Kaiser Permanente unveiled its new, state-of-the-art labor and delivery wing at its Woodland Hills facility earlier this month. Its roomy 23,000 square feet features six delivery rooms and 15 mother-baby suites, among other amenities. But that is only one of several large construction projects Kaiser has undertaken in recent years, including in Lancaster, North Hollywood and Panorama City. This expansion is driven partly by the desire to attract customers in new areas as well as to elevate the brand. But one big reason for the boom: The Affordable Care Act has greatly boosted membership in Kaiser’s health plans. “There’s a whole bunch of people that have health insurance today that didn’t have it a few years ago,” said Dennis Benton, senior vice president and area manager at Kaiser Permanente Woodland Hills Medical Center. Growth is good. But for Kaiser, growth also presents something of a dilemma. Because its business model calls for all those new members to be looked after and treated in-house, it means Kaiser must go on a construction spree and not merely expand its network of existing medical providers. And that has changed its cost structure. Fixed costs The Kaiser business model involves growth costs that competitors don’t have. Most other insurance companies contract with hospitals, physician groups and doctors, who provide the health care in exchange for subsidies and being in the insurance network. But at Kaiser, when the customer base grows, the organization has to expand its infrastructure, hire doctors and nurses, and add administrative resources. This creates higher overhead that must be absorbed somewhere, which could explain Kaiser’s increase in premiums. Some recent construction projects include its 136,000-square-foot medical office building in Lancaster and a 72,000-square-foot specialty clinic in Panorama City. Both opened in 2014, and its 31,000-square-foot facility in North Hollywood opened in 2013. “One issue with Kaiser is they are a brick-and-mortar operation,” said Dylan Roby, an assistant professor of health services administration at the University of Maryland. “Kaiser is a system that has high fixed costs. If you think about an organization like Health Net, it is more readily able to scale up its network quicker than Kaiser.” When an insurer like Health Net has an increase in enrollees, the company does not necessarily need to build anything but will sign up a proportionate number of existing doctors’ practices to cover the new customers, a far more flexible and cheaper approach than Kaiser’s construction projects. Winning model The Kaiser model differs from other health insurers as the organization provides the insurance as well as the health care to its customers. This allows Kaiser to have more control over the entire process and allows the nonprofit to streamline operations. For instance, a patient goes to a Kaiser location for a dermatology appointment and because its systems are integrated, can be notified of an overdue mammogram at the same appointment. As a result, the patient may be able to have a mammogram that same day or schedule it for later. Kaiser’s delivery system of care takes a more integrated approach, which other insurers and health care providers have been trying to emulate since the Affordable Care Act went into effect. For example, last year Indianapolis-based Anthem Inc. launched Vivity, a plan similar to Kaiser’s. “There is a big push across the whole health care industry to be more patient-centric and to really provide full service to the patient,” said Sharoni Billik, owner of health care advertising firm Sharoni Billik Healthcare Communications of Encino. “It’s not just about treating a patient when sick, but it’s really providing a full service with preventative care, making things easier for the patient.” Jason Sandler, partner at OHM Benefits & Insurance Solutions in Northridge, who sometimes sells Kaiser insurance to employer groups, has noticed the shift in the industry but believes other providers still have some catching up to do. “We have seen some movement in the traditional carrier sector that does lean toward that single-model approach that Kaiser uses, but right now, I don’t see any carriers’ options that are quite at that level (of Kaiser).” Kaiser implemented its integrated system since inception over 70 years ago, while a lot of other insurers began incorporating similar systems in more recent years. “We’ve grown up and evolved that way (with an integrated system) for so many decades now, so it’s just how we do business,” said Kaiser’s Benton. “It’s seamless. The patients come to see doctors, doctors refer to other doctors who are right here. Any radiology service, pharmacy, anything else — it’s quite literally one-stop shopping. … It’s actually interesting to us to watch the industry evolve in trying to be like us. Our biggest selling point is that we provide that comprehensive, integrated care that other organizations are just starting to dabble in.” The organization’s holistic approach to health care has carried over to its marketing strategy, which currently highlights its focus on patient health, happiness and well-being. It’s current “Thrive” campaign embodies this message and is somewhat emblematic of the nonprofit’s recent expansion. But with the capital investments and changing market under health care reform, Kaiser’s position in the market has shifted. “Historically, Kaiser has been known as the low-cost leader,” said OHM’s Sandler. “If you wanted cheap insurance, you went to Kaiser. In very recent years, that has turned around. I think they are trying to portray themselves as a mainstream carrier that offers state-of-the-art technology and facilities, and pricing that is still competitive in the marketplace but not necessarily bargain basement.” On Covered California, the state’s health insurance marketplace, Kaiser tends to be one of the more expensive offerings with comparable prices to such middle-tier insurers as Health Net Inc., which was recently acquired by Centene Corp. of St. Louis; San Francisco-based Blue Shield of California; and Anthem. Compared to low-cost providers such as Molina Healthcare Inc. of Long Beach, Kaiser can be substantially more expensive, depending on the plan. Competition To compete with Kaiser, rival insurers and health care providers are beginning to create deeper partnerships with each other to provide more comprehensive care to patients. If other networks successfully integrate their health care systems, they could potentially reduce Kaiser’s market share. These networks would provide consumers with both integrated care and more options from different health care providers as opposed to Kaiser, which only offers care in-house. “There are lots of threats on the horizon,” said University of Maryland’s Roby. “Organizations that previously wouldn’t work together are now working together to create different models that might compete better.” But for the time being, Kaiser is thriving. In addition to the new labor and delivery wing, the Woodland Hills campus embarked on a solar rooftop project just a few weeks ago and is in the process of installing 20 solar panel canopies over the 60,000-square-foot parking structure. The project will produce 1 megawatt of energy and is scheduled for completion by the end of September. The location is also upgrading its ventilation, electrical, plumbing, heating and air conditioning systems and has another project on the drawing table. Pending board approval, the hospital hopes to expand its emergency room and add 10 operating rooms in the next three years. Outside of Woodland Hills, Kaiser also is building a medical office building for primary care in Porter Ranch as well as another location in Ventura that will focus on medical specialties like neurology and endocrinology. Both are slated to open in 2018.