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the peculiarities of obstetrical practice, and sensitized by our experience, I now question whether a small new group should even attempt to cover OB-GYN with its own men until it has at least 20,000 members.

Laboratory and xray are high cost fields in which there is a close relationship between cost and volume. Both the buyer and the provider can benefit greatly from sharing cost and pooling volume. We thought we had found the ultimate when we devised a per capita payment for these services based upon such a partnership approach. Though it worked reasonably well, we later abandoned it in favor of a cost

FIGURE XVII-2 Kaiser Foundation Health Plan, Colorado Region, Methods of Payment for Medical Services, 1969–1971

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related unit charge system, which has several distinct advantages. We are pleased with the results of these arrangements to date.

In ENT, I had the brilliant idea that we would pay the doctor a part-time salary for the few hours he spent in the clinic and fee-for-service for his hospital work. I needn't tell you what happened. The incidence of surgery skyrocketed. After switching to a part-time salary for all ENT work, utilization quickly came under control. Incidentally, there is no evidence of underutilization, which, of course, is just as undesirable as overutilization.

In urology the change from fee-for-service to per capita was not made to save money, or to control utilization. On the basis of his previous utilization with us, which was very reasonable, both the urologist and the medical group saw practical advantages in having the high degree of predictability of payment of a per capita mechanism. This is working so well that we should not need to add a urologist to our salaried staff for another year or two. In fact, we may be tempted to extend this concept to other specialties, such as orthopedics or neurosurgery.

I think this chronicle of our experience in Denver only supports what is already well known to the older regions—there is no cookbook recipe for starting a prepaid group practice in a new area. Moreover, we should be careful not to conclude that what happened in Sacramento, Cleveland, or Denver could be expected to happen in Omaha, St. Louis, or Memphis. One must simply bake his cake with the ingredients he has at hand and then be prepared to accept the fact that it may have its own peculiar flavor.

Discussion of New Areas

Q. Please comment further on the unique arrangement of the Cleveland plan with its membership board, that is, participation by the membership in the activities of the plan.

A. Presumably, the reference is to the establishment of an advisory board, consisting of some prominent labor leaders and several other prominent citizens who were active, in the early history of the Cleveland Community Health Foundation. This does represent a departure from the typical K-P pattern. We don't feel that this technique is completely effective at this point. But we do feel that it has possibilities and we are exploring them.

Q. There is some confusion about the way in which the Cleveland operation is tied into the California operation. Please describe that relationship.

A. In the state of Ohio our California type of approach is not legally permissible. They did have the Community Health Foundation which was a membership corporation wherein the health plan members actually were in control. With our plans the legal authority rests in the board of directors. We did retain some of the original members from the CHF board and renamed that entity Kaiser Community Health Foundation.

On the new board is the chairman of the board of the original organization and one of the Cleveland labor leaders who was instrumental in starting the plan. That board is still active and efforts are also being made to activate a local advisory council.

The Kaiser Community Health Foundation is a legal entity in the state of Ohio. It has designated the Kaiser Foundation Health Plan to manage many of its normal functions. So in effect they have two health plans in Ohio. We're very hopeful that the use of a local board to guide, steer, and direct affairs will set a pattern for the future. Thus far, however, this has not been fully accomplished.

Q. What has been the financial experience of the Colorado plan?

A. Speaking for the medical group only-I can't speak for the health planwe are still losing money. We are losing it at a somewhat lower rate per capita than we were. Our present membership is about 15,000. We have, on paper at least, tried to justify a breakeven point at perhaps 30,000-35,000.

A. With further reference to Denver, the investment in facilities, equipment, and startup costs was about $500,000. We lost about the same amount last year; and

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we are anticipating a similar loss this year. However, these are losses that we anticipated. In fact, we are running somewhat better than we forecast.

Q. What are the arrangements for financial support between an emerging plan and the parent Kaiser-Permanente organization?

A. We have a special arrangement to finance the geographic expansions into both Denver and Cleveland. This came about principally by a combination of a grant and interest-free loan from the Henry J. Kaiser Family Foundation. In addition, the existing regions have agreed to a formula for a modest contribution into a so-called expansion fund. The exact ground rules for use of the funds generated internally have yet to be worked out; but the intent of the combination of the two is to finance the start-up costs for both Denver and Cleveland, both of which are experiencing losses to date.

A. Don't misunderstand those loss figures in Denver or in Cleveland! Though they may be high, they are not taken lightly. Eventually those regions will have to repay those losses. So the ability to keep them down, to control them, is very important.

Q. In terms of your future expansion, have you any plans to develop programs for rural areas?

A. One of the attractions to the Kaiser-Permanente Committee moving to Colorado was the fact that, at some point in time when the membership base was established and we had reached a breakeven point, then the Colorado Region might enable us to begin to reach out into rural areas. Part of our decision to go to Colorado was the hope that eventually we could begin to move in that direction.

A. We have already had considerable rural experience in the development of programs with sugar plantation workers and other rural people and further information on these programs can be obtained from our Hawaii office.

Q. There is another California institution which is moving eastward—the medical foundation system for health delivery which a number of California county societies have sponsored. What is the relation of the K-P program to these foundations? Are you competitive or complementary?

A. Historically, the development of medical society foundation plans started in 1954. Without any prior discussion with Kaiser-Permanente management, Mrs. Goldie Krantz, representing the International Longshoremen and Warehousemen's Union-which has substantial membership in Stockton, California—initiated discussions with representatives of the San Joaquin Medical Society. She informed them that unless more satisfactory prepaid health care arrangements, including more effective policing of utilization and fees, were established in the Stockton area, “The ILWU would bring Kaiser-Permanente into Stockton!" It appeared that she was using the K-P program without our consent.

Subsequently, however, Dr. Donald Harrington, a leader in the San Joaquin Medical Society, who has become the most ardent spokesman for medical society

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foundation plans, has said that he was using Goldie Krantz to stimulate some fresh thinking and action within the society. In any event, the San Joaquin Foundation evolved from this encounter.

Medical society foundation plans represent another alternative to commercial insurance, Blue Cross-Blue Shield, group practice prepayment, and certain other variations, for distributing the cost of health care. To a greater degree than commercial insurance or Blue Cross-Blue Shield plans, but to a lesser degree than group practice prepayment plans, the foundations can influence the delivery of health care services -primarily through peer consensus on appropriate fee levels and peer review of utilization and charges. As in other segments of the health care field, evolution is going on, and some foundation plans are experimenting with assumption of responsibility for inpatient care and other health care services as well as for physicians' services.

In the prepaid field, foundation plans function as competitors with other prepayment systems, including group practice prepayment. Under the landmark Federal Employees Health Benefits Program, foundation plans are classified as "individual practice prepayment plans" and many such foundations are a recognized option available to federal employees as an alternate choice under that act.

In Sacramento a foundation plan, that had existed on paper for several years, became active contemporaneously with the establishment of the K-P program in that city. A number of Permanente medical group physicians in Sacramento are members of the county medical society and of the foundation. To date there has been little actual participation. However, the Sacramento foundation is now interested in working out a capitation arrangement with the state for Title XIX services, and presumably Permanente physicians will participate under this arrangement in the same manner as any other physicians practicing in the area.

In Colorado, before becoming associated with the K-P program, Dr. Reimers supported the formation of a medical society foundation, and he continues to favor development of that program. In his view the foundations and the Kaiser-Permanente program share a common goal-effective prepaid health care.

There appear to be areas of potential cooperation between foundation plans and prepaid group practice. Under the K-P principle of voluntary enrollment through dual- or multiple-choice of health care arrangements, foundation plans represent another alternative available to the public which, though competitive, is entirely compatible with our approach.

Q. If competition is to be encouraged in what way could K-P support a medical foundation or could a K-P facility actually exist within the framework of a medical foundation?

A. Kaiser-Permanente management regards competition among significantly different alternative health care plans as constructive. In those few areas in which both the K-P program and medical society foundation plans are active, a number of Permanente physicians are participating physicians under the foundation plan. Our program is entirely receptive to participation by medical society foundation plans as one of the options available to employees eligible for health coverage under negotiated group health and welfare funds or programs established by statute such as the Federal Employees Health Benefits Program.