan calls for the creation of a new company, Kaiser-Group Health, which would oversee strategic planning, budgeting and administration for both Kaiser and Group Health programs in the Pacific Northwest. Group Health members would continue to elect the Co-op's own trustees, who would set policy for health-care staff and services and name five of the umbrella company's 11 trustees.

Last month, the current Group Health board unanimously endorsed a draft bylaw amendment to implement the alliance, and voting Cooperative members will cast their ballots in April.

Muted opposition

Given Group Health's habit of decision-by-ordeal, one would expect all hell to break loose, but opposition has been surprisingly muted. If silence equals assent, the plan enjoys the support of Group Health's unions, which railed loudly against the Virginia Mason alliance. Most doctors and professional staff members have given their support, if for no other reason than it promises some stability after years of economic uncertainty and down-sizing.

The economic logic of affiliation is difficult to challenge, especially from Group Health's point of view. While it allows Kaiser to expand out of the Vancouver, Wash., area into the rest of Washington, Group Health gains access to a regional market and interstate employers. It also helps that Kaiser is a known entity with which Group Health has enjoyed reciprocity and a tacit non-competition pact for many decades.

Group Health president and CEO Phil Nudelman stresses that the two organizations' shared values of not-for-profit service, preventive medicine, physician autonomy, and health research should make for a good fit. There is one fundamental difference: Group Health is ultimately governed by and accountable to its consumer-members, and Kaiser is not.

This is the crux of the issue before Group Health's members, and some fear that if the alliance is approved, the Kaiser "sea lion" will quickly gobble up the Cooperative and spit out the bones of its consumer constitution. There is an equal risk that Group Health would be nibbled to death by Piranha-like competitors and corporate contract managers if did not join with Kaiser. Neither fate is desirable, but there is another possible scenario.

If history is any guide, the new alliance will quickly lead to internal clashes between Kaiser's more corporate culture and Group Health's traditions of accountability that cut across various hierarchies, consumer governance, and medical independence. Any effort by the new Kaiser-Group Health executive superstructure to compromise Cooperative principles and rights will galvanize key constituencies such as consumers, physicians or labor, and they will seek to inject Group Health's democratic DNA into the rest of the Kaiser system.

The prospect of such turmoil is, ironically, the best reason for supporting the alliance. It would renew Group Health's internal democratic culture, strengthen key values of accountability, service and innovation, and sharpen the unique foresight and reflexes that have enabled the Co-op to anticipate and survive a half century of change, all the while challenging Kaiser to reform its own structure. The end result could be a new national model: a democratic HMO system in which consumers and providers, not "medicrats" or corporate accountants, set the course and the standards for health care.

Too much to hope for? Perhaps, but Group Health is virtually the last of its species. Mating with an organization like Kaiser may offer the only hope for passing on its cooperative inheritance to future generations.

Walt Crowley is a Group Health member and author of "To Serve the Greatest Number, A History of Group Health Cooperative of Puget Sound."