On Friday, the non-profit Kaiser Foundation Health Plan reported that its profit for the first half of the year was over $1.9 billion. For the first time in years, the organization also reported its figures on an operating income basis, a more helpful measure of ongoing performance, rather than net income (which happens to be an issue I had raised again and again).
Last year, internal projections showed that the organization would begin seeing significant operating losses this year. So, you might, understandably, be wondering: where exactly is all of this unexpected profit coming from?
Good question. In technical terms, it’s usually referred to as funny money.
Beginning last year, Kaiser Permanente essentially set up a printing press for profit in some accounting office in Oakland. For starters, tack on about $350 million in “profit” from the most recent quarter for “reduction of reserves for professional liability and worker’s compensation.” A key question, from an accounting standpoint, is how much of this reserve reduction profit, in fact, came from previous quarters? Those dollars should have been treated as an adjustment to prior quarters, not as misleading profit for the most recent one.
Everybody in Kaiser Permanente is asking: those “administrative efficiencies [which] have contributed to these favorable results” are coming from where, exactly? So, to top up the funny money, George Halvorson has turned Kaiser Permanente into a lean, mean job cutting machine, but you won’t hear a word about that in any press release. Budgets for a number of areas are being “rationalized,” and, in particular, Oakland has been ordering up quite a bit of cash through unannounced job cuts through attrition (which is to say, when somebody retires or leaves, their position may not be filled). Quite a bit of cash that previously was flowing into KP-IT for staffing has also been reduced, which started last fall with mandatory “vacations” without pay. (Can you say “great morale builder“?)
So why the sudden switch to reporting results as operating income, rather than as net income? Did someone at Oakland finally see the light? Was some accountant at headquarters taking accounting advice from my blog? No, I don’t think so.
Year-over-year, net income wasn’t looking so hot. So, George Halvorson did what he does best: he found the numbers that made <i>his</i> performance look as good as possible. (Afterall, what can you judge a chief executive by if not the financial performance of the organization he’s supposed to be leading?) It just so happened that, with all the funny money, operating income was looking quite nice at this point.
Which brings me, once again, to the big issue: transparency. Kaiser Permanente reports its figures, essentially, however it so chooses. Net income last quarter. Operating income this quarter. Who knows what we’ll see for the third quarter? And questions, such as how exactly it’s treating reserve reductions, or even exactly how many employees the organization currently has, just can’t be answered, since the public doesn’t have access to any more detailed information than about 532 words in a press release every few months than George Halvorson has deemed acceptably favorable.
Financially, over the past year, Kaiser Permanente has built an increasingly fragile house of cards. Misreporting of reserve reductions are one issue that led the SEC to file charges against the chief financial officer at ConAgra in 2003. Sadly, as a not-for-profit, Kaiser Permanente is able to operate in the abyss of financial honesty, where barely no agency polices the accuracy or integrity of the numbers it reports.
George Halvorson has chosen to exploit the not-for-profit status of Kaiser Permanente. But that’s not the way everybody plays the game. The American Red Cross, under Mark Everson, the former Commissioner of the IRS, has audited financial statements for 2006 available right on its website.
You won’t be finding any such information on kp.org. And, speaking of the IRS, Kaiser Permanente normally files its Form 990 months late (and 2004, yes, that was three years ago, is the most recent filing you’ll find on GuideStar).
Eliminating financial transparency for Kaiser Foundation Health Plan is a choice George Halvorson makes on a daily basis, a choice that our inept board rubberstamps every time it meets. For George Halvorson, it’s an issue of job security. For Kaiser Permanente members, it’s an issue of their money being wasted and misspent, and most of them don’t even know about it. And if George Halvorson has anything to say about it, they never will.
