Kaiser Permanente considers itself the future of U.S. healthcare: patient-focused, data-rich, and affordable. Combining a nonprofit insurance plan with its own hospitals and partnerships with specialist medical groups, it hopes to set the standard for the industry at large.

“Our hospitals operate on reverse economics,” says Murray Ross, Vice President of Kaiser Foundation Health Plan and Director of the Kaiser Permanente Institute for Health Policy. “More patient days means higher costs, not higher revenues. So we work hard to keep people healthy and out of the hospital.”

Industry experts such as Leemore Dafny, a professor of strategy at the Kellogg School, refer to Kaiser Permanente as an “integrated health delivery system”—a healthcare group that aligns the roles of insurer and provider, and one that challenges the prevailing business model of fee-for-service. “In some ways, it is the kind of healthcare system the Affordable Care Act had in mind,” Dafny says, where a high degree of coordination among doctors, nurses, administrators, and analysts can provide patients with an end-to-end experience at a single facility.

This focus on patient outcomes requires a unique style of organizational management. How does Kaiser Permanente accomplish this? For William Ocasio, a professor of management and organizations at the Kellogg School, the group owes its success to its culture. “It’s not often that you can walk into an organization and breathe the culture as much as you can at a place like Kaiser,” he says. “It’s not just about the soft parts of the culture—it also permeates how they do their operations management.” From scheduling appointments to measuring outcomes, the integrated model works best when collaboration is built into the organization’s daily practice.

The Benefits of Integration

Premised on the alignment of clinical and financial incentives, Kaiser Permanente sees itself as leading the way when it comes to maximizing value and keeping medical bills low—for this, the integrated model is key. In its home state of California, where the group enrolls 7.5 million members and operates 35 hospitals, Kaiser Permanente comprises both the Kaiser Foundation Hospitals, which are not-for-profit, and the Permanente Medical Groups, which are for-profit. This model bucked the industry’s trends toward broad provider networks and looser physician integration over the last two decades.

From an organizational management point of view, at least, the benefits of an integrated system are clear. Kaiser Permanente physicians are salaried employees of the medical group, which means they are expected to take into account the total impact of any treatment, including effectiveness and cost. “As individual doctors, they are responsible for the patient in front of them, Ross says. “As owners of a medical group, they are responsible for making the best use of available resources for all of the group’s membership.”

“Without a culture of accountability and resource stewardship, all the new technologies in the world aren’t going to get you where you want to be.” – Murray Ross

Among the resources available to staff is a huge amount of data. Kaiser Permanente has the nation’s largest electronic medical record (EMR) system, which allows physicians, hospitals, and patients to monitor treatment and progress. For Leemore Dafny, this is a system with great potential to improve service delivery. “What Kaiser has done is demonstrated through some massive IT investments in recent years that they can provide excellent care across a range of services.”

Having this data also allows the group to make better coverage decisions, since doctors, nurses, and insurance representatives are consulting the same database. “I think a real gap for our country and our health care system is a lack of broader sharing of the data that you would need to compare the effectiveness of alternative treatments,” Dafny says. For Murray Ross, integration is the best way to close this gap. “Medicine is too complicated to be played solo,” he says.

The Value of Small Data

Effective as it is, big data alone cannot account for Kaiser Permanente’s success. “Long before EMR, our physicians shared medical records and held themselves accountable for the quality and cost of the care they provided,” Ross says. “It’s worth recognizing how much can be accomplished with small data.” Electronic records show, for example, whether patients are up to date on their preventive screenings; but it takes responsive front-line staff—not an algorithm—to make same-day appointments for the patients who are overdue. And for those with chronic conditions, Kaiser Permanente uses a “panel support tool,” a relatively low-tech way to confirm that patients have completed routine exams. Scanning the electronic medical record helps the group identify care gaps, but the record alone is not enough. “Without a culture of accountability and resource stewardship,” Ross says, “all the new technologies in the world aren’t going to get you where you want to be.”

Ocasio agrees that data is only useful if you know what to measure. “In their analysis, they found that scheduling appointments was a huge pain point,” Ocasio says, “so that became their metric: How easy is it to get a same-day appointment? Data can help, but only when the staff know how to use it effectively, and this depends on the culture factor.”

As Ocasio defines it, culture is not an abstract value. “It’s about values being manifested in clear metrics that people know and live by on a day-to-day basis. For too many companies, culture is a series of vapid pronouncements that really have little to do with day-to-day operations. I think that’s what’s distinctive about Kaiser—the fact that a commonality of focus as a cultural phenomenon leads to operational excellence.”

Organizational Hurdles

Of course, there are challenges to the integrated model, in large part due to conflicts within the healthcare industry itself. Doctors, patients, and hospital administrators each have different goals and incentives, which makes it difficult to manage such a large and diverse organization. For example, physicians who work for Kaiser Permanente may earn less than specialists at a nonintegrated healthcare provider, which can be limiting for surgeons or others who prefer a system that depends on a fee-for-service model.

There is also the fact that Americans tend to be skeptical of insurers, and some might not be comfortable with the integrated system. “The insurance industry was the fall guy of the Affordable Care Act,” says Leemore Dafny. “If you integrate the insurer and provider, there can still be a taint associated with that. Consumers might worry: Will my doctors really act in my best interest when they’re aligned with an entity whose bottom line is enriched by rejecting the bills?” Customers also like to have options—or, at the very least, second opinions.

Although Kaiser Permanente has come to define itself as a patient-focused culture, many prefer to have broader physician networks—even if it costs them more—and to have the ability to shop around when it comes to certain procedures or treatment. This became apparent in the 1990s, with the rise of healthcare maintenance organizations, or HMOs. Dafny says that this skepticism towards integration is one reason the healthcare industry has not widely emulated the Kaiser Permanente model.

That is, at least not yet. The medical group is well positioned to be a leader in affordable care. As Murray Ross sees it, the integrated model is in favor again, and it has the best chance of delivering high-quality care at low cost. Hospitals across the country are partnering with doctors and health insurance companies to form “accountable care organizations” to better coordinate patient care.

For Ocasio, whether the company will grow depends, at least in part, on effective organizational management. “In many ways, it’s about the interplay of economics and sociology,” he says. Obviously healthcare organizations need to understand the economics, including the size of the market, the cost structure, and the competitive landscape. But when it comes to executing its strategy on a daily basis, he says, “that’s where having a strong culture gives them an advantage.”