Kaiser Permanente acquisition tests health care model after turbulence at Geisinger Health

Kaiser Permanente, the nation’s largest nonprofit health system, is entering the Pennsylvania health care market with a reputation for providing better and cheaper care.

Geisinger Health, the leading health care provider in the north-central part of the state, is poised to become the first member of a new nonprofit corporation formed by Kaiser. Called Risant Health Inc., the acquisition was announced in April and is under regulatory review.

Kaiser’s creation of Risant fits with the national trend in health care consolidation toward deals that aren’t based on geography and the ability to cut costs locally — but rather on building scale in physician management, clinical tools, and innovation. The first test of the approach in Pennsylvania comes at a time when the industry is still recovering from the financial upheaval of the pandemic.

“The combined hospitals could just as well be on separate planets,” Lawton R. Burns and Mark V. Pauly, two University of Pennsylvania professors, wrote in a paper in the Milbank Quarterly called “Big Med’s Spread.” “The idea is that especially adept combinations of leadership and culture may be extended from their original birthplace to other, less well-directed systems.”

Both Kaiser Permanente, which is based in California, and Geisinger own hospitals, insurance companies, and physician practices. They argue their integrated models allow them to trim costs and get better results. With Risant, Kaiser aims to spread its model to other systems around the country.

Geisinger agreed to join Risant after being financially weakened by a decade of expansion during which it acquired seven community hospitals, opened two joint venture hospitals, and added a medical school.

The decision to join Kaiser in forming Risant came after years of internal strategic planning, Geisinger said in a statement: “We believed that joining Kaiser Permanente in the creation of Risant was the best path toward improving health outcomes, affordability, and access.”

National attention on the Kaiser-Geisinger deal has centered on Risant’s plan to acquire an additional four or five health systems in five years. It anticipates total revenue of $30 to $35 billion. Some industry experts see Risant as a bid by Kaiser to create a national brand.

Fitch Ratings analyst Kevin Holloran expects the next systems to join Risant will have a profile similar to Geisinger, bringing both hospitals and health insurance, with a focus on improving quality and reducing costs. “There aren’t that many that make a natural fit,” he said.

Many are watching to see if Kaiser will help turn around Geisinger’s fortunes. The Pennsylvania system’s financial health was declining even before the pandemic, after it and other state competitors, such as Lehigh Valley Health Network, had expanded through acquisitions in ways that sapped their financial strength.

“They’re still boxed in,” Michael Abrams, managing partner at Numerof & Associates, a health care consulting firm in St. Louis, said of Geisinger. “If they want to have a bigger regional presence, it’s going to be head-to-head competition with the other players.”

Documents filed with the Pennsylvania Insurance Department, which is reviewing the sale of Geisinger’s health insurance operations to Risant, provide details on Kaiser’s agreement with Geisinger. Kaiser has already approved Geisinger’s plan to open 19 primary care clinics, 13 senior care clinics, and 8 ConvenientCare walk-in clinics. This builds on Geisinger’s current 130 primary and specialty clinic sites, including 30 ConvenientCare walk-in clinics and 11 senior-focused primary care sites.

Under the merger agreement, Geisinger can count on at least $2 billion over five years for capital projects, including Geisinger’s own money. Geisinger will have access to at least $100 million over five years for the expansion of health care services and insurance in neighboring communities.

Geisinger’s CEO Jaewon Ryu will take the same job at Risant, which will be based in Washington D.C.

In California, where most of Kaiser’s business is located, Kaiser owns hospitals, employs doctors, and provides insurance. It’s a mostly closed system: people with Kaiser insurance get their care from Kaiser doctors and hospitals. That gives Kaiser more leverage to manage care and keeps costs in check, experts say.

Kaiser’s operations look different in other parts of the country, particularly on the East Coast, where Kaiser does not own hospitals. Instead, it has contracts with them. “When you control the hospital, you control the cost base a whole lot better,” said Holloran, the Fitch analyst.

Risant is expected to have a structure more like Geisinger’s than Kaiser’s. Risant health systems will also care for people relying on competitors for health insurance. People with its insurance are also expected to be able to use other providers for care.

Geisinger, however, gets its better results when insurance customers are also patients receiving their health care in its system, according to Ryu.

“We’ve seen great things happen when we wrap our arms around our members as patients,” Ryu said during an American Medical Association webcast in July. For example, he said patients are more likely to follow doctor’s orders for taking medications.

Right now that overlap is limited. As of Sept. 30, fewer than half of the people in Geisinger’s insurance plans were receiving their care at Geisinger facilities.

Abrams, the Numerof consultant, is skeptical that Risant represents the dawn of a new day in health care. Still, he sees potential if Geisinger and other systems that Risant acquires can prove they get better results with Kaiser’s help.

“That would put many of the other conventional providers on their back feet,” he said.

Founded in 1915, Geisinger was famously highlighted in September 2009 by President Barack Obama in an address to a joint session of Congress as an example of a health system that offers “high-quality care at costs below average.”

Geisinger then had three hospitals, its flagship Geisinger Medical Center in the small town of Danville, Pa., plus two hospitals in Wilkes-Barre, Wyoming Valley Medical Center and South Wilkes-Barre medical center.

A few years later, Geisinger started an acquisition spree and added seven more hospitals from 2012 through 2017. Competitors did the same thing, with Lehigh Valley Health Network and St. Luke’s University Health Network encroaching on Geisinger’s market from the south, and UPMC from the west.

Geisinger has subsequently opened two hospitals in joint ventures in its core market. Geisinger St. Luke’s opened in Orwigsburg, Pa., in 2019. Three years later, Geisinger and Highmark opened Geisinger Medical Center Muncy, a 20-bed hospital east of Williamsport, Pa. — five minutes away by car from competitor UPMC Muncy.

During its expansion run, Geisinger’s revenue grew to a peak of $7.1 billion in 2019 from $2.1 billion the year Obama praised it before Congress, while its profitability declined.

The pitch that Geisinger and Kaiser are now making for Risant sounds similar to an effort close to a decade ago that did not work out. This was the 2015 deal for AtlantiCare, a two-hospital system near the Jersey Shore, 211 miles from Geisinger’s Danville headquarters.

A Geisinger executive told The Inquirer at the time that AtlantiCare offered Geisinger an opportunity to “scale and generalize some of our innovations to other markets through other health care providers.”

The union didn’t last. AtlantiCare initiated a split in 2020. Neither side gave a reason, but financial records show that AtlantiCare was sometimes more profitable than its owner’s Pennsylvania operations.

Geisinger health insurance — an interest of AtlantiCare in the deal — never took off in AtlantiCare’s market.

During this era, Geisinger was losing money on its 2014 acquisition of Holy Spirit Health System in Camp Hill, Pa. That facility was in bad shape financially and faced stiff competition from Penn State Health and later UPMC. Penn State bought it from Geisinger three years ago.

Geisinger discounted the significance of what happened in South Jersey.

“There is little to compare between Geisinger’s experiences with AtlantiCare and the pending transaction with Kaiser Permanente and Risant Health,” Geisinger spokesperson Matthew R. Van Stone said in an email.

He called Risant a national model aiming to give nonprofit health systems what they need to succeed in a future where providers are financially accountable for costs: “The goal is to improve quality, accessibility, and affordability of care more broadly in Pennsylvania and beyond.”