390 KAISER-PERMANENTE BASIC PHILOSOPHY AND ORGANIZATION Obviously the amount ultimately distributable from the health plan revenue pool depends upon the amount flowing in. This is predominantly the product of plan membership and prepaid dues rates. One might see the basic incentive as maximizing revenue through maximum enrollment effort at the highest marketable rates, but that is not how the program works. Enrollment is constrained by personnel and facility limitations a framework within which management must judge the amount of enrollment that we can properly serve. Thus the program is often closed to new enrollment in many geographical areas. FINANCIAL Self-SufficieNCY With respect to the level of prepaid rates, in addition to the market-competition of other prepayment plans and limits on what individuals and groups are willing and able to pay for health care coverage—our program operates within important policy constraints. We do not seek to maximize revenue but rather seek to cover financial requirements for continuing good quality services. Such financial requirements include a modest contingency which not only provides a financial cushion for adverse developments but also, if the entire program functions effectively, will translate-through the incentive compensation mechanism-into additional earnings for the physicians and for the hospitals and health plan. These added earnings are not "surplus" but are essential over the long run to remain competitive for professional talent vital to the program, and to maintain the financial soundness and growth capacity of the hospitals and plan. This brings us to another basic characteristic of the Kaiser-Permanente program ---financial self-sufficiency. We do not seek to maximize revenue, but we do seek-so far successfully—to build into our revenue structure an income flow sufficient to cover all operating requirements and to provide for moderate but sufficient generation of capital for facility improvement, facility replacement, and reasonable growth. We wish to be sure that the blood supply for the program does not depend on transfusions. PERMANENTE SERVICES Figure III-3 depicts a further complication in our organizational structure. In each region we have a business corporation operating under the name Permanente Services. These corporations, all of whose outstanding stock is owned by Kaiser Foundation Hospitals and by the health plan in the region, were originally established as a legally suitable vehicle to provide a variety of supporting services, such as data processing, accounting, purchasing, and transportation, required by the three operating organizations. They function on essentially a breakeven basis and thus do not divert funds from the support of the overall program. It is now clear that supporting services could be performed by the plan itself and would not require a separate legal structure. However, it has been the position of the Internal Revenue Service that "trade-or-business" functions, such as providing outpatient pharmacy service at nonhospital locations, cannot properly be performed by tax-exempt organizations. In response to this governmental position we utilize the Permanente Services corporations to operate pharmacies in what we call our “detached clinics," and the net income derived from such pharmacy sales is subject to 32 KAISER-PERMANENTE BASIC PHILOSOPHY AND ORGANIZATION income tax. Meanwhile there have been changes, both in the law and in the viewpoint of the IRS, and it is likely that a separate tax-paying corporation is no longer a necessary part of the structure of a comprehensive group practice prepaid health care program. DECENTRALIZATION AND COORDINATION I have tried to describe the anatomy of the Kaiser-Permanente program, perhaps with undue emphasis on the structure. I would like to conclude with a brief comment on the nervous system. The management mechanism through which the unification of our various structural elements is achieved consists of physician management and administrative management working in close cooperation within a framework of mutual acceptance of common objectives. The K-P program is strongly decentralized and operational management is largely a regional function. Within regions, and particularly within the large regions, management is further decentralized to individual medical center locations. At these locations there is a managing physician and an administrative manager who together constitute a management team for handling the problems of that location within the framework provided by regional management. At the regional level there is a chief executive of the medical group and a chief executive representing both the Kaiser Foundation Hospitals and Kaiser Foundation Health Plan, whom we call the regional manager. These two persons, working intimately together and assisted by their key personnel, constitute the regional management team and constitute the primary operational element in the decision-making process. Because of the high degree of decentralization in our managerial structure, the central staff functions largely in a coordinating and supporting capacity. There are, however, issues that cross regional lines-for example, financing program growth, expansion to new geographical areas, and speaking with a single voice on increasingly significant governmental-relations issues. A few years ago, as the need to bring a mutual medical group-health planhospital decision-making process to bear on problems transcending regional lines, we established the Kaiser-Permanente Committee, now consisting of the medical group chief executives, regional managers from each region, Dr. Keene, James Vohs, Arthur Weissman, and myself. This committee, operating by consensus rather than by vote, is the mechanism which carries the mutual medical-administrative management philosophy to the program-wide management level within the whole Kaiser-Permanente program. IV Characteristics of Health Plan Membership ARTHUR WEISSMAN* and RICHARD ANDERSON+ THE ROLE OF THE HEALTH PLAN in our program is understood when the implications of this simple concept are appreciated: The plan deals with members, whereas the physicians, the hospitals, and other providers in our program deal with patients. The plan enrolls members; it furnishes the medical care program with its membership population. It is out of this population that the patients emerge who in turn are cared for by the providers. HEALTH PLAN MEMBERSHIP-THE KEY TO MEASUREMENT Our revenue, our costs, our utilization rates, our staffing ratios, our planning functions all relate to the defined population comprising our membership. As Dr. Keene indicated (page 15) the membership provides the denominator for most of our measurements. We use this type of fraction so much that we have developed our own shorthand. Here, for example, are the abbreviations most generally used: pitals. Per 100,000 Members P/1000/P/Y P/100,000 Following are some illustrative measures, derived for our defined population: Physicians P/1000 RN's P/1000 Hospital beds P/1000 * Vice President and Director of Medical Economics, Kaiser Foundation Health Plan and Hos † Medical Economist, Kaiser Foundation Health Plan and Hospitals. 34 KAISER-PERMANENTE BASIC PHILOSOPHY AND ORGANIZATION Total facility space (hospital and doctor office) P/1000 Physicians in internal medicine P/100,000 Doctor office visits P/1000/P/Y Hospital admissions P/1000/P/Y Prepaid dues revenue P/M/P/M Excess of revenue over expenses P/M/P/M Note that in all cases the frame of reference is membership. This per capita or per member approach to revenue, expenses, and our many derived operating ratios is made possible by an enrolled membership. The significance of having a defined population for stability, for planning, and for certain types of research will be elaborated throughout this volume. DISPARITY AMONG DIFFERENT Defined POPULATIONS With the flowering of the seedling called HMO-health maintenance organization-it has become fashionable to talk glibly about serving a defined population on a per capita basis. It is generally not difficult to get agreement when the obvious point is made that defined populations may differ significantly one from another. Nevertheless, this point merits specific attention. The magic of the phrase “defined population," can bewitch the unwary. Let me illustrate. The annual health care costs per capita for each of several defined populations under the California Medi-Cal (Title XIX) program for the year ending June 30, 1970 are given in Table IV-1 and Appendix Table 2. Clearly, with the wide spread in per capita costs for various populations, as shown in an example of this type, those concerned with organizing health care services are not exactly home free if their information about a population is limited to knowledge of numbers of persons. Our ability to characterize the K-P membership in additional dimensions provides us with a broader basis for understanding how to meet the requirements of those we serve. Most of my remaining presentation will be devoted to this subject. CHARACTEristics of the health plan POPULATION Characteristics of our membership may be classified under two broad headings: (a) special characteristics relating to voluntary prepayment plan populations; and (b) standard demographic characteristics, such as residence, age, sex, race, income, educational status, and religion. Under the first heading I will describe the special |