Group Health Cooperative, Part 6: Marriages and Divorces, 1991-2000

  • By Walt Crowley and the Staff
  • Posted 8/09/2007
  • Essay 8257
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The health care visionaries who founded Group Health Cooperative in Seattle in 1945 were activists in the farmers' grange movement, the union movement, and the consumer cooperative movement. Their inspiration was Lebanese-American physician Dr. Michael Shadid (1882-1966), founder of the nation's first cooperatively owned and managed hospital (in Oklahoma). Dr. Shadid's crusade was to overthrow the traditional fee-for-service practice of medicine dominated by solo practitioners, expensive specialists, and private hospitals and clinics. Instead he advocated affordable, prepaid healthcare through the cooperative ownership of hospitals staffed by physicians -- practicing as a group -- who promoted the new idea of "preventive" medicine. Group Health Cooperative began providing health care after merging in 1946 with the Seattle-based Medical Security Clinic, a physician-owned group practice whose idealistic doctors also believed in preventive care. After years of struggle and despite virulent opposition by the medical establishment, Group Health became one of the nation's largest consumer-directed health-care organizations. This is Part 6 of a seven part history of Group Health Cooperative.

Marriages and Divorces

Phil Nudelman, pharmacist, health administrator, and former airline pilot, would need all of his nerve and skill for the bumpy flight that lay ahead. But at first, as the 1990s took off, it looked like clear skies for as far as the eye could see for Group Health. Chief financial officer Grant McLaughlin and chief operating officer Cheryl Scott joined medical director Al Truscott in the executive cockpit. 

In 1991 Group Health opened a Teen Pregnancy and Parenting Clinic on its Capitol Hill Campus in Seattle. The clinic would go on to win local and national awards for its excellent care of pregnant teens. Teens served by the clinic have significantly fewer premature deliveries, low-birth-weight babies, cesarean sections, and repeat pregnancies than national or local averages.

The Co-op also launched a $367 million capital program with the opening of the Tacoma Specialty Center in January 1992. This was followed by new facilities in Everett, Olympia, and Seattle. Enrollment passed 470,000. 

But by 1993, the national and local health-care scene began to undergo an enormous sea change. On April 23, 1993, newly installed Governor Mike Lowry, once a Group Health lobbyist, signed a new Health Services Act making coverage available to virtually all Washington residents by mandating employer coverage for workers through a choice of "certified health plans" that delivered a comprehensive and uniform benefit package. For the low income there would be access through Medicaid, Healthy Options (a managed care plan for Washington Medicaid members), the Basic Health Plan, and a state-run depository to coordinate part-time employer premium contributions. Aubrey Davis served as a key architect of the new act and Group Health was an enthusiastic participant, at least initially. Governor Lowry tapped Pam MacEwan (current Group Health executive vice president of public affairs and governance) and former Group Health executive Don Brennan to serve as commissioners in charge of making sure the Health Services Act worked effectively.

On the national level, President Bill Clinton, in an address to Congress on September 22, 1993, unveiled his plan for universal health-care access via a national "managed competition" system, which Phil Nudelman had helped influence through his role on a White House–sponsored committee. Health care -- particularly HMOs and managed care -- was in the news and Group Health came under scrutiny and into the limelight across the nation. The Co-op was held up -- in The New York Times, the Wall Street Journal, ABC-TV's World News Tonight, and NBC's Today Show among many other newspapers, magazines, and news programs -- as an example of an established and successful example of managed care. 

Yet Group Health found itself subject to new and decidedly threatening market forces. A new breed of large, for-profit HMOs that managed costs more than care were creating a negative backlash in the popular culture. And, both government regulations and market forces seemed to favor the survival of the biggest. Even with nearly half a million members and enrollees, in the mid-1990s Group Health felt the need to get bigger and to lower prices -- and do it quickly -- in order to compete. 

This was the context of the new affiliations Group Health undertook. Even after Clinton's American Health Security Act was savaged by a withering ad campaign and then trampled in the 1994 congressional elections by the "Republican Revolution," health care, it appeared, would continue to expand. Local reform and the potential of national reform created for Phil Nudelman and others the urgent sense that Group Health would not survive unless linked to a larger regional or even national plan. 

Wooing Virginia Mason

Group Health's Board updated its strategic plan to "develop partnerships with other health care systems/providers" in order to expand its market share from 15 percent to 20-25 percent, improve quality and scope of care, and polish its regional reputation. A natural mate was Virginia Mason Medical Center -- an ally of Group Health from its earliest days -- which enjoyed great public esteem and operated a major hospital and clinics in Seattle. Group Health went courting and Virginia Mason accepted the proposal on November 9, 1993. 

Some of the in-laws -- notably veteran Group Health member-activists such as Lyle Mercer -- did not bless the marriage. Leaders of the nurses' union, District 1199 Northwest, which had affiliated with the Service Employees International Union (SEIU), also regarded Virginia Mason as an anti-labor bastion. Unlike Group Health employees, its nurses had stayed with their older union, the Washington State Nurses Association. 

Group Health passed two milestones in 1994 by surpassing half-a-million enrollees (including 150,000 Group Health Northwest subscribers and 30,000 Options Health Care, Inc. policyholders) and grossing more than $1 billion in revenues, with a $35.7 million net margin. In the face of this success (which turned out to be quite temporary), District 1199 Northwest president Diane Sosne reported that the Co-op's 1,400 nurses felt "absolutely betrayed" by Group Health's financial offer during contract negotiations. Fruitless negotiations culminated in a one-day walkout on March 22, 1995, and a contract was not approved until early 1996. 

In July 1995 Group Health and Virginia Mason agreed to an alliance through which they would combine certain clinical services, use Virginia Mason's hospital for acute inpatient care for Group Health members in the Seattle area, and offer a new set of health plan products called Alliant. Supporters and critics of the marriage collided head-on at the October 1995 Annual Membership Meeting over a motion to expand Board authority to enter into such arrangements. Former chair of the Cooperative Hilde Birnbaum, then approaching her 90s, stood up to defend the alliance, citing mounting competition from other HMOs. "Group Health must survive as a business," she insisted, "in order to survive as a cooperative, not the other way." 

Members ultimately agreed by a nearly two-to-one margin. Yet the near total repeal of the 1993 Health Services Act by the newly elected Republican state legislature left both parties wondering if there was much to gain in a complicated alliance. In addition, the engaged couple soon developed cold feet over "cultural" differences, particularly between their respective medical staffs. The marriage was never fully consummated, but the two institutions remained good friends and continue to cooperate extensively, especially around hospital care for the Seattle area. 

Even before the Virginia Mason alliance cooled, Phil Nudelman recognized that its anticipated economies and "synergies" were not going to be enough to meet Group Health's strategic need to increase its market share. He firmly believed that the Cooperative could not survive independently, and began looking for a new partner. An early comrade-in-arms, Kaiser Permanente, was an attractive -- and willing -- marriage prospect. 

A More Perfect Union?

There was much to commend an affiliation with Kaiser Permanente. With 7.4 million enrollees in 17 states, it was the nation's largest, oldest, and most respected HMO. With nearly 400,000 members in Oregon and Southeast Washington, Kaiser Permanente Northwest's coverage nicely complemented Group Health's. Affiliation offered the Co-op potential access to national markets beyond the region and offered Kaiser Permanente easy access to the Washington state markets dominated by Group Health. The alliance could also ward off the large, national, for-profit HMOs then eying the Pacific Northwest.

Kaiser Permanente's professional culture also mirrored Group Health's emphasis on preventive medicine and group practice, although its form differed in that its physicians had organized their own independent service corporation and contracted with Kaiser Permanente to treat its members. Still, it seemed a natural fit. Moreover, there was a growing sense of urgency as Group Health posted a modest but troubling $11 million deficit in 1995 -- the result of aggressive rate reductions to compete in the post-health-care-reform, free-market frenzy. 

The Board disclosed its discussions with Kaiser Permanente at the October 1996 Annual Membership Meeting. Traditionalists feared that the Cooperative would be swallowed up by the larger organization. They called it a "hat-in-hand sale of Group Health to Kaiser" that would "destroy the right of the voting membership to direct the Cooperative." Affiliation critics also opposed a companion bylaw change to extend automatic voting rights to all Group Health affiliate enrollees, fearing that this would dilute the influence of the Cooperative's core constituency.

Thanks to the wholehearted support of the physicians and the unions, and to smart outreach and education to the membership from the Board, the voting-rights resolution passed and a special Membership Meeting in March 1997 endorsed the Kaiser Permanente alliance by a margin of more than 10-to-1. It was a bittersweet vindication for Phil Nudelman, who three weeks earlier had suffered a massive heart attack while addressing the downtown Seattle Rotary Club, and would step down as Group Health President/CEO to become head of Kaiser/Group Health, the non-profit corporation set up to oversee Group Health Cooperative, Group Health Northwest, and Kaiser Permanente Northwest.

Best Laid Plans ...

Responsibility for making the new alliance work for the Cooperative fell to longtime chief operating officer Cheryl Scott, who formally succeeded Nudelman as Group Health President/CEO on May 15, 1997. She was joined the following year by Dr. Louise Liang, who arrived from Honolulu to succeed Al Truscott as president/medical director of Group Health Permanente, PC the new independent multispecialty group practice formed by Group Health physicians and other practitioners to serve as Group Health's clinical partner. Scott and Liang "introduced" themselves to staff and employees on July 11, 1998, in the first of a series of candid biweekly letters that declared, "It's time to move forward together as Group Health." With Debbie Ward, a nurse with a Ph.D. in health policy, serving as chair of the Cooperative, for the first time in Group Health's history, all three leadership positions were filled by women. 

Cold reality intruded on the Kaiser/Group Health alliance almost immediately. And just holding Group Health together in its 50th year would prove daunting enough. Kaiser Permanente and Group Health had chosen to affiliate just as changing market conditions and the receding tide of reform spread chaos in Washington state's health-care industry. Whatever sense it made on paper, the timing for the affiliation was disastrous. 

In undercharging to attract enrollment and stave off potential national competition, both Group Health and Kaiser Permanente had made, during the early to mid-1990s, the same economic miscalculation satirized in the novel Catch-22: They tried to make up in volume what they lost in unit sales. It didn't work any better for them than it had for Milo Minderbinder. 

Scott and Liang's executive missives would turn into a virtual diary of a white-knuckled "two-year rollercoaster ride," in Scott's phrase, as the Co-op and Kaiser Permanente struggled to survive the final years of the twentieth century. Group Health's annual deficits soared past $20 million as costs ballooned and government reimbursements and fee caps shrank. The Co-op halted individual enrollment under the state Healthy Options Medicaid program, dropped out of TriCare (the health-care program for members and retirees of the military and their dependents), ended care for residents served in 13 counties, and, along with other major providers, exited the individual and family health-care market. After years of expanding into new areas and actively recruiting new enrollment, which peaked near 700,000, Group Health began shrinking and casting off consumers. 

Group Health's reputation took a major hit in communities affected by the market pullback. But one group of consumers -- Clallam County seniors, led by then-Senior Caucus Chair Patty Ruegg -- fought back. They arrived in force at the 1999 Annual Membership Meeting to protest Group Health's desertion. As a result, Cheryl Scott asked Representative Norm Dicks to sponsor congressional action to grandfather in these seniors, giving them special permission from the Health Care Finance Administration (the agency that provides insurance for Medicare, now known as Center for Medicare and Medicaid) to travel to Group Health facilities in Kitsap County for their care. 

Kaiser Permanente faced problems similar to those of Group Health and would run up multimillion-dollar losses. Spokane-based Group Health Northwest lost control of its costs. Cost-trends also worsened at Group Health's Eastside Hospital, which had never fulfilled its market potential, and at its state-of-the-art but costly Kelsey Creek residential-care facility. Labor relations offered a rare bright spot and seemed to be the one area to thrive under the partnership with Kaiser Permanente. 

Amid the downward spiral, Kaiser/Group Health executive Kate Paul took over Kaiser Permanente Northwest's operations. She and Group Health President/CEO Cheryl Scott met and agreed that the institutional partnership was not working. Even though Kaiser/Group Health now employed several former Group Health leaders, it had added a layer of bureaucracy, with everything the Co-op did now requiring approval by Kaiser/Group Health. Cheryl's young and feisty leadership team chafed under the bureaucratic restraint, and their ongoing resistance irritated Kaiser Permanente leaders. The Co-op had not, due to lean times on both sides, received certain expected benefits. And the foreseen threats, which had made linkage to larger regional or national plans seem imperative, had not really materialized. Finally, the new arrangement seemed intent on making Group Health a mere division of Kaiser Permanente. Cheryl Scott saw that Group Health had to both become financially viable again, and return to strength by leading with its own mission, purpose, and values. Unlike her predecessor, she firmly believed Group Health could and must survive independently. 

She and Kate Paul began efforts to "unwind" the Kaiser/Group Health structure. It was Cheryl Scott's courageous mission to convince corporate executives to reassert their authority. She did so with the full support of the Group Health Board of Trustees -- led by chair Debbie Ward and Aubrey Davis Jr. 

With losses mounting, Group Health Northwest CEO Dr. Henry Berman retired and the operations of Group Health Northwest, serving North Idaho and Eastern and Central Washington, were integrated into Group Health Cooperative under the leadership of Scott Armstrong. 

Former Group Health chief financial officer Jim Truess notes that the crisis forced the Co-op "to think about itself as a business, which required a fundamental if subtle shift in its culture." One example is its attitude toward health plans other than the traditional pre-paid HMO. Health service contractors such as Group Health Options, Inc., a wholly owned Group Health subsidiary that offers a variety of health plans, were controversial within the Co-op but generated crucial revenues during the crisis, and today represent a major vector for Group Health's future growth. 

Some of the cuts and changes of the late 1990s were wrenching, but Cheryl Scott later posed the question: "If you don't take on your own sacred cows, how can you lead?" Best of all, the reforms worked. After running up nearly $90 million in operating deficits since 1995, Group Health recorded a $3.3 million surplus in 2000. Although minuscule compared to a $1.6 billion annual operating budget, this signaled a huge turnaround. The following year Group Health posted an even more impressive $25 million margin. 

An agreement between Governor Gary Locke, the state legislature, and three health plans -- Premera, Group Health, and Regence -- allowed Group Health to resume acceptance of individual members in 2000. The Cooperative's financial recovery was also good news for its nearly 10,000 staff members. After some hard bargaining and federal mediation, Group Health nurses accepted a four-year contract, with an 18 percent average pay hike and higher compensation for both entry-level and veteran care providers.

As the last year of the twentieth century dawned, many predicted that the "Y2K bug" would trigger worldwide computer-failure when older systems reset their internal calendars to year 00. This never happened. Instead, Group Health staked a pioneering claim in cyberspace in July 2000 by launching the innovative and award-winning "MyGroupHealth" website to provide members direct and private access to physicians and health information (and later, medical records) via the Internet and a secure message system.

In contrast to 2000, however, the first year of the third millennium would prove to be a different and much more dangerous time than anyone could have predicted.

To go to Part 7, click "Next Feature," to see Part 5, click "Previous Feature"


Walt Crowley & the Staff, Group Health Timeline (Seattle: Group Health Coop/History Ink, 2007).

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