Kaiser Permanente to Buy Major Insurer in Washington State

Kaiser Permanente has agreed to acquire a major health insurer in Washington state, signaling a more aggressive expansion strategy for the big California-based managed-care operator at a time when its integrated model is increasingly fashionable.

The nonprofit’s acquisition of Seattle-based Group Health Cooperative, which like Kaiser includes both an insurance arm and health-care providers, would bring about 590,000 new members and a far broader geographic footprint in the state of Washington. To acquire Group Health, itself a nonprofit, Kaiser plans to spend $1.8 billion, which will go toward the establishment of a Seattle-based foundation focused on improving health in Washington’s communities. The deal will require the approval of the voting members of Group Health Cooperative as well as regulators.

The planned deal is the most public sign yet that Kaiser—which hasn’t made a major acquisition since the mid-1990s—wants to expand beyond its current locations. Kaiser, founded in 1945, is among the largest managed-care operators by revenue, with $56.4 billion in operating revenue last year, and has been increasing its membership recently, to around 10.2 million now. In addition to its imposing presence in California, home to the majority of its members, Kaiser offers plans in the mid-Atlantic region, Hawaii, Georgia, Colorado and the Pacific Northwest.

“Our goal is to continue to grow,” said Bernard J. Tyson, Kaiser’s chief executive. He said the nonprofit aims to expand on its own in its current regions and into contiguous geographies, but it is now also interested in entering new markets selectively when it sees opportunities such as the Group Health deal. “We’ll continue to look at where there might be strategic fits,” he said.

The Group Health acquisition will draw attention “as a potential bellwether for other deals like it” that Kaiser could make in the future, said Dave Osterndorf, a partner at Health Exchange Resources Inc., a consultancy.

Analysts said the combination makes sense, as the two operators, which have long had close ties and discussed merging in the late 1990s, have similar approaches. “They are certainly aligned philosophically,” said Raj Bal, an insurance-industry consultant, who added that Kaiser could bring technology and other resources to the smaller insurer, while the combined operation will have significant scale in its region.

Scott Armstrong, Group Health’s chief executive, said the acquisition will help hasten investments in technology and expanded operations, including new clinics. “We can grow more quickly,” he said.

In the late 1990s, Kaiser pulled back much of its national presence, unloading operations in the Northeast, Texas and North Carolina. The moves came amid a backlash among consumers against 1990s-style health-maintenance organizations, though part of the challenge for Kaiser was that some of those regional operations didn’t fully reflect its traditional model of owning both health-care providers and health plans.

Now, consultants and analysts say, partly because of the growing cost of traditional health coverage, companies and their employees are far more open to the Kaiser approach, which typically is built around directing members to Kaiser’s own health-care providers, rather than letting them access a network of independent doctors and hospitals.

“The employers would welcome a Kaiser expansion wherever it can go,” said Tucker Sharp, a senior vice president at the health-benefits unit of Aon PLC, an insurance broker and human-resources company. However, he said, large employers are unlikely to use Kaiser as their sole health-insurance carrier, partly because some workers would object to the limited choice of providers. Kaiser can also gain a foothold when employers turn to so-called private exchanges, which offer employees a choice of insurers, he said.

To some degree, the rest of the industry is already moving in Kaiser’s direction. Many traditional insurers are rolling out narrow-network plans and seeking to work closely with health-care providers, while hospital systems are launching their own insurance arms. “Kaiser has been at it the longest,” said Michael Turpin, executive vice president at USI Holdings Corp., a major insurance brokerage.

Health plans with limited choices of health-care providers are also common on the Affordable Care Act’s insurance exchanges, where consumers have shown they are willing to trade off broad access to doctors and hospitals in order to secure a cheaper premium, said Michael Z. Stahl, a senior vice president at insurance agency HealthMarkets Inc. Kaiser is also a significant seller of Medicare Advantage plans, a rapidly growing market for insurers.

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