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Interview with David Lawrence

Hedrick Smith: It's December 9th, 1999. We're in Oakland, California, and we're talking with Dr. David Lawrence, the CEO of Kaiser Permanente. Let me ask you just the most basic question. What is the mission of Kaiser?

LawrenceDavid Lawrence: Well, the mission of Kaiser is very simple, and that's to improve the health of the people we serve, our members, and the communities we serve.

Hedrick Smith: And there is a Kaiser way and a Kaiser ethic that people talk about. Take me into that a little bit more deeply.

David Lawrence: We really deeply believe in the principle that the best care that we can provide for someone comes in an organized approach or integrated approach. There are many words are used to describe [it], but none of them very powerful in terms of communicating what we're trying to do. But the whole principle is a multi-specialty group of physicians, a multi-professional group of professionals, organized to take care of a patient with diabetes or colon cancer or an emergency or a common problem. And the idea is to try and put together the right people, the right facilities, the right intelligence so that people get the very best of what our science and our technology and our human caring have to offer. That's the Kaiser way. Now there's some other principles you wrap around it like prepayment and instead of paying on an as-you-go basis, the traditional fee-for-service model. But at the core of it, that idea of organized care and integrated care with this patient at the center, is the principle to which we aspire.

Hedrick Smith: What does the patient get from integrated care?

David Lawrence: Oh, I think the patient gets many, many things from integrated care. What we're aspiring to is when you come in as a family or as an individual you come to a single place or one or two places, and you get the full panoply of care that you need to have for your particular condition. The short-term term that we use is one-stop shopping, but it means much more when you're sick or when you have a chronic illness than just a Wal-Mart… So that's one thing. Second thing is you get better safety… Safety is driven by the quality of the support systems, your ability to organize the care in a way that protects the patient from the errors that are inevitable when human beings are involved in a human enterprise.

Hedrick Smith: Thinking about the contrast with other health plans, we have been impressed with your coverage of the HIV community. You ran through a rather bumpy phase here--in the mid '90s. I'd like to know how you were involved in some of those decisions. Because there you had people chanting in the streets, "Kaiser's a killer." And the next thing you know, a couple of years later, they're sitting on your advisory board and you've got an HIV module. That's a dramatic change, a dramatic turnaround.

David Lawrence: The pressure that was felt in the HIV community primarily was felt at the level of a medical center. In San Francisco or Oakland or Los Angeles, where we had a lot of members, there were a lot of people at risk for AIDS, those medical centers really felt the pressures.

I think we were able to create the environment inside Kaiser Permanente that was supportive of what was clearly, obviously needed at the local or at the medical center level, which was much closer relationships with the people who were supporting patients with AIDS. Our medical centers created the advisory committees and the strong relationships with the AIDS community and the support communities and really changed our views. Not only Kaiser Permanente but . . . in health care.

Hedrick Smith: You advertised that you had Steve Follansbee here. You advertised that you had some of your advisory board members in ads. We've seen some of the ads saying, "We've got great care here." That's in a way opening the door and inviting in a population that's very sick and very costly. How can you do that?

David Lawrence: That's part of our mission. It's as simple as that. It's part of who we are.

Hedrick Smith: But can you survive economically?

David Lawrence: We believe we can, and we believe we are. This gets us into a whole dimension about social insurance that is threatened by the current lack of regulatory framework and lack of public policy direction focused on creating an environment that allows you to provide insurance to a broad array of people with different kinds of diseases. So that you can balance the risks, if you will, across a large population. It's getting harder and harder to do that because of the failure to deal with the requirements of a social insurance approach in health care. What that means is right now the way the insurance industry —

and again, I separate Kaiser Permanente from that industry — but the way the industry is moving is to try and find the healthier and healthier populations to take care of, to cover.

Hedrick Smith: You make money because they don't use your services.

David Lawrence: Exactly. Exactly right. And that's different from the principle that many operated on, and certainly we grew up in, where health care insurance was designed to cover a broad range of people from the healthy to the sick on the presumption that at any given point in time any one of us is at risk of getting sick. The current system we're in — and it's been in existence really throughout most of the nineties — says if you're sick, you’ve got to pay more. In a certain sense it's kind of your fault. You picked your parents the wrong way. I mean basically that's what it's saying. We're fragmenting the risk pools. We're charging a lot more for the people who are sick than the people who are healthy. And the opportunity to provide care for people with AIDS, for example, the opportunity to spread risk across a broad population, [is] being slowly eroded. It's a very dangerous, explosive situation from a public policy point of view, and one that I personally decry.

Hedrick Smith: How do you pay for the AIDS patients?

David Lawrence: What we do is an insurance principle. We take care of a lot people. Some very, very healthy, some very, very sick. And you balance that across your entire membership. We haven't changed the way we approach that in probably, in 50 or 60 years. So the, the healthy, the younger, the well help take care of the very sick.

Hedrick Smith: If I understand it correctly, your colon cancer screening is extensive, expensive — relatively speaking — and it doesn't pay off economically for seven or eight or nine years. So why does it make sense?

David Lawrence: Well, the basic question you're asking is why does prevention make sense if you don't get immediate payoff from it as an economic matter. Well, if that's the business you're in, you wouldn't do preventive care. What I mean by that is if your business is turning a profit and making money, you wouldn't do preventive care necessarily because the payouts are very long. We just don't operate that way.

Our whole approach is to say we want people who are in our program for their lifetimes. We want their children to enroll in our program. We want their children's children to enroll in our program. And the way you do that is by focusing on their health, their health status, and maintaining it for as well as you can, for as long as you can.

Hedrick Smith: Is the key difference between you and other health plans that they're for-profit and they have to worry about stockholders and Wall Street, and you don't because you're a non-profit?

David Lawrence: I think it's more a matter of philosophy and more a matter of what your, what you see your mission is, whether or not you want to be doing health care 50 years from now or a hundred years from now, as we have for the last 50 years.

I think others have different philosophies. If you're an insurer, you're trying to manage your economic exposure in different ways and provide a benefit package that meets the public's need and gives you the opportunity to generate enough profit that you can stay in business the next year.

Hedrick Smith: We ran into several patients, but one in particular, whose name is Roberta [Kuhlman]. She's been with Kaiser for 40 years. She loves Kaiser. She worked for Levis. She got laid off about a year ago. And once she went from being covered under a group to being covered as an individual, she found that the benefits changed. She's a diabetic. Her doctors recommended an insulin pump. But the coverage she gets as a private individual wouldn't give her an insulin pump. Whereas if she were under the group she would get an insulin pump. That's a $5,000 item. That's a big chunk of money for an individual. I wonder how that squares with Kaiser's social message.

David Lawrence: What you've identified in that story is the fundamental problem right now in American health insurance coverage. It's a fragmented, fractured system. When you're in the coverage system where your employer pays for it, depending on what the employer wants to do they can cover it, provide broad coverage or narrow coverage. When you move into the individual pool, it's a group of people for whom we have to make the insurance affordable enough that a large enough number can join it, that the healthy can help offset the cost of the sick.

We structure the benefit packages so that they can be affordable to individuals who are buying that care out of their own pocket.

Hedrick Smith: Is this a case of economics overriding the social mission?

David Lawrence: You have no way of financing the individually covered individual out of the working pool, for example. There's just no way to cross-cover those groups. We do some subsidies, actually, of the individual members.

Hedrick Smith: But what you're saying with the individuals is they come in without a pool of other people to help offset their high cost?

David Lawrence: And they're paying it by themselves, as this particular person is. And there's not a pool of people to help offset their cost. This is why it's harder and harder to carry out our social mission in today's insurance climate. What this means is employers are saying, we want to pay you for our employees and nobody else. We want to pay and cover only our costs. If we happen to be made up of a lot of older employees, then they want to be pooled with everybody else including a lot of employers with young employees. Those with young employees want to just pay their own freight.

Hedrick Smith: So you're saying that Kaiser's having a harder and harder time maintaining its own social mission in the economic climate?

David Lawrence: In the economic and the public policy climate surrounding health insurance, yes.

Hedrick Smith: Being the leader of Kaiser at this moment, what are your greatest frustrations?

David Lawrence: One is this clash between what we believe is the most appropriate way to approach the public policy issues around insurance coverage and access, and where the marketplace is actually moving, because we don't have the kind of framework that we would like to see.

A second frustration is that, as health care has become a much hotter topic in the public debate, the regulatory climate has changed dramatically. So that we're spending more and more time responding to regulatory oversight issues, most of which turn out to be non-issues.

And then I think the third thing is this issue of how one responds to the competitive environment. How do you do that as a socially-driven organization? We think we're actually leading the country from a competitive point of view on our delivery system — with the integrated delivery system, with the multi-specialty group practice, with the kind of work we do in care, care management, for example, and diabetes or congestive heart failure. Those are, those are leading the country.

Hedrick Smith: Coming from corporations it looks as though the pressure for cost reduction or cost containment is greater than the drive for quality improvement.

David Lawrence: It is clear from our anecdotal experience and also from the studies we do of purchasers that the dominant issue [for] most purchasers is cost, cost, cost. However, I think to say that that's the only issue or that there aren't leading purchasers who have done an extremely aggressive and responsible job of trying to protect and manage the quality in the way in which they purchase health care would be a mistake.

Why do they benefit? Two or three reasons. First of all, improving quality is the most effective way of lowering costs. Don Berwick and others in health care have estimated that we're paying an enormous premium for the costs of poor quality in health care. Safety issues, overuse, misuse, underuse reported by the Institute of Medicine last year, for example. So that's one thing.

And the second thing is that if you focus on quality, including prevention, you get an investment in the health of workers and their families that pays dividend[s] downstream for the employer. But those are the enlightened positions. The more common position, unfortunately in the country, is to focus on cost. And to assume quality.

Hedrick Smith: You did something interesting that those of us who don't live in California noticed. You began buying up plans around the country. I mean suddenly Kaiser [is] up in Albany, you're in New York and you're in New England, you're down in North Carolina, you're in Texas, you're [in] a whole lot of places. What was the idea behind that?

David Lawrence: Each of those is a different situation. We had been in the red all during the 1980s in each of those places that you mention--in Texas, North Carolina and the Northeast. We had an aggressive effort to try and fix the issue that we faced in the Northeast. It expanded our presence, again in the smaller cities of New England, not in the major cities. It turned out to be the wrong decision in retrospect.

Hedrick Smith: Why?

David Lawrence: It wasn't medical center-based, it was community physician-based. And what we began to see in the '97-'98 period was it was extremely difficult to have consistent quality, and it was extremely difficult to maintain any kind of predictable prices, from the docs back to us.

Hedrick Smith: So are you saying in effect that as you expanded here in the Northeast that you were moving away from the Kaiser model?

David Lawrence: Yeah, that actually was one of the things that happened. There was no way to move the Kaiser model or the medical center model into the smaller communities of New England. They just don't have the population mass to do that. And so we used what most of the HMO managed care organizations have used, which is a distributed network of individual and small group physicians. And individual community hospitals.

What happened was that the economics in the '90s for doctors and hospitals in the communities changed radically. The prices that doctors in the community were charging went way up. And hospitals, of course, many community hospitals had no competition, and their prices went up, as they began to recover from losses or lost income, whatever, whatever they were dealing with. And those prices got passed along to us in the contracts, and then we had to pass them along in terms of rate increases. And it was just very had to stay up.

What we learned about managing these distributed networks of doctors and hospitals is how difficult it is. It's a completely different proposition than what Kaiser Permanente is about. It's harder to manage quality, it's harder to integrate the care for the patient, or the way we can do it in a more consolidated, multi-specialty group, the way we operate. The volatility in terms of what doctors charge and what hospitals charge is much greater. So it's much harder to be accurate in your predictions about how to set the premiums for the insurance that will cover the costs of the care the patients are going to need.

It's just a different business, completely a different proposition. I don't think we understood that when we went into the Northeast or tried the same thing in North Carolina. And the good news is we've divested those activities.

Hedrick Smith: So you think that was a mistake?

David Lawrence: I think what it was, in retrospect, yes, a mistake. But I guess more importantly we learned from it. One of the things that we've tried to do setting out at the beginning of the decade of the '90s in Kaiser Permanente was to move from being a very sleepy giant that was also often called the sleeping giant to one that was willing to take on some new challenges, try some new ways of doing things, not just be stuck in the old way we'd always done things. And we've done that in California, we've done that all around the country. Some have worked, some haven't. But what we've done is learn a lot from them.

Hedrick Smith: It sounds [like] you got caught in the market game which was going on in health care.

Was one of your ideas that, as a voice for managed care, as well as a corporation, as well as an economic entity, that you would have more clout, more voice, that you needed to have larger market share nationally?

David Lawrence: Well, I'd say that was part of the consideration. But the deeper consideration was, look, we've proven that we can provide the superior care in a model that works and is sustainable. We've done that in the West. We've been as far east as Cleveland. And we've had a very successful plan in Washington, D.C. From there it was a question of, can we figure out a way to take this model to other parts of the country and make it successful and demonstrate the value of this kind of organization?

Hedrick Smith: What were people like McKenzie and Arthur Andersen and folks like that, their consultants, telling you during this period was a smart strategy? Because this was very difficult waters. What were you hearing from the consultants?

LawrenceDavid Lawrence: One of the things that I quite consciously did, beginning in the '90s, early '90s, was to bring in people from the outside, consultants, experts to help break down the insularity of Kaiser Permanente that had been built up over 40 or 50 years. Remember, this was a sleeping giant beginning in the late '80s, early '90s. People were quite afraid of what would happen if Kaiser Permanente woke up and became a truly proactive, aggressive competitor with its social mission on the national scene.

When I brought in people to help us, here's the things they were saying. They were saying, first of all, you have to understand who you're competing against, and what people are asking for in the markets, far more than you do now. What we learned was that we had to work very hard [at] making sure people understood the quality question and why we were a superior quality organization. Consumers, interestingly enough, were buying health care based on the presumption that everybody provided equal quality.

That message had not been getting out. Service and access, and an organized system like ours is always a problem. It's always an issue that we have to wrestle with, and we learned from them that we had to focus on service and access.

And the third was cost structure. How could we improve the cost structure? We have less variation in the way in which clinical care is practiced in our organization than is true outside, and that's safer, that means it's safer and higher quality.

But we had still a fair ways to go before we took out what I would describe as an unwarranted variation in the way in which physicians practiced. You know, where there was good science and good evidence. The medical groups believed all of their doctors should practice that way. But medicine has never operated that way in America.

What we began to do in the early '90s was to start to think about how we could move from being this collection of highly autonomous, geographically distinct regions around the country, to actually taking advantage of the fact that we were a national organization with 10,000 physicians who could learn from one another - where best practices would be invented in [the] Northwest and be moved through the rest of the program as the best practice for taking care of a diabetic or a person with congestive failure.

So everything that we've been trying to do during the '90s is to create that ability to think globally, to think nationally, and to put in place institutions that will enable us to do that, and then act locally, act where the patients are. That's a tough transition for an organization that was just defiantly local in its thinking and very hidebound in the way it thought about itself.

Hedrick Smith: Did that advice from the consultants encourage you to become more robust, bigger in the Northeast? And to build up your North Carolina network?

David Lawrence: Actually, it's quite interesting. The advice that we got about the Northeast, in 1995 was to leave the marketplace.

Hedrick Smith: But you stayed?

David Lawrence: We chose to stay and try to expand. That was against the advice of our outside consultants, quite frankly. That was an internal decision that we made. And we made it we made it with the leadership in the Northeast and the leadership nationally to try and figure out how we could have a presence in the Northeast. And the choice was expand and join with the CHP. There actually was no other way to do it, because we knew we couldn't grow the organization. It wasn't growing the way we wanted it to in the Northeast, in spite of the fact we had the best rate position, the best quality story, the best service story in the Northeast of our competitors. We weren't growing.

Hedrick Smith: But the '90s have been the go-go growth decade. It's hard not to get caught up in that, isn't it?

David Lawrence: Yeah, but we've learned over a long period of time that the unexpectedly high growth is not what we want to have. When you have unexpectedly high growth, it's hard to take care of. Because we're about taking care of people and we do it in our organization with our own physicians and our own nurses and our own hospitals to the extent we can. And when you have more than you anticipated it becomes very, very difficult to take care of those people the way you want to take care of them.

Hedrick Smith: How do you feel about where Kaiser is now? Where are you trying to take Kaiser now?

David Lawrence: I'd like to see us expand again and be in a position to expand with a robust financial circumstance, and we're building that back up again. I'd like to see us be able to move into larger population centers around the country because I think we do things in a unique way that brings extraordinary value to patients and consumers - a real discipline to the rest of the health care system. When we come in and we're successful, we drive the standards of health care in the community. And that's part of what our mission is in improving the health of our members in the communities we serve.

I think we're in a good position to do that. We've learned a lot from what didn't work in the '80s and in the '90s. We're building systems now that will support that kind of expansion and that kind of care when we do choose to go into other communities. The clinical information systems we're building -- the consumer-based Internet systems that we're building for consumers to access our organization through KP online. The physician knowledge connection that we have for the Permanente physicians. All of those systems put us in a much better position to be able to expand again.

Hedrick Smith: To what extent was the problem at Richmond over the emergency room an outsourcing problem? That you were not building or activating a full facility with a full-fledged emergency room, a full-fledged operating room, that kind of thing. And you were outsourcing that to other facilities of Kaiser in San Francisco or to other facilities in that area?

David Lawrence: Richmond was a hospital that was designed to be, I believe, fifty beds. The demand for hospital care at Richmond actually had us with an average daily census at Richmond of eight to ten patients. Because the kind of care that people needed coming out of the Richmond community required specializations, specialty nurses, specialty care that needed to be concentrated to keep the quality high -- we weren't using the inpatient facility the way, even at fifty beds we thought the demand would be.

When you don't have the inpatient demand and volume, it's very hard to keep the emergency room staffed properly. Because you need some of the support from intensive care, intensivists from respiratory therapy and other sorts of things, and you have them move between the inpatient and the emergency room setting.

So I view the Richmond question as one of how do how do you meet the needs of a community on the one hand, and maintain standards of quality and superior care that require consolidation?

Hedrick Smith: And which meet cost needs.

David Lawrence: Well, the cost part of it flows from that, but it's primarily a quality issue. And that's why in the state of Pennsylvania, for example, laws have been passed that limit what local community hospitals can do based on the volume with which they do it. We had the same thing, same opportunity in California at the state legislature, and it was knocked out.

And you can understand why. Local community interests, local chambers, et cetera want their own community hospital. Guess what? It's not as good care. End of story. Unless you're doing it all the time, unless you can specialize and do it all the time, you're not gonna provide the care as well as a hospital that's doing it. That's why you go to the Mayo Clinic or you come to our heart care center at San Francisco, or you go to a neurosurgical center in Redwood City, to get the quality. Because that's where the quality occurs. It doesn't occur when you're out in community hospitals.

Hedrick Smith: If Richmond Hospital didn't make sense because it was too small a market, why did you build it in the first place?

David Lawrence: Well, I made that decision. That was on my watch in the 1980s. Richmond was a place we started. It was a place where the shipyards were that Henry Kaiser built -- the Liberty ships in World War II. And there was a very strong emotional and historic tie to the community of Richmond. It's also an African-American community. And we'd been champions of diversity and champions of our social responsibility. You put all of that together and in all honesty, when I was looking at this decision I said, ‘I think we can try and figure out a way to make it work.’

And I think in retrospect it's been wishful thinking. On my part, and I suspect on other people's part. We wanted it to work. But a 50-bed hospital in today's world, small hospitals in today's world that are not specialized on a particular disease just don't . . . very difficult to run. And I think that's what we got ourselves trapped by in Richmond.

It scares me a little bit because as you look at the protests against a Richmond or some of the other small hospitals that we've run, the protests against consolidation, so that you can raise the standard of care by having the volume that enables you to get really good at things. Those protests are very well intended for the most part. And very heartfelt. But they run counter to the whole issue of how you do care safely and how you provide high quality care. They run counter to the fact that we're not producing enough nurses in the country to cover all of these hospitals in all of the ambulatory settings in the country that we have. We're not producing the nursing capability in this country. It's a major crisis.

Hedrick Smith: But you've turned it around. I mean you're going to try again now.

David Lawrence: Well, we have. We've tried to bring in more patients there, move some of our patients from the Oakland Medical Center there, put some specialists there to try and fill that 50-bed hospital. It's better than it was. I think the team that's been working on that,trying to solve that problem,has done some really good work. But at the end of the day it'll be a 50-bed hospital serving that community, which on the one hand is going to be good for access.

On the other hand we're going to have to work very, very hard to make sure that the standards of quality are maintained, because it's very difficult to do when you're not doing these highly specialized kinds of things we do in the hospital today on a regular basis with a regular team. You know, with really, really superior people. It's very hard to recruit superior people into all the kinds of places that we have in the country, not just Kaiser Permanente but around the country in other systems as well.

Hedrick Smith: You're doing it for a social mission in a lot of ways?

David Lawrence: In a lot of ways we are. It doesn't make any economic sense whatsoever. It is part of our social mission. It's part of our commitment to a community that we've had a commitment to since we went in, we started in, right after World War II. The community of Richmond is a very special place. And we've worked really hard with that community. We believe we have a very close relationship with that community, and quite frankly most of the people who get their health care in Richmond get their health care from us.

Hedrick Smith: How did you feel personally going through those protests? The kind of things that were said, given the fact you made the decision.

David Lawrence: I've been around the political world at various times in my own career and I know what gets said in the heat of battle, so I don't take them personally and I don't get terribly upset by them. I think the important thing is to go back and make sure that you keep the record straight. You keep the debate as honest as it's possible to keep it, given the anger and the angst and the frustration and the agendas that are all playing out.

So you do your best. When we had the error in Richmond and this whole thing came to light, I held a press conference. And I said, ‘We blew it. We made mistakes. We're going to find out why. We're going to find out what needs to be done, and we're going to fix them.’ And I think that's all you can do. You just try and be honest as you can about it.

Health care is not perfect. We can't ever expect perfection. We can expect as robust and safe an environment as it's humanly possible to create. We learned from Richmond. We learned from Walnut Creek. And we tried to incorporate those practices elsewhere through the rest of the program. And frankly, that's all we can do.

Hedrick Smith: I'm interested by the point you've just made. I'm struck by looking at you and looking at your competitors. And the standard method for dealing with problems in the health care industry is to file a lawsuit, [put a run to] the legislature.

David Lawrence: One of the things that I really am proud about, about this organization, is that the people at the medical center level or here in the national office, all of us are involved in one way or another in the communities where we live. We put a lot of money into the communities as part of what we call our direct community benefit program. That's part of what's expected of us as a not-for-profit health care organization. We reinvest in our communities. I'm really proud of that link. And what that means is when I walk out the door, I'm face to face with people who get their care from the place that I'm responsible for.

Hedrick Smith: Is Kaiser more a family than a business?

David Lawrence: It's a family, but like any big, boisterous, contentious family we have our share of internal squabbles and so on. But one of the things we try to do at the end of the day is to make sure that we try very, very hard to treat people's points of view and perspectives and opinions with great dignity and with great deference, and we try to find solutions as we make our way through all of these squabbles and all of these pressures. We try to find solutions that work for people: our patients and the people who work here.

Hedrick Smith: Speaking of a family, one of the things that interests me is the business of this colon cancer preventive screening. Why does it have so much trouble moving from one part of the family, moving from the one area to another? I mean this is Northern California, but why doesn't it spread?

David Lawrence: Doctors are very, very cautious about taking on a new way to do things. And what that results in is a lot of what we call the N.I.H. phenomenon, the Not Invented Here phenomenon. You get a great solution in the San Francisco Medical Center, and it doesn't move to Santa Clara. The doctors in Santa Clara have got to come up to San Francisco and see it and touch it and feel it and witness it and try it, and then it'll start to move.

We've actually been successful at accelerating those kinds of standards of excellence, if you will. Our work in diabetes, pediatric asthma, congestive heart failure, [and] depression has demonstrated a movement in that direction that's much more rapid than what gets reported in the rest of the health care field.

But the problem you describe of moving a good idea or a new science from one part of health care to another is endemic in health care. We figured out how to do it better than others, and we're still not very good at it, not where I want us to be anyway.

Hedrick Smith: And again on family. You find people here are uncomfortable, again, this '90s go-go market era. We're talking about members or patients as customers. Talking about market share. We're talking about the business. The lingo about cost. Some of the language in Kaiser, people feel has changed.

David Lawrence: I think the language has changed, and we've done that very deliberately. Because we know that we will never lose the ethic and the core language of Kaiser Permanente, which talks about patients and members, and focuses on that. That's what we're about.

When I took over in 1990, '91, what I was worried about was that we were so internally focused that we could destroy this institution if we didn't start understanding what was happening in the world around us. We began to introduce words that had to do with maintaining the financial integrity of this organization and the business operations of this organization. Because we had one little mantra that we used over and over again, and that is no margin and no mission.

We kept emphasizing hammering away at some of the business language, too, and that's been introduced into all of health care and also into Kaiser Permanente. It's been uncomfortable. I don't use the term customer. I use that to describe the people who purchase health care, the employers. But I still use my own language, the member and the patient, because that's the language I grew up in.

We've always been very cost-conscious, and if you go back in the history of Kaiser Permanente, in the first 10 years or 15 years where they were struggling to try and even become a viable entity, there are stories that go back to having to turn in a pencil to the procurement guy in order to get a new pencil. And it had to be a certain number of inches before you could get a new one. It had to be ground down to an inch and a half. So it was a very tightfisted organization in its early days.

I think what we're trying to do is to find the proper balance so that we focus on costs. But saying, look, the way we get that is by emphasizing the consistent improvements in quality and safety. Because that's where the real opportunities lie to improve the cost equation in health care.

Hedrick Smith: How do you feel about where we're moving on health care as a country? What do you say we need to be doing?

David Lawrence: My view is that what's going on in health care is a change from a chassis for delivering health care that was characterized by the solo doc, the kind of cowboy individual professional mentality, I'll call the shots, I'm the boss of this, I'm the captain of this ship, the isolated community hospital. We're moving from that, which is still the dominant way that health care is provided in the United States — 75 percent of physicians are either in solo or small group practices still — to one in which the technology and the science and what we're now able to do requires us to operate in different kinds of organizations, integrated delivery systems. That's why people when they're very, very sick with cancer think of M.D. Anderson or Sloan-Kettering. Or why if you're sick with an undiagnosed or difficult to diagnose illness you think of the Mayo or the Cleveland Clinic. Those are integrated delivery systems.

So I see what's going on as nothing less than a fundamental change in the way in which health care is being organized and delivered. And it's changing a lot of the traditional ways that doctors think about themselves. Their role in the team, their role with other physician professionals, the demands and transparency with which they're being held accountable. All of those things have changed. I think it's for the better.

Hedrick Smith: In the brutal price and cost environment that you're operating in, can an organization committed to quality survive without sacrificing?

David Lawrence: No. I think quite the contrary. Unless you're committed to quality, and improving quality, you can't survive economically. Because there's no place to go, other than slashing quality.

Hedrick Smith: But the consumer wants choice.

David Lawrence: But that's not quality. That's not about quality. That's about an emotional commitment to the idea of being able to go anywhere they want. That has nothing to do with quality and often leads them to the wrong solutions from a quality point of view and a safety point of view. That's a myth.

Hedrick Smith: So they're focused on choice, and that's not helping quality. And the employers are focused, the biggest purchasers, are focused on cost.

David Lawrence: It's an economic clash that has nothing to do with quality. Patients, members, employees would like to have as much choice as possible. I want to go anywhere I want, anytime I want, and get any care I want. That's the old indemnity model which we funded through the early part of the '90s. The purchasers are saying, ain't no way. We can't afford that. We can't stay in business doing that. And that's why cost becomes so important, and it looks like a cost issue.

For the health care delivery systems you have a couple of choices. You can cut what you do. You can cut staff to the bone. You can stop investing in the technologies and the science and the infrastructure required to deliver it. Or you can find out ways to consistently improve quality the way the leading industries have done in other sectors of our economy.

Hedrick Smith: Let me just ask you, while you’re standing there at that press conference, you blew it on Richmond — or in the weeks leading up to that, having made the decision to open that hospital and put it there — what were you going through? What were you feeling?

David Lawrence: The feeling I get when something like this happens is just a sickness in my stomach. I mean, it’s visceral with me. And the same thing happens when somebody calls and, and reaches my office, and is complaining about not being cared for properly or not being able to get access — things like that. I get sick to my stomach. I mean, it’s a physical reaction quite literally.

Hedrick Smith: Roberta Kuhlman is going to solve her problem by going through with Kaiser because she likes her doctor, has confidence in him — is going to take the care from Kaiser. She’s going to sign up for her husband’s plan to get the insulin pump because Kaiser won’t pay for it. You talk about waste?

David Lawrence: Absolutely. It’s the problem that we have in a fractured kind of insurance coverage system where the employer-based system is the dominant system. But there are big gaps in it. The individual is laid off or retires, [is] sitting between layoff and Medicare, [is] the person who [doesn’t really] have employee based coverage for whatever reason.

There are big gaps: the poor, different kinds of ethnic groups that just don’t know how to access the bureaucracies or the systems that enable them to get coverage. It’s a very, very fractured system of care that we have for providing access. I think there are only two countries in the western world that don’t have some sort of guaranteed financial access to health care. And we’re one of them.

Hedrick Smith: So what you’re saying is, is that Kaiser Permanente can’t fill that gap up?

David Lawrence: We can’t. We can’t be government. We can’t redistribute income. Social insurance enables us to do it to some extent. And we did it historically. It’s an income redistribution model for, for covering health insurance. We can’t do that anymore. It’s public policy.

Hedrick Smith: What about her predicament where she signs up for a program and the program itself from year to year drops a $1,000 drug benefit?

David Lawrence: What we’re faced with is a situation in which there are more drugs. They cost an arm and a leg. And they’re going up at 15 to 20 percent a year. And utilization’s going up because of advertising. So the actual use of drugs is going up. And so what we’re trying to do is to balance all of that and still have a package from year to year that will meet the needs of most people who are what we call individually covered — making the decision to cover themselves out of their own pocket.

The U.S. has never decided what a minimum benefit package is going to be. We’ve never done that as a matter of public policy. We have large gaps in the way we provide coverage for people. We expect people to get coverage in the commercial insurance world. And that’s a cutthroat business to pay because of the fact that that’s how we’ve decided to set it up as a matter of public policy.

Hedrick Smith: What are the one, two, or three things that you think we most need to do in the realm of public policy?

David Lawrence: Number one, we have to decide what we’re going to do with the uninsured and the under insured. It’s an absolute travesty. It’s been the top thing on our agenda as a not-for-profit health care organization. It has got to be solved. It, it is [unconscionable] from a human point of view and it’s extraordinarily costly from a financial point of view.

Hedrick Smith: If they’re uninsured?

David Lawrence: They still get care. But they happen to get it at the end stage of their diseases, in emergency rooms. And that all gets passed back into the health care system. We’re paying for it. And we’re paying for it in the most expensive way possible. And of course, there are some people who never get the care they need as a consequence of not having insurance. And so they wait until they’re desperately ill. That’s [unconscionable], especially when it comes to children--number one.

Number two, I would reform the insurance marketplace. I think we have to deal with putting some perimeters around the insurance marketplace so that in fact we say this is a social insurance mechanism that we are using to provide broad coverage. And we’re funding it with a combination of what individuals pay, what employers pay, and what government pays. And we have to decide on what basis we’re going to do it, what’s allowable or required in terms of basic benefits and underwriting — and all of those things — so we don’t get into the kinds of games that are now occurring from a public policy point of view.

Hedrick Smith: Such as?

David Lawrence: Well, the fracturing [of] the risk pools. Underwriting benefit structure changes to try and attract the healthiest and avoid the most the most ill, negotiating rates in order to capture a particular population of very healthy people so you can improve your bottom line. All of those games are going on day in and day out in the insurance industry.

And the third would be to focus on the whole issue of safety and quality. The study last year in 1999, the Institute in Medicine Study, was a real [bell weather] in American health care. Where a problem that we’ve known about was called out and brought to public attention. It’s critical that the government of the United States at the public policy level decides what it’s going to do to protect the safety of the patient and the consumer of health care in the same way that they’re intervened in the nuclear power industry, in the automotive industry, and in the aviation industry. Health care it turns out has more errors and causes more deaths from errors than any of those. In fact, any of those combined. So the government has got to decide at the public policy level what kind of role we’re going to play to stop that — and to improve the safety of health care dramatically. It’s possible. We know how to do it. It’s a matter of making sure it happens from a public policy point of view. Those would be my big three.

Hedrick Smith: Not surprisingly you’ve got a lot of books on health care. Here’s an old book. Here’s a new one. But the book that interests me the most is the one you have right here — To Err Is Human.

David Lawrence: Yeah -- [building safer] health care systems. It was just put out in 1999 by the Institute of Medicine. And this is a study group. I happened to sit on it. It was chaired by Bill Richardson, who’s the director of the Kellogg Foundation, that looks at the whole issue of errors and safety in health care. And it’s a very, very critical study. A very important study. And critical of the health care system.

Hedrick Smith: This is [about] the people who die because of mistakes made [within] the health care system?

David Lawrence: Right. And those are human errors. But they’re preventable by building good systems of safety — like the airlines have done and like the automotive industry has done, or like the nuclear power industry has done, believe it or not. And we can do that in health care and really have an impact.

Hedrick Smith: Many times I’ve heard the doctors saying, first do no harm. Well, I always thought, of course, why do you need to emphasize that? And here it is again.

David Lawrence: The numbers get a little bit scary when you start thinking about it. But mistakes in health care is one of the leading causes of death in the United States. In fact, it would be one of the top five causes of death in the United States.

We’ve got this extraordinary technology - that is, the drugs and surgeries and the diagnostics, and so on — that we have. And the way we deliver it isn’t strong enough to carry the technology. It’s like inventing a jet engine and putting it on an old bi-plane covered with cloth and calling it a Boeing Triple Seven. That’s what we’re trying to do in [health care].

Hedrick Smith: What are we talking about here? Are we talking about wrong prescriptions given? Medical operations done on the wrong part of the body? Infections in surgical procedures? What are we talking about?

LawrenceDavid Lawrence: Yes. All of the above. We’re talking about all the places where what you intend to do doesn’t get executed the right way. Or you choose a way of doing things that is not correct and you end up in either case with harm to the patient. That’s what we’re talking about. And they run the range from the right drug given the wrong way. The wrong drug given the right way — or the, the wrong way. The wrong or the right drug given at the wrong time. The patient not understanding how to take the drug.

There was a great anecdote that come out of some work looking at medical literacy — of a woman who had a little baby with an ear infection. The baby was prescribed an oral antibiotic. The researcher, the investigator, asked her what the prescription was. She described it correctly. The researcher then went on to say, what is an oral antibiotic? How do you give an oral antibiotic? And she said, I actually don’t know.

And so twice a day I give it in the baby’s ear. And the other two times I give it in the baby’s mouth. And then they said, how often do you give it? And she said, well that’s easy. Four times a day. That’s what it says on the bottle. And they said, well, tell us how you schedule that. And she said, no problem. I leave for work at two o’clock in the afternoon. So I get all four doses in before I go. That’s an error.

It happens on the consumer side; that can result in harm. So there are all kinds of errors. And what we’ve learned from looking at the experiences of other industries is, the way you stop them from happening is by building very, very thoughtful systems that prevent them from happening and make sure you’re doing the same thing every time in a regular kind of way — and not making mistakes. So you don’t pick up the wrong drug out of the anesthesia tray. Or you don’t grab the wrong drug when you’re in an emergency room. And you don’t get the mistake [in] cutting off the wrong leg or doing the wrong procedure on somebody. They don’t happen often. But they happen with greater frequency than they should in a system as advanced as ours in health care.

Hedrick Smith: Thank you.

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