News release: National

February 28, 2003

For more information, call:
Beverly Hayon
Kaiser Permanente
Phone: (510) 271-5953
E-mail: Beverly.Hayon@kp.org

Kaiser Foundation Health Plan maintains solid financial position while advancing commitment to patient care

Investments in technology, facilities and personnel meet the needs of 8.4 million members and communities served by non-profit health plan

Oakland, CA – Kaiser Foundation Health Plan Inc., Kaiser Foundation Hospitals and their subsidiaries (KFHP/H) announced net income of $70 million and operating income of $142 million on revenues of $22.5 billion for the year ended December 31, 2002. In 2001, KFHP/H reported net income of $681 million and operating income of $714 million on revenues of $19.7 billion. Membership as of December 31, 2002 was about 8.4 million, reflecting growth of 115,000 members during the year.

In the 4th quarter of 2002, KFHP/H reported a net loss of $525 million and an operating loss of $450 million on revenues of $5.8 billion. By comparison, in the 4th quarter of 2001 KFHP/H posted net income of $187 million and operating income of $198 million on revenues of $5 billion.

The 2002 and 4th quarter results include KFHP/H's decision to move from a proprietary automated medical record to a more advanced and cost-effective vendor system. This decision resulted in a $442 million adjustment for system development over the last several years. The results also reflect higher operating costs as expected at the end of the 3rd quarter, driven primarily by increased pension-related benefits and the declining returns in non-operating investments consistent with current market performance. Excluding the automated medical record adjustment, KFHP/H's net income for year-end 2002 was $512 million and operating income was $584 million.

In addition, KFHP/H in 2002 increased its estimated pension liability funding per SFAS 87 requirements, which resulted in a $470 million reduction to net worth. The adjustment is non-cash, and it reflects market declines experienced by other, similarly sized organizations with defined benefit pension plans.

"This is the right time to be investing in a major care system re-engineering project. Our strategy reflects Kaiser Permanente's commitment to reinvesting in our patients, our physicians, our employees and in the communities in which we operate," said George Halvorson, KFHP/H chairman and CEO. "The fact that we were able to make investments that are essential to our long-term growth and viability is extremely gratifying."

Another crucial area of investment for KFHP/H is its communities. In 2002, KFHP/H extended its commitment to community service through $485 million in direct community benefit investment across the country, an increase of more than $140 million from 2001. Also in 2002, the organization clarified its strategic areas of focus for community investment and service, which include: financing and delivery of care for vulnerable populations, development and communication of evidence-based clinical care, education of health workers and consumers, and informing public policy. This strategic focus improved the effectiveness of Kaiser Permanente's community benefit activities and paved the way for a number of notable accomplishments:

At the national level, Kaiser Permanente collaborated with the National Consumers League to develop education materials for consumers on the value of evidence-based medicine and improved patient-physician communication.
In California, Kaiser Permanente developed partnerships with community organizations such as the California Primary Care Association, community clinics and the California Association of Public Hospitals to expand access and coverage for the uninsured and other vulnerable populations.
In other regions, such as Colorado, Kaiser Permanente provided leadership for community-based events such as Neighbors in Health, where health care providers from Kaiser Permanente and other community organizations provided immunizations and health screenings for thousands of low-income individuals and families in the Denver area.

"As a non-profit, our priorities are very clear," said Bernard Tyson, senior vice president for communications and external relations. "To provide the best health care to our members, we invest in the people of Kaiser Permanente, as well as technology, tools, facilities and the communities where we operate. We develop and use new technologies to give our physicians and nurses the most comprehensive and current information about advances in care, and the individual health profiles of their patients. We believe this is what health consumers seek in a health partner, and we are focused on becoming that ideal health solution."

Peter diCicco, executive director, Coalition of Kaiser Permanente Unions, AFL-CIO, noted that KFHP/H's investment in its employees, such as hiring nurses above and beyond the nursing ratios set by the state of California, leads to a better health care experience for patients and employees alike. "Our investment in staff is a powerful example. In a year when industry leaders, government regulators and the media reported a continuing nursing shortage, Kaiser Permanente actually recruited nearly 6,000 new nurses and improved the benefit package for current employees, assuring an expanded, stable staff," diCicco said. "Kaiser Permanente is only as good as our people - and our people are top-notch, thanks to our unsurpassed commitment to recruit, retain and invest in physicians and employees."

Earlier this month, Kaiser Permanente announced a major investment in the future of health care in the form of its automated medical record system. "The AMR system allows Kaiser Permanente to expand on its ability to understand patients, document their needs and provide evidenced-based care in a safe and secure environment," said Francis J. Crosson, MD, executive director of The Permanente Federation. "This system will revolutionize the way health care is provided in this country. It's a win-win - for both our members and the American health care system."

Industry analysts have predicted that the health plan will be able to realize significant savings once the automated record system is fully functional. KFHP/H predicted that the records system would improve accuracy and health outcomes, helping to lower costs. When the AMR system was announced, health advocacy organizations, including AARP, predicted that the system would give Kaiser Permanente a competitive edge in attracting new customers.

"We are an organization that not only cares for, but cares about, the health of our 8.4 million members," said Halvorson. "And the health and wellness of our members and their communities are at the core of the investments we made in 2002. I'm pleased that our fundamentally strong financial picture will allow us to continue to make capital investments in hospitals and facilities upgrades that we believe are an important part of our patient care."

In 2002, KFHP/H invested about $1 billion in facilities projects, an increase of more than $300 million over 2001. These investments include:

11 medical office buildings completed in Ohio, the Mid-Atlantic states, and California.
At least 14 additional medical office buildings under construction in California, with an additional six in the design phase.
Two large-scale, state-of-the-art replacement hospitals in California where construction is underway: the $700 million Santa Clara Medical Center, and the $400 million Los Angeles Medical Center. Both projects are slated for completion in 2006.

"Our financial position remains solid," said Robert Briggs, KFHP/H chief financial officer. "Our margins before the automated medical record adjustments are near target, our debt burden relative to total capitalization is low, and our cash-to-debt position remains strong. We will continue to monitor marketplace forces and adjust our investments in technology, capital, personnel and other areas accordingly to maintain our financial viability into the future."

About Kaiser Permanente

Kaiser Permanente (Oakland, Calif.) is America's leading integrated health care organization. Founded in 1945, it is a non-profit, group practice prepayment program. Kaiser Permanente serves the health care needs of 8.4 million members in nine states and the District of Columbia. Nationwide, Kaiser Permanente includes approximately 125,000 technical, administrative and clerical employees and about 11,000 physicians representing all specialties.

Except for historical information contained herein, the matters discussed in this media release are forward-looking statements that involve risks and uncertainties. Actual results may vary significantly based on a number of factors including, but not limited to: the impact of competitive products and pricing; government regulations; health care legislation; litigation; changing membership requirements, and the change in economic conditions of the various markets the organization serves.