MELISSA BLOCK, HOST:
The Supreme Court did not issue a ruling today on President Obama's health care law. It could come this Thursday. One of the aims of the law is to reduce health costs by rewarding doctors and hospitals when they do a good job coordinating patient care. The HMO Kaiser Permanente in California basis its entire model on coordinating care. Kaiser is not only a chain of hospitals and clinics, it's an insurance company, too.
But as we hear from Sarah Varney, of member station KQED, its premiums are not necessarily cheaper than the competition and it's not clear why.
SARAH VARNEY, BYLINE: Kaiser Permanente rose out of a utopian, industrialist dream. During the 1930s and '40s, Henry J. Kaiser wanted to make sure the workers at his Richmond, California shipyard were steady and strong.
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UNIDENTIFIED MAN: A medical dream comes true under the drive of industrialist Henry Kaiser who holds the plans of the ultra-modern hospital designed by...
GEORGE HALVORSON: When Henry built things, he tended to assemble an entire team to build all the parts.
VARNEY: George Halvorson is Kaiser Permanente's current CEO.
HALVORSON: So when he started providing health care to his workers, he used that model which was to have a Kaiser hospital and Kaiser clinics.
VARNEY: Kaiser Permanente opened its doors to the public in 1945, and offered health coverage that was high quality and considerably less expensive than conventional insurers like Blue Cross. The strategy worked because it owned its own hospitals and clinics and directly employed physicians. Other insurers had to negotiate with outside hospitals and doctors, demanding ever higher payments.
But Mark Smith, head of the non-partisan California Health Care Foundation, says the HMO is no longer the bargain it used to be.
MARK SMITH: They got to where they are, in part, by being the cost leader in the market. And they no longer are.
VARNEY: He says because Kaiser is both the insurer and the health care provider, the company hasn't faced much competition.
SMITH: They're not really pressed to be that much cheaper. They're kind of shadow pricing, is what the economists would say. So if your competitor takes $4 to make a banana and it only takes you $2 to make a banana, you price your banana at $3.95 and you pocket the rest.
VARNEY: Since negotiations between health plans and employers are largely confidential, it's difficult to discern just how Kaiser fares against other companies. Kaiser says its costs increase by about 5 percent each year. But some of Kaiser's biggest customers say their premiums have jumped much higher, in some cases 20 percent. That's a charge Kaiser's CEO George Halvorson vigorously denies.
HALVORSON: We're at least 10 percent better everywhere. Sometimes we're 15 to 20 percent less expensive.
VARNEY: Kaiser sets its rates, says Halvorson, based on how much it spends on patient care. It has nothing to do, he says, with what other insurers are charging. And he adds, Kaiser offers richer benefits than other plans.
HALVORSON: Everybody else is stripping their benefits package down. So they're putting in higher and higher deductibles. And that's just shifting the cost to the employee.
VARNEY: But Kaiser Permanente has difficulty explaining how it sets its prices, according to David Lansky of the Pacific Business Group on Health which represents large employers.
DAVID LANSKY: If Kaiser can't document their internal cost structure and pricing, then there's a whole chain of mistrust that gets generated because of the lack of transparency and clarity.
VARNEY: The frustration seems to stem in part from the very trait that makes Kaiser Permanente so efficient. The HMO, unlike other providers, doesn't have a menu of fees. And the company's electronic medical record system is one of the most advanced in the world and has largely eliminated duplicative tests.
But Lansky says employers - who pay the bills - aren't yet seeing the savings.
LANSKY: It's a little bit of what we went through with the banks when they went to ATMs and stopped having tellers in the retail points of service. You'd think that would actually lower costs. Instead, we started paying fees at the ATMs.
VARNEY: Some of Kaiser's biggest customers say their annual rate increases don't reflect changes in the use of Kaiser services. But they are loathe to drop Kaiser since tens of thousands of employees would have to switch doctors.
Bob Kocher, a former health care advisor to President Obama, says Kaiser's model was at the back of policymakers' minds when they pushed to include in the federal health law financial enticements for hospitals and doctors to essentially form Kaiser look-a-likes.
BOB KOCHER: A lot of us in health policy land have scratched our heads a bit and said, Well, you know, why can't Kaiser be a heck of a lot cheaper?
VARNEY: Kaiser hospitals have shown they can deliver top-shelf care for happy hour prices. Recent Medicare data show all but one of Kaiser's hospitals cost significantly less than the national average. Kocher, and other health policy experts, suspect that as more doctors and hospitals band together into Kaiser mini-me's, Kaiser Permanente could face more competition.
So Kaiser is pressing ahead with an aggressive expansion plan. In Tyson's Corner, Virginia, a swarm of construction workers are erecting a new medical building that will take its place among the mirrored office towers of suburban Washington, D.C. Butch Hawkins, a construction supervisor, lays out the plans.
BUTCH HAWKINS: This is going to be the cafe area, a small cafe. Over there will be your pharmacy.
VARNEY: Kaiser Permanente is well known out West, but the company sees opportunity the nation's capital and farther south in Georgia. That eastward march costs a lot of money. Health policy experts, who praise Kaiser's exemplary medical care, assert that the company is setting its premiums, in part, to underwrite that expansion.
CEO Halvorson says Kaiser Permanente spends its surplus to benefit its customers.
HALVORSON: We use our money to invest in our care system. We use our money to invest in our computer systems. We re-invest the money in hospitals and clinics and that's the only use of the money.
VARNEY: Halvorson contends, if all Americans got their care at Kaiser-like facilities, the U.S. would save hundreds of billions of dollars in health care costs. Others are less convinced. The perplexing and vexing problem of still too high prices, even at a smooth-running operation like Kaiser Permanente, have led some true believers to question one of their most fundamental beliefs, that bringing order to America's fragmented health system will corral runaway health care costs. Indeed, the cautionary tale of Kaiser Permanente, they say, is that, even under the best circumstances, U.S. health care prices may still be untamable.
For NPR News, I'm Sarah Varney.