Kaiser Takes The Cyber Cure

The managed-care giant is spending $2 billion to move its operations to the Net

For years, Kaiser Permanente and most other health-maintenance organizations didn't invest much money in information technology. Instead of using the power of the Internet, they relied on old-fashioned paper records and creaky steel filing cabinets. Even Kaiser, the country's largest HMO and one of the techno-savvy, kept virtually all of its patients' files on paper until two years ago and had to ship them around in fleets of trucks. In places like Colorado, 20 or so courier vans would take off every night in a Keystone Cops-like scramble to get files to the appropriate hospital or clinic. Not only was it absurdly expensive, it was incredibly ineffective: Specialists who had patients referred to them ended up without a patient's paper file 30% of the time.

Now Kaiser is giving itself emergency tech care. Chief Executive David M. Lawrence has launched a massive $2 billion project at Oakland (Calif.)-based Kaiser to move all of its operations to the Internet. For starters, he plans to create digital medical records for each of Kaiser's 9 million members and to electronically link its 361 hospitals and clinics with Kaiser's 10,000 doctors, nurses, and dentists. He'll set up customized Web sites so clients such as General Motors Corp. and Wells Fargo & Co. can look up their particular rates or coverage. And there will be separate sites so doctors and administrators can order everything from bandages to CAT-scan machines over the Net. Lawrence considers building the e-care system to be Kaiser's top priority. "It will be the central nervous system for tying together all of the elements needed to care for patients better--and it will do so in ways now unimaginable," he says.

Kaiser needs powerful medicine. In 1998, the HMO lost $288 million on sales of $15.5 billion, largely because it underestimated the amount of care it would have to give and had to switch patients to more expensive non-Kaiser physicians and specialists. For the first nine months of last year, it returned to profitability, but it had to sell off money-losing operations in five states, including New York and Massachusetts.

Knowing that competition will continue to be vicious, Lawrence is turning to the Net to give Kaiser a leg up. "Companies have already squeezed what savings they can out of managed care, so HMOs like Kaiser must find new improvements to compete, or falter," says Ian Morrison, an independent health-care expert at the Institute for the Future, a Menlo Park (Calif.) think tank.

Kaiser's effort comes as managed care is under fire. Patients have begun to believe that HMOs are cutting costs by barring doctors from giving adequate care. Politicians like Democratic Presidential contender Bill Bradley are arguing for radical changes in how health care is delivered. HMOs such as Kaiser need to figure out how to harness the Net to deliver better care at a lower price. "We spend $1.2 trillion on health care--$450 billion on administrative costs," says Bradley. "By simply moving things from paper to the Internet, you will be able to achieve significant savings."

LONG HAUL. The Kaiser experience shows, however, that there are likely to be bumps along the road to savings. Since embarking on its Net effort in 1998, the HMO has fallen nearly a year behind schedule--it now expects to complete the transformation in 2003. The delays have been caused by difficulties in some pilot programs, resistance from some doctors and hangups in selecting tech suppliers. Now, IBM and Net consultant USWeb/CKS will help lead the Web program for Kaiser. We "may have underestimated the complexity of this undertaking," says Lawrence.

Still, he's starting to see results. In the Northwest, where the Net system has been in place for two years, Kaiser's costs increased at a 2.1% pace in 1999, down from a 6% average annual rate in the mid-1990s. And only three of Kaiser's six regional divisions are using the Net system so far. When Kaiser completes its move to the Internet in 2003, the company expects to be saving "tens of millions" per year, according to Lawrence. "It's a revolution, and we're just now seeing the first glimmers of the impact it's going to have on the delivery of health care."

Here's how Kaiser's Net effort shows up in its day-to-day operations: When a patient comes in for a visit, doctors can instantly tap into their records from a keyboard and a flat-panel screen attached to the wall in each examining room. Doctors use the computer to type up notes and flip through records of previous treatments, X-rays, or charts. All that information is zipped over dedicated high-speed phone lines, called T-1s, to a central database in each region. For example, the database in the Northwest region is housed in Portland, Ore., and can be accessed from any of Kaiser's hospitals and clinics in Oregon and Washington state.

The biggest savings from the system today are coming from containing pharmaceutical costs, which have been rising 16% to 18% annually. When a doctor logs on to Kaiser's computer network to prescribe a drug for a patient, the network automatically offers up any available lower-cost alternatives. For example, if a physician enters a prescription for the antidepressant drug Zoloft, a digital note reminds the doctor that the drug is twice as expensive as the similar Prozac. Doctors still can prescribe Zoloft, but they're less likely to do so. Simply offering alternatives to Zoloft helped Kaiser trim drug costs by $100,000 in its Northwest division. For all types of drugs, the system has helped the Northwest unit cut costs by 20%, according to Dr. Robert Pearl, who is implementing the Net program at Kaiser.

Kaiser's new network is doing away with silly mistakes, too. In the past, 10% to 15% of patient tests in the Northwest had to be repeated because of lost paperwork or illegible doctors' handwriting. "You'd be surprised to find how often a patient's records simply fall through the cracks," says Pat Hogan, vice-president in the Portland, Ore., office of benefits broker Marsh USA Inc. Now that those records are on a central database, the vast majority of those repeated tests have been eliminated. An added bonus of the database: Doctors can get instant updates of everything going on with their patients. "We don't have to wing it anymore," says Steve Gordon, a Portland internist.

Soon, patients will be able to make appointments with the click of a mouse. In pilot programs in Modesto, Calif., and Stockton, Calif., Kaiser customers can tap into its Web site to schedule time with a doctor. That could add up to big savings, since it costs HMOs an average of $10 per patient to make appointments on the Net, vs. $70 over the phone, according to an October study by medical researcher Northwest Healthcare Networks. Kaiser won't break down per-patient savings, but officials say they expect to save $400,000 annually in the Northern California region alone. Multiply that throughout the Kaiser system, and the savings run into the millions.

Still, doctors have been a bit wary. At the start, many found that the Net system made talking with patients awkward. "Putting the computer in the examining room doubled the difficulty in the physician-patient interaction, which is the most critical piece of medical care," says Andy Lum, assistant medical director of service quality in Kaiser's Colorado division. After training doctors to maintain eye contact with patients and share information on the computer, the problems have declined. But many doctors still don't like computer systems giving them advice or suggesting alternative medications. "It's been a big challenge," says Dr. Andy Wiesenthal of Colorado. "But everybody uses it, and everybody loves the information they can access."

No question, Kaiser still has much work to do. As the HMO rolls out its Internet care system to the rest of its divisions over the next three years, the number of Kaiser patients with digital records will rise from 1.5 million today to 9 million. The HMO is just starting to move its ordering of supplies, such as medical equipment, to the Net. Pearl expects that will cut the administrative costs of purchasing by 30%, to 40%. What's more, Kaiser is beginning to design customized Web sites for corporate customers, such as AT&T, BankAmerica, and Xerox.

"GREAT OPPORTUNITY." Despite the progress, Kaiser and the rest of the industry have a long way to go. Most remain tech laggards. But change will be forced upon them--if not by campaigning politicians, then by customers who can vote with their feet. "I don't think the health-care industry overall has quite figured out the benefits of the Internet," says David Wachspress, director of undergraduate and e-commerce programs at the New Jersey Institute of Technology. "But customers are going to start demanding access to health records and other resources, and that will drive the industry to start providing these services, or people will leave them."

Lawrence plans to lead the charge. Sure, he wants to cut costs and make Kaiser as efficient as possible. But he also thinks the Web can help Kaiser deliver something grander. "The Internet is a great opportunity, a key to improving health care everywhere," he says. Kaiser's digital revolution could be just what the doctor ordered.

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