Group Health Cooperative
Group Health Cooperative
Incorporated: 1945 as Group Health Cooperative of Puget Sound
Sales: $1.4 billion (1999)
NAIC: 621491 HMO Medical Centers; 62211 General Medical and Surgical Hospitals
Group Health Cooperative (GHC) is a health maintenance organization (HMO) serving nearly 600,000 enrollees in Washington State and Idaho. Of these, 30,500 voting members select a panel of 11 trustees to represent consumers. Although part of its founding mission was “to serve the greatest number,” CEO Cheryl Scott stresses that neither GHC nor HMOs in general are the best choice in medical care for everyone. Group Health has cut back unprofitable services and limited enrollments to balance its budget.
The inspiration for Group Health Cooperative came from Dr. Michael Shadid, who is credited with starting America’s first cooperatively owned and managed hospital. Shadid left his native Lebanon in 1898 at the age of 16 and later, horrified by the high toll of medical costs on Oklahoma farmers and also by the plight of the poor in his homeland, he set up the first cooperative hospital in the nation in Elk City, Oklahoma, in 1931.
A crusader against traditional fee-for-service medicine, Shadid lectured in Seattle in August 1945, where the idea of a medical services cooperative began to take root. Farmers had used co-ops to finance machinery and farm supplies and markets; extending the concept to a hospital seemed a logical progression.
According to the historian Walt Crowley, Group Health’s founding members were farmers, workers, and political activists who believed consumer-owned cooperatives represented a safe middle ground between the extremes of capitalism and socialism.
Led by attorney Jack Cluck, Group Health Cooperative of Puget Sound incorporated as a nonprofit organization in 1945. It began operating, so to speak, on January 1, 1947, when it took over a Medical Security Clinic (MSC) and St. Luke’s Hospital. The Medical Security Clinic was a local prepaid group health practice of 16 physicians led by Dr. Sandy MacColl. It paid $200,000 for MSC and assumed a mortgage of $50,000 on St. Luke’s Hospital, which was renamed Group Health Hospital in 1948. Four hundred of the original clientele were GHC enrollees; Medical Security brought another 8,000 from its industrial contracts.
At the time, prepayment of medical services was rare, but not completely novel. The Virginia Mason Clinic was another local group practice; the Mayo Clinic had become internationally famous. Still, the American Medical Association (AMA) denounced the group’s leftist leanings even as Congress debated the issues of universal access and affordable healthcare.
Group Health’s other main priority was preventative medicine. This concept might seem to be a matter of common sense and would become commonplace within a couple of decades, but it was treated by the medical profession with suspicion at the time, says Crowley.
Despite opposition from the medical establishment, Group Health was clearly an idea whose time had come. Its hospital was able to add another 30-bed wing in August 1950. In 1951, Group Health contracted to provide medical care to 2,200 members of the International Longshoremen and Warehousemen’s Union. Coverage was extended to dependents within a few years.
Group Health was staffed with contract doctors and demobilized Army doctors. In 1951, after a two-year legal battle, the Washington State Supreme Court determined the King County Medical Society had conspired against Group Health by blacklisting its doctors. Medical Society doctors continued to quip about “Group Death” after the ruling.
In the summer of 1953, Group Health created an independent co-op to provide dental services. Enrollment for medical services approached 36,000 by the end of 1953. Group Health only had 17 doctors at the time, and with the aggressive membership drive, they were swamped with bodies in need of repair.
In 1952, with the controversial departure of general manager Don Northrop impending, the board decided to appoint a single leader ultimately in charge of both medical and administrative staff. Dr. Sandy MacColl, who had been with the organization from the beginning, was the first to take this position of executive director. He was succeeded in 1955 by Dr. John A. Kahl (pronounced “kale”), formerly head of the state department of health. The chain-smoking Dr. Kahl headed the group for ten years.
Clinics in Renton and North Seattle opened in the mid-1950s. Plans were underway for a new $2.5 million, 150-bed hospital to replace the existing one. To finance it, Group Health levied an additional $100 in addition to the $75 one-time capital dues paid by each member (who also paid in addition an average of $54 per year).
Growing in the 1960s and 1970s
In spite of its success in raising funds for its new hospital, in the late 1950s GHC was logging annual deficits in the range of $250,000 to $350,000, due largely to rising medical costs. Dues were raised in 1960 (to $8.00 a month for men and $8.50 for women) in an attempt to cap a projected $500,000 deficit. Enrollment began to slow. By the end of 1960, Group Health had 65 physicians and 60,000 members.
In 1961, representatives of Kaiser Permanente, a prepaid medical services firm based in Portland, Oregon, intimated they would pursue group contracts within Washington State if Group Health did not. In 1963, Group Health signed an agreement with the Seattle Professional Engineering Employees Association, its first inroad among Boeing employees since it supported the machinists’ union in a 1948 strike at the aircraft manufacturer.
Clinics were added or expanded in the mid-1960s to support a recovered rate of growth (8,000 new members signed up in 1964 alone). Mental health was a new area of service being introduced.
Dr. H. Frank Newman took over Group Health after Dr. Kahl died of a stroke in 1965, the same year the Medicare program was created. As it was first set up, Medicare gave pay-for-fee providers little incentive to control costs. As a prepaid provider, Group Health had to create some mechanism for billing the government for specific procedures.
In the last half of the decade, several new building projects were started. The most critical need, however, was for more doctors. By 1968, Group Health had 100,000 members and a physician-to-patient ratio of 1:1,800.
Seattle’s 1970s began with an ominous sign: Boeing laid off nearly 60,000 workers. Group Health was not hit as hard as rival King County Medical, as many members continued to pay for their own coverage themselves. In fact, Group Health’s enrollment actually increased.
Group Health’s popularity and reputation grew as then President Richard Nixon championed the creation of “health maintenance organizations”—HMOs—as the saviors of the American medical system. (However, it was not until 1975 that Group Health was conditionally recognized by Medicare as an HMO, due to its prepayment methodology.)Amid a period of intense media scrutiny, Group Health’s enrollment grew to 149,000 in 1971 and 173,000 at the end of 1973—far greater numbers than anticipated or desired by the board of directors. The building of new medical centers and the recruiting of doctors continued at full pace. Hospital costs and doctors’ fees grew too during the decade’s inflationary periods—about 20 percent in 1974 alone.
Group Health had more than 200,000 enrollees in 1975; many of them complained—publicly—about problems booking appointments. One TV journalist reported having to make 78 phone calls to schedule a visit with his Group Health physician.
Workers, having recently won the right to strike, were also voicing their discontent. X-ray technicians walked off the job for ten days in 1975, and nurses staged a 28-day strike the following year.
“Controlled growth” became the policy for the rest of the decade. In 1976, Group Health chose a new leader, Don Brennan, formerly vice-president for finance and administration. In late 1978, GHC took over a Tacoma medical center operated by the nation’s first federally recognized HMO, Sound Health Association.
The company’s purpose is to transform healthcare, working together every day to improve the care and well-being of our consumers and communities. Our mission, as a consumer-governed organization, is to design, finance, and deliver high-quality healthcare. Our guiding principles are respect, integrity, scientific discipline, a pioneering spirit, and stewardship.
Reagan Era Competition
Brennan resigned in 1980; Gail Warden, who had formerly led Chicago’s Rush-Presbyterian-St. Luke’s Medical System, became CEO the next year. Crowley’s history notes that in 1981, while President Ronald Reagan taunted the Soviets, Group Health members inclined to political activism in a variety of causes voted to further the cause of nuclear disarmament, hoping to prevent “this final epidemic.” (The cooperative’s Nuclear Awareness Group would be nullified by trustees in 1987.)Another sign of the Reagan era was the termination of a rural healthcare program that Group Health administered, which affected 6,000 beneficiaries.
At the same time, many more new HMOs were federally sanctioned across the country, giving Group Health its first taste of direct, prepaid competition. By 1984, the Puget Sound area had four other HMOs vying for business. A restructuring ensued at Group Health to keep it lean enough to survive.
In November 1981, Group Health began leasing a new administrative center, giving the organization more of the appearance of a corporation than the grass roots cooperative it had once been. Many on the board and the staff were becoming more willing separate the organization from nonmedical causes; however activists continued to protest GHC’s coverage of abortions. In 1983, Group Health officials created a credibility crisis when they suppressed an article on noxious arsenic emissions from the American Smelting and Refining Company, with whom Group Health had a contract, set to run in the cooperative’s View magazine.
Also in 1983, Group Health took over a Spokane-area managed-care operation set up by the California-based Insurance Companies of North America, which was itself merging with CIGNA Healthplan, Inc. There followed inconsequential talks about creating a national network with other HMOs. Group Health also served customers in some outlying areas with outside physicians.
Enrollment growth failed to meet projections in 1985. In fact, it was the first year enrollment had suffered a net loss. Nevertheless, GHC was able to open or buy several new medical centers in the 1980s. Administrative offices were moved to the old Seattle Post-Intelligencer headquarters in 1987. Warden stepped down as CEO, to be succeeded by Aubrey Davis in February 1988. When Davis took over, Group Health had 325,000 enrollees and 9,000 employees; its annual budget was $325 million.
Enrollment increased 40 percent between 1987 and 1989, fueled by new programs to extend service to new populations, such as a state-sponsored one to help the working poor called the Basic Health Plan. However, Security Care, which aimed at long-term care for senior citizens, was cancelled after state insurance regulators blocked Aetna from taking over a partnership role.
Joining Forces, Cutting Programs in the 1990s
Group Health’s 1990 operating budget was $555 million. In 1990, Group Health incorporated a for-profit affiliate, Options Health Care. A major source of pride for the organization was its role in providing medical services for the Goodwill Games in Seattle in 1990. This made Group Health even more visible nationally; it would also be praised by the New England Journal of Medicine and U.S. News and World Report as a paradigm for successful health care.
Phil Nudelman, executive vice-president for operations, replaced Aubrey Davis as president and CEO in January 1991. He embraced the philosophies of Total Quality Management.
Among new facilities opened in the early 1990s was the $55 million Central South Specialty Center, which opened in November 1991, just as Group Health was laying off about a hundred nurses.
Group Health unsuccessfully bid for a CHAMPÚS contract to provide service to 250,000 military dependents and retirees, but was hired by the winner (Foundation Health of California) as a subcontractor.
In November 1993, Group Health announced a comprehensive alliance with the Virginia Mason Medical Center, a nonprofit system that had 300 physicians at 13 medical centers in addition to its teaching hospital, and 41,000 subscribers. The two soon began marketing an insurance product allowing consumers to have access to doctors in both systems.
One of the nurses’ unions feared that restructuring would jeopardize its members’ career prospects. After months of tense negotiations and a one-day strike, Group Health agreed to provide a fund for their retraining.
Group Health launched “The Partnership Program” in February 1993. This was a comprehensive initiative to address all areas of employee health on behalf of client companies. The goal was to stabilize healthcare costs by raising the level of health of the employee population. Expected side benefits for employers included a reduced number of workmen’s compensation claims, fewer absences, and greater productivity. Services offered ranged from counseling to quit smoking to onsite medical care. GHC also sponsored four programs to help rebuild communities affected by violence. Annual revenues exceeded $1 billion for the first time in 1994. Group Health had more than 500,000 participants.
Talks with an Oregon-based unit of Kaiser Permanente, a similar HMO, began in 1996. The ensuing alliance gradually extended into areas such as joint purchasing, marketing, and reciprocity in medical care. Wider geographic reach made GHC more attractive to national and regional employers.
In 1997, the rapidly expanding GHC had more than 700,000 members. Still, it was a bad year. Nudelman’s claimed educational achievements featured in the “Dubious Credentials” episode of the tabloid television show American Journal. Administrator Cheryl Scott later became the new president and CEO. Group Health also lost $10.4 million on revenues of $1 billion in 1997, due to vigorous price competition.
- Group Health begins providing prepaid medical care.
- The organization’s enrollment exceeds 100,000.
- Group Health Northwest is created.
- GHC enters an alliance with Virginia Mason Medical Center.
- GHC enters an alliance with Kaiser Permanente.
Scott reduced costs, increased premiums, abandoned more than a dozen counties, and dropped out of low-income programs. GHC also closed enrollment in individual plans. GHC logged a profit of $3 million in 1999 after losing $68 million in the previous two years. As the patients’ rights movement built momentum, in 2000 GHC joined 21 other health plans in a series of voluntary reforms.
In another change designed to encourage more member participation, GHC dropped the requirement to pay an additional $25 annual dues to become a voting member of the cooperative. However, the hectic pace of modern living, rather than the fee, was what kept most from attending meetings.
In the late 1990s, GHC (along with two other carriers, Premera Blue Cross and Régence BlueShield) began offering insurance to individuals, yielding to political pressure to help the state’s uninsured residents (although those with the worst health problems were referred to the state’s high risk pool).
In 1999, Group Health cut Medicare service in some areas after pulling out of most remaining rural counties the previous year. GHC’s Medicare unit was the subject of numerous complaints. In 1999, the state ombudsman took the unprecedented step of referring one complainant to an administrative law judge at the Social Security Administration. Soon after, the federal government stopped funding Medicare and Medicaid admissions at Group Health’s Bellevue nursing home (Kelsey Creek), citing violations with federal law.
Center for Health Studies; Center for Health Promotion; Group Health Community Foundation; Group Health Enterprises; Group Health Options, Inc.; Kaiser/Group Health.
Adventist Health; Health Net, Inc.; PacifiCare Health Systems, Inc.
Anders, George, “For a Shangri-La of HMOs, a Dose of Modern Reality,” Wall Street Journal, August 4, 1998, p. Bl.
Barker, Kim, “Two HMOs to Drop Medicare Customers,” Seattle Times, July 1, 1999.
Beason, Tyrone, “Group Health Pulls Out of Most Rural Areas,” Seattle Times, May 27, 1999.
——, “Two More Insurers Won’t Sell Health Policies,” Seattle Times, December 25, 1998.
Bernstein, Sharon, “HMOs, Under Political Pressure, Offer Package of Patient-Friendly Policies,” Seattle Times, July 19, 2000.
Cimini, Michael H., “Training Featured in Group Health Settlement,” Monthly Labor Review, December 1995, p. 47.
Crowley, Walt, To Serve the Greatest Number: A History of Group Health Cooperative ofPuget Sound, Seattle: Group Health Cooperative of Puget Sound/University of Washington Press, 1996.
Egan, Timothy, “Seattle Showpiece of Health Care by Democracy,” New York Times, May 2, 1991.
Frabotta, David, “Up in Smoke,” Managed Healthcare, September 1999, p. 42.
Fryer, Alex, “Nudelman Smarts Over Focus on His Degrees,” Seattle Times, June 1, 1997.
Gilje, Shelby, “For this Health Insurance, a Mere 272 Questions,” Seattle Times, November 1, 2000.
Gould, Bob, Ted Nolan, and Robert C. Schuweiler, “An Experiment in Risk Sharing,” Health Forum Journal, September/October 1999, pp. 19, 26 +.
Hagland, Mark, “Synergy in Seattle,” Hospitals & Health Networks, June 20, 1996, p. 55.
——, “Two HMOs Play ’Let’s Make a Deal’,” Hospitals & Health Networks, November 5, 1996, p. 64.
King, Marsha, “HMO Under Fire: State Backs Woman in Dispute with Group Health,” Seattle Times, October 4, 1999.
Kokmen, Leyla, “Old Health Groups Eye Benefits of New Alliances,” Seattle Times, September 14, 1996.
Lee, John Y., and Pauline Nefcy, “The Anatomy of an Effective HMO Cost Management System,” Management Accounting, January 1997, pp. 49–54.
Levine, Ruth, “Group Health Searches for Solutions in Tough Market,” Puget Sound Business Journal, June 23, 2000.
Lumsdon, Kevin, “Hospitals, Suppliers Put TQM to the Test,” Hospitals, March 20, 1993, p. 58.
McCue, Michael T., “Consumer Governed, Patient Focused,” Managed Healthcare Executive, January 2001, pp. 14–26.
“New Buildings for a New Era Can Look Very Different,” Medical Economics, February 9, 1998, pp. 90–91.
Nudelman, Phillip M., “Stop Violence Now,” Hospitals & Health Networks, July 20, 1995, p. 62.
——, “The Partnership Prescription,” Chief Executive, January/February 1994, p. 57.
Walker, Tracey, “Three HMOs Ask for Regulation,” Managed Healthcare, November 1997, pp. 10–11.
Winslow, Ron, “Kaiser Permanente Unit, Group Health Enter Talks That Could Lead to Merger,” Wall Street Journal, September 16, 1996, p. B6.
—Frederick C. Ingram