809.B – Discussion 5

Use the readings listed in Moodle and lecture notes to answer each of the following questions with supporting details. Please do not use AI tools (ChatGPT, Course Hero, etc.) to answer discussion forum questions because they will not help you personalize your answers and have been known to give misinformation. Use first person language (I, me, my, etc.).

1. As you have been implementing your leadership practicum project over the past few weeks and received feedback, which one of nine suggestions from the Forbes Coaches Council (2021) did you (or would you) find most helpful to use? Please explain.

2. Criticism, especially when associated with work performance can be difficult to accept. Which of Zawadzki’s (2021) “6 Commandments of Learning to Accept Criticism” resonates most with you and why?

3. Describe a team meeting, feedback session, performance review, or other professional two-way communication engagement that you recently had. How would you assess your listening level using Zenger and Folkman’s (2016) listening level scale? Please explain.

4. Which one of the ten adversarial tactics (see PowerPoint from Week 4 Zoom) mentioned in Dunk Tank do you feel most confident addressing as a leader? Please explain.

5. Use the Kaiser Case Study (2021): What did Dr. Pearl identify as Short-Term Wins (step 6) to address this problem? Please explain.

6. Use the Kaiser Case Study (2021): What data/observations did Dr. Pearl use to measure the success of the short-term wins? Please explain.

Feb 19, 2021,08:10am EST|1,247 views
Nine Ways Leaders Should React
To Unexpected Negative Feedback
Expert Panel®
Forbes Councils Member
Forbes Coaches Council
COUNCIL POST| Membership (fee-based)
Leadership
Human beings are unpredictable, and often, how we see ourselves isn’t the
same way others see us. This reality seems to be doubly true for individuals
who work within a team.
Leaders usually have the most responsibility on their shoulders, and the
success of a project relies on their interaction with the team. However,
sometimes their rapport with individual team members may be tenuous. This
weak connection may eventually lead to a situation where team members
voice unexpected negative feedback, throwing off the leader’s consideration of
how each member of the team sees them.
Below, nine associates of Forbes Coaches Council talk about how a leader
should react to these unexpected opinions from trusted team members to keep
the team intact and functional.
1. Always Ask For Context
When I receive any feedback, especially surprising feedback, I always ask for
context. Feedback is essential for growth, but understanding the when, how,
where, and why makes the feedback more rich and meaningful. The Center for
Creative Leadership’s (CCL) SBI model underscores this, with the S standing
for situation, B for behavior and I for impact. Getting all of these makes any
feedback helpful. – Dan Ryan, ryan partners
2. Acknowledge And Thank Them
Acknowledge and thank team members for their forthrightness and candor. I
think it’s a positive sign that your team members are willing to speak directly.
Take the time to reflect, and leverage your human resource business partners
and/or coach. It’s essential you respond with the actions you will take, and
what you may not be able to tackle right now. Provide the context for your
thinking. – Lesly Higgins, Lesly Higgins
3. Suspend Judgment, Understand, Nurture
You can follow three simple steps: SUN. First of all, suspend judgment —
allow yourself time to get to a state where you can listen with an open mind.
Understand — ask for probing questions or similar incidences in the past. Try
to understand. Nurture — ask the person giving you feedback for help, make
them a part of the solution. This will signal you care about their opinion and
are willing to make a change. – Guliz Kavuncuoglu, The Green Room Collective
4. Strip Away The Emotional Component
A positive way to deal with negative feedback is to first view it as just
“feedback.” Strip away the emotional component and look for the message’s
validity without being defensive. Identify insight, details, and key information
from the feedback. See it as an opportunity for improvement in your
performance and leadership effectiveness. Let your response be an excellent
example for others to follow. – Rick Itzkowich, Vistage Worldwide, Inc.
5. Listen With Open Body Language
There is much to be learned about the speaker and the receiver in these
challenging conversations. It is very difficult to listen if you move into flight or
fight mode or have a defensive response. Try your best to listen with open
body language and book a follow-up clarifying conversation for the next day
after some reflection. Consider including your HR professional for guidance
and action steps. – Gayle Draper, Intentional Careers and Human Resources
6. Practice Self-Reflection And Honesty
Self-reflection and honesty are key. Sit with the feedback for a few hours or a
day and reflect on what it means, what it tells you, and what you may need to
change. Trust that the feedback was given to help you grow, not bring you
down. Then, be honest as you share your feedback with the team. Include your
ideas for change. And humbly ask for their input. – Candice GottliebClark, Dynamic Team Solutions
7. Ask Them To Be Specific
Adapt, improve, and learn from it. Every piece of feedback we receive can help
us identify our own blind spots and weaknesses. Ask your team members to be
specific in their feedback, and also ask them for ideas as to how you can
improve. And of course, be sure to thank them. – Billy Williams, Archegos
8. Evaluate What Prompted The Feedback
The hardest feedback to take is the one we know was unfair. However, if
someone gave you feedback, it is because they felt it. Instead of justifying
yourself, evaluate what made the other person feel the way they did. What was
it that made them give you negative feedback? Even when not at fault, instead
of taking it personally, evaluate and address the situation that prompted the
feedback. – Ruchi Motial-Suri, Success Culture
9. Be Curious And Treat It As Growth Opportunity
Receiving negative feedback directly from team members is a gift — it speaks
to the psychological safety you have built in the team culture. If the feedback
surprises you, first appreciate that they are giving it to you and then get
curious about the signals you send and use it as a growth opportunity for your
self-awareness and leadership skills. – Shefali Raina, Alpha Lane Partners
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CASE: SM-333
DATE: 8/1/21
DR. ROBERT PEARL
AND THE PERMANENTE MEDICAL GROUP
OF NORTHERN CALIFORNIA:
A LESSON IN STRATEGIC LEADERSHIP
INTRODUCTION
Becoming CEO of a multibillion-dollar health care organization would surely be a tempting
prospect for any ambitious health care professional. Yet when such an opportunity presented
itself to Dr. Robert Pearl, MD, he initially demurred. He was content in his role as physician-inchief, leading the Silicon Valley portion of the Kaiser Permanente program in California. Being
CEO would mean a massive change in his professional life, including the end to his career in
reconstructive surgery.
The problems Kaiser1 faced were massive: Patient satisfaction scores were plummeting,
physician morale was sagging, and the number of open positions was widening as new doctors
steered clear of a troubled brand.
Throughout the case, the shorthand “Kaiser” is used to denote The Permanente Medical Group of Northern
California, which employs the physician groups that provide medical services to both the: (a) offices (i.e., for
outpatient care) and hospitals of the Kaiser Foundation Hospitals, and (b) the patients of the Kaiser Foundation
Health Plan, which respectively run the hospital and insurance portions of Kaiser Permanente. In certain
jurisdictions such as Northern California, the three entities, although technically distinct, are governed by medical
service agreements and mutually exclusive contracts (see footnote 12), creating Kaiser Permanente, which to
patients appears as a single, unified whole. Kaiser is situated in eight different regions: Northern California,
Ziv Shafir and Professor Robert Burgelman prepared this case as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation. The authors wish to thank Dr. Robert
Pearl for his extensive assistance with this case. Unattributed quotes and data in this case come from an interview
conducted with Dr. Pearl on March 15, 2017, along with subsequent communications over email.
1
Copyright © 2021 by the Board of Trustees of the Leland Stanford Junior University. Publicly available cases are
distributed through Harvard Business Publishing at hbsp.harvard.edu and The Case Centre at thecasecentre.org;
please contact them to order copies and request permission to reproduce materials. No part of this publication may
be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means ––
electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate
School of Business. Every effort has been made to respect copyright and to contact copyright holders as
appropriate. If you are a copyright holder and have concerns, please contact the Case Writing Office at
businesscases@stanford.edu or write to Case Writing Office, Stanford Graduate School of Business, Knight
Management Center, 655 Knight Way, Stanford University, Stanford, CA 94305-5015.
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
p. 2
Yet even more troubling were the headlines about Kaiser in major publications.2 Not only had
Kaiser posted losses for the first time in its history, but those losses were over five times what
was initially projected.3 One metric in particular stood out like a lamppost on a dark, foggy
night: two days of cash. With over 50 years of history providing innovative, quality health care
to millions of members, the organization was now at the point of taking out an emergency loan
simply to meet California regulatory requirements. A change in leadership was desperately
needed, and the Board of Directors of The Permanente Medical Group selected Dr. Pearl as the
next CEO, the fourth-ever in its history.4
Over 20 years later, in a classroom at the Stanford Graduate School of Business packed with
second-year MBA and other graduate students, Dr. Pearl delivered the final lecture in the
seminar he taught with Professor Robert Burgelman about leading strategic change in health
care. His tenure as CEO complete after three successive six-year terms, Dr. Pearl had been
asked to explain the approach and mindset he used to turn Kaiser into one of the most admired
health systems in the United States.5
THE HISTORY AND LEGACY OF KAISER
The roots of Kaiser were interwoven with those of America’s modern-day infrastructure, from a
historical perspective as well as a figurative one: Each was a feat of human engineering born of
necessity. For residents of Los Angeles, this meant constructing the Colorado River Aqueduct to
Southern California, Hawaii, Georgia, Ohio, Colorado, Northwest, and Mid-Atlantic states. Northern California is
the largest and most successful of the regions.
2
Milt Freudenheim, “Kaiser HMO, Erring on Costs, Posts $270 Million Loss for ’97,” The New York Times,
February 14, 1998, http://www.nytimes.com/1998/02/14/business/kaiser-hmo-erring-on-costs-posts-270-millionloss-for-97.html (July 12, 2019).
3
Carl T. Hall, “Huge Loss for Kaiser – Rates to Rise / $270 million Shortfall Also Means Cost Cuts,”
San Francisco Chronicle, February 14, 1998, https://www.sfgate.com/news/article/PAGE-ONE-Huge-Loss-ForKaiser-Rates-To-Rise-3012692.php (July 12, 2019).
4
Dr. Robert Pearl, MD, was also CEO of The Permanente Medical Group for the mid-Atlantic region from 2008 to
2017; for more information about his impact in that region, please refer to GSB case study SM-319, “The MidAtlantic Permanente Medical Group: Spreading the Integrated Care Delivery Model.”
5
“Most recently, TPMG received the 2013 Acclaim Award from the American Medical Group Association. The
award is the AMGA’s most prestigious, and honors excellence and innovation in high-performing medical groups
and health systems. In addition to the accolades we receive as a top-performing medical group, TPMG also has
been recognized along with Kaiser Foundation Health Plan for the combined excellence of Kaiser Permanente
Northern California. The National Committee for Quality Assurance (NCQA) ranked KP Northern California third
in the country, out of 395 plans, in the NCQA’s Medicare Health Insurance Plan Rankings for 2012-2013. It ranked
Kaiser Foundation Health Plan of Northern California eighth nationally, out of 473 plans, in NCQA’s Private
Insurance Plan Rankings for 2012-2013. In the latter category, the next best performer in California, outside of
Kaiser Permanente, is ranked 139. We’ve also scored four stars—the highest rating possible—for clinical quality
from the California Office of the Patient Advocate five years in a row. And Hewitt Value Health Initiative results
show Kaiser Permanente is the highest-ranking health care plan in California for clinical quality in 2013. As a result
of this superior performance, we are one of only 11 health care organizations—and the only one in California—to
earn a five-star rating from the Centers for Medicare & Medicaid Services, out of a total of nearly 600 plans.”
See “Performance Powered by Physicians,” The Permanente Medical Group, April 2014,
https://doctorsatkaisertpmg.com/wp-content/uploads/2014/04/TPMG-Performance-Powered-By-Physicians.pdf
(April 2, 2019).
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
p. 3
transport water over 242 miles to supply a rapidly growing and thirsty metropolis. For the
forefather of Kaiser, Dr. Sidney Garfield, this meant supplying health care to the 4,000 workers
and their families toiling away to build the Aqueduct.
Dr. Garfield did not intend to create a health care revolution. He was a newly minted surgeon
looking to open a medical practice and begin his career. Having trained in Southern California,
he saw a prime opportunity in 1933 by opening a 12-bed hospital in the Mojave Desert, right
next the main construction site of the Colorado River Aqueduct. Dr. Garfield ran the equivalent
of a fee-for-service practice, providing care and seeking reimbursement after the fact from
insurance companies or the patients themselves. In California and most of the nation, insurance
companies in this case were not the modern-day behemoths but rather workers’ compensation
plans, set up by the state legislature in response to the rising tide of on-the-job accidents.6
The same reimbursement and patient population headaches facing doctors in 2019 nearly
bankrupted Dr. Garfield’s practice in those early years. Insurance companies challenged the
necessity and cost of Dr. Garfield’s treatments, and when they finally agreed to pay, they were
frequently late doing so. Insurance companies referred workers with the most serious injuries to
favored hospitals in Los Angeles, which deprived Dr. Garfield’s practice of the most profitable
cases. Furthermore, Dr. Garfield loathed having to turn away workers and their families who
could not pay full price for their non-industrial medical problems. This meant he frequently was
left unreimbursed, much like modern-day hospitals when uninsured patients seek care
(particularly primary care) in the emergency room.7, 8, 9
A Health System Blossoms in the Desert
Ironically, it was Industrial Indemnity Co.,10 one of the main insurance companies not only
underwriting the Colorado River Aqueduct but also paying for workers’ industrial treatment, that
ultimately rescued Dr. Garfield’s practice. Harold Hatch, an executive at Industrial Indemnity,
proposed prepaying Dr. Garfield a portion of the premium otherwise allocated towards treating
injured workers. In exchange, Dr. Garfield would be responsible for comprehensive medical
care for industrial injuries. This was the rough equivalent of a capitated model, in which Dr.
Garfield could keep any leftovers of the prepayment if he efficiently delivered the necessary
care—but also would not be further compensated for medical care required beyond this prepaid
amount for a particular population. The other innovation was a voluntary payroll deduction of 5
The California legislature had previously passed the Workers’ Compensation, Insurance and Safety Act of 1913
(the Boynton Act), which required companies to cover worker compensation fees administered by insurance
companies.
7
Kaiser Permanente, “Harold Hatch, health insurance visionary,” April 12, 2018,
https://about.kaiserpermanente.org/our-story/our-history/harold-hatch-health-insurance-visionary (April 2, 2019).
8
Kaiser Permanente, “How it all started,” https://about.kaiserpermanente.org/our-story/our-history/how-it-all-started
(April 2, 2019).
9
“Who Bears the Cost of the Uninsured? Nonprofit Hospitals,” KelloggInsight, June 22, 2015,
https://insight.kellogg.northwestern.edu/article/who-bears-the-cost-of-the-uninsured-nonprofit-hospitals
(April 2, 2019).
10
Henry J. Kaiser, the industrialist whom Kaiser was ultimately named after, owned a substantial portion of
Industrial Indemnity Co. See Kaiser Permanente, “How it all started,” op. cit.
6
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
p. 4
cents a day (the equivalent of $1.00/day in 2017), for which Dr. Garfield would provide medical
care outside the scope of worker’s compensation.
This switch from a fee-for-service health care model to a prepaid, capitated one allowed Dr.
Garfield’s practice to thrive and even turn a tidy profit. Workers, as well as their employers and
the insurance companies underwriting their care, were pleased to have quality, affordable health
care nearby.
One of the most interesting outcomes of this switch in payment models, however, was the new
focus on preventive care. Dr. Garfield himself explicitly acknowledged how incurring the
financial risk for sick and injured patients fundamentally changed his practice: “To the private
physician, the sick person is an asset. To us, the sick person is a liability. We’d go bankrupt if
we didn’t keep most of our members well most of the time.”11 Such preventive practices were as
granular as Dr. Garfield and his associates roaming the construction sites, pulling errant nails out
of dangerous spots and installing signs exhorting workers to do the same.
Dr. Garfield’s efforts and successes were noticed by Henry J. Kaiser, one of the twentieth
century’s great industrialists—and the man responsible for mammoth projects such as the Grand
Coulee Dam in Washington state, one of the world’s largest concrete structures, and the “largest
construction sites in history.”12 With the Colorado River Aqueduct project winding down and
Dr. Garfield preparing to move on, Henry J. Kaiser asked Dr. Garfield to take over health care
operations in the construction of the Grand Coulee Dam.
Using the prepaid medical model pioneered at the Colorado River Aqueduct, Dr. Garfield was
able to replicate the success with the Grand Coulee Dam. This model was repeated again on an
even larger scale at Henry J. Kaiser’s shipyards and steel mills in the early 1940s, which were,
among other things, building the large battleships sailing off to World War II. At its peak, Dr.
Garfield’s network of physicians and nurses cared for over 200,000 patients across four hospitals
with a capacity of 790 beds.13
When the war ended, however, the number of workers employed at the shipyards and steel mills
plummeted, and Dr. Garfield did not have enough patients to support the vast health care
network he had built. With Henry J. Kaiser’s support and approval, Dr. Garfield began
accepting patients outside of Kaiser’s industrial empire. Ultimately the same model of
integrated, pre-paid health care flourished, becoming the modern-day Kaiser Permanente.14
Kaiser’s Growth and Decline, from World War II to 1999
For the next 50 years, Kaiser’s growth and strategic thinking was driven by rough shorthand:
“Provide good-quality health care, but always be 15 percent cheaper than the competition.”15 Dr.
Pearl emphasized that intrinsic to such an approach was the directive to “never compromise
Geoffrey C. Nunes, “Kaiser, Garfield and Permanente,” Arch Surg, 2002; 137: pp. 1034-1036.
See Kaiser Permanente, “How it all started,” op. cit.
13
Nunes, op. cit., p. 1035.
14
Health Plan (as it ultimately became known) opened to the public in 1945, with a vision for expanding the model
of health care Dr. Garfield had pioneered. See Nunes, op. cit.
15
Interview with Dr. Robert Pearl, MD, March 15, 2017. Subsequent quotations are from the authors’ interviews
unless otherwise noted.
11
12
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
p. 5
quality; I want to make sure people understand that quality came first and foremost.” He
explained:
At the same time, routine problems took a back seat to urgent ones. If you
already had back or shoulder pain for three months, what was another few weeks
to wait for care? If you had a serious problem, you were going to be seen right
away. The concept of triage—treating patients based upon the likelihood of a
problem—is not intrinsically negative, at least not from a medical point of view,
even though patients can interpret it that way. The perception of quality is what
suffered as a consequence, not clinical outcomes.
A growing number of patients and employers welcomed the trade-off of convenience and service
for low-priced, high-quality health care, and enrollment boomed over the ensuing years. That
same strategy, however, buckled in the face of two major external forces in the mid-1990s.
The first of these forces were new entrants into the health care market—lower-priced, for-profit
entities known as health maintenance organizations (HMOs). The new entrants achieved lower
prices by artificially reducing health care consumption, and thus costs, by restricting access to
high-priced services. Traditional health care practices meant a patient could see almost any
provider, and the insurance companies would then pay the bill. HMOs instead contracted with a
limited number of providers at reduced “in-network” rates, leaving patients to cover a larger
portion (or even all) of the cost when they saw an “out-of-network” provider.16 These HMOs
expected primary care physicians to function as “gatekeepers” and offered large financial
incentives to discourage referrals to specialists. In addition, they imposed stringent preauthorization requirements on patients and their treating physicians when patients sought
reimbursement for anything more than basic care.17
The second force buffeting Kaiser was a major economic recession beginning in 1990. Health
care costs in the United States had risen over the previous decade at double-digit rates, year over
year, yet employers, buoyed by growth and the associated tax advantages of offering health care
as an employee benefit, acquiesced to the rising insurance premiums. The impact of the
recession prompted employers to reconsider Kaiser in favor of the lower-priced, new-style
HMOs, transforming the health care marketplace into a fierce battle for survival.
Patients and doctors alike hated HMOs—only tobacco companies ranked as less popular with the
American public.18 It was bad enough that patients began associating Kaiser’s coordinated
health care model with the restrictive practices of the newer HMOs, but a more existential crisis
had emerged: Kaiser’s reluctance to modify its historic strategic model. As a result, both in 1997
and 1998, the organization priced services 15 percent below these aggressive competitors, yet
failed to find ways to reduce its costs proportionately. This caused revenue to fall below the cost
16
HMOs initiated the concept of in-network vs. out-of-network providers but the distinction was adopted by
virtually every payor and became industry practice.
17
For an in-depth review of the external forces buffeting Kaiser Permanente at this time, please refer to Case No.
OB-42(A), “The Liberty Medical Group,” p. 13.
18
Atul Gawande, “Of Course You Don’t Like Your HMO,” Slate, October 25, 1997,
http://www.slate.com/articles/health_and_science/medical_examiner/1997/10/of_course_you_dont_like_your_hmo.
html (April 5, 2019).
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
p. 6
of delivering care, and the organization lost hundreds of millions of dollars in both years. As Dr.
Pearl explained, this was why “literally in one year, the organization got into big trouble—and
almost out of business within two.”
DR. PEARL’S PATH FROM SURGEON TO CEO
Just as Dr. Garfield’s early history of chance and necessity led to Kaiser’s modern-day approach,
understanding Dr. Pearl’s strategic actions meant examining his path to CEO. “Almost
everything that I ended up doing when I became the CEO, I had started to develop prior to that
time,” Dr. Pearl explained.
Upon finishing his residency in plastic surgery at Stanford, Dr. Pearl was planning to fly down to
South America to spend a year operating on children suffering from cleft lip and palate
disfigurement.19 Before leaving the country, however, he received a request from the chief of
plastic surgery at the Kaiser facility in Santa Clara: Could he perform operations at their facility
for six months until they could hire someone for the role full time? The previous surgeon, Dr.
Charles (Charlie) Thuss, had died while piloting a private plane. Dr. Pearl put his plans on hold
and agreed to take the position. Reflecting on the decision, he said:
If I tried to become the CEO, I would have failed in my ambition. You can never
connect the dots going forward. It was all a set of happenstance and serendipity.
Windows open and windows close. And when the windows open, if you jump
through them, you find yourself in a different place, and if you don’t, you may
never get the chance again.
Dr. Pearl leapt through that proverbial open window, performing over 1,000 surgeries in his first
year of practice, in comparison to the 200 or so that most new surgeons usually complete. “I was
hired to perform complex and extensive operations; surgical interventions I enjoyed
tremendously. I was very well-trained. I was at the cutting edge of the field. It was just a great
professional experience.” What began as a temporary assignment quickly transformed into an
invitation from Kaiser to stay full time.
Progressively Larger Leadership Roles
Only a year into practice, Dr. Pearl was asked to head the operating room committee, “a very
important committee” he explained. “It oversees staffing—not the day-to-day assignments, but
the overall staffing and ensures timely access to the operating room for patients. And there was a
big problem at the time.” A severe nursing shortage was rippling across the United States, and
for Kaiser this meant much-needed surgeries were backing up because the operating rooms could
not run at full capacity.20 With a half-joking laugh, he explained the circumstances:
Cleft lip and palate, a congenital disorder, occurred when a baby’s mouth and/or lip did not form properly.
Timely surgery offered a profound intervention and a nearly complete fix to avoid otherwise debilitating aesthetic
and functional effects for a child born with this condition.
20
Craig J. Newschaffer and Julie A. Schoenman, “Registered nurse shortages: the road to appropriate public
policy,” Health Affairs, Vol 9, no.1 (1990): pp. 98-106.
19
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
p. 7
I had only been there for one year, and of course I thought I had been offered the
position as a result of my training at Yale and Stanford. More likely everyone
else had said “no” and I was the last guy available and dumb enough to say “yes.”
Once again, just happenstance. If a more experienced individual had stepped
forward, they never would have asked someone one year into practice to take on
the responsibility. The entire trajectory of my career would have been different.
Dr. Pearl led the committee to employ stop-gaps such as bringing on traveling nurses, while
developing longer-term fixes such as retention programs and an in-house operating room nurse
training program. Over the course of a year, the nursing shortage that had backed up operations
at Kaiser Santa Clara had been resolved. “Once people see that you can actually solve a
problem, particularly one they thought was insurmountable, they start giving you more and more
tasks,” said Dr. Pearl.
Upon completing his second year of practice, Dr. Pearl received an even more prestigious
opportunity. Kaiser asked him to work directly under the physician-in-chief at Kaiser Santa
Clara as an assistant physician-in-chief, as the previous person in that role had been promoted to
direct a newly opened Kaiser facility in nearby San Jose. The physician-in-chief was in charge
of the medical center, overseeing not only medical care in the hospital but also the physicians’
offices, and all of the medical center’s doctors and outpatient staff.
At the time of Dr. Pearl’s appointment, there were only two assistant physician-in-chiefs for any
particular medical center: one overseeing malpractice and other legal issues, and the other
focused on all operations at the medical center. “Today there are probably 8 to 12 assistant
physician-in-chiefs at most medical centers,” Dr. Pearl remarked. “I wasn’t yet even a partner in
the medical group—that takes three years. At year two, I now became the second most senior
administrative leader at Kaiser Santa Clara, the largest medical center in all of Kaiser.” Once
again serendipity had played an important role.
As an assistant physician-in-chief, Dr. Pearl had operational accountability for almost everything
at the medical center, tackling progressively larger projects in a variety of areas: hospital
operations, access, outside referrals, patient satisfaction and physician recruitment and retention.
The learning curve was steep but extremely fulfilling. He had to quickly master the full
spectrum of medical center operations, including primary, specialty, and diagnostic care. These
administrative duties did not replace Dr. Pearl’s work as a surgeon; they were in addition to a full
clinical load. Dr. Pearl even continued to conduct and publish research and teach at the Stanford
Medical School. Despite working over 100 hours every week, Dr. Pearl found himself enjoying
the process immensely, and remarked on how fascinating his leadership responsibilities had
become:
Figuring out how to staff an operating room more effectively leads you to start
thinking about how to structure a delivery system to achieve significantly better
outcomes in dozens of related areas. Leadership is fundamentally a creative
process, with the breadth of solutions limited only by a leader’s analytic ability
and imagination.
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For over ten years, Dr. Pearl maintained his role as assistant physician-in-chief. He was
summarily promoted to the physician-in-chief role at Santa Clara when the incumbent physicianin-chief retired in 1995. Dr. Pearl felt well placed to succeed in the job, brimming with ideas
about how to make Kaiser better.
Taking the Helm
It was in 1999 that Dr. Pearl received an even greater opportunity to have an impact at Kaiser,
when the CEO of The Permanente Medical Group announced he would be stepping down. “The
organization was in big trouble. We were losing hundreds of millions of dollars, and the board
wanted someone else to take on the responsibility. It was one of the most turbulent times in our
history,” Dr. Pearl confided.
By this point in Kaiser’s history, there had only ever been three CEOs, and the board began
casting around for the fourth. Dr. Pearl recounted what drove him to strive for the open role:
It was not a job that I wanted, because I loved what I was doing as physician-inchief. Not only could I practice surgery, but I could walk around the medical
center, go to the various medical and surgical departments, talk to doctors, roam
the operating room or emergency room, and participate in a vibrant, patientfocused health care delivery environment. The medical center felt like home; I
had hundreds of colleagues who were friends and felt like family. I knew
everyone; they knew me.
The idea of moving to a purely administrative job, 50 miles to the north in
Oakland, with responsibility for 19 dispersed medical centers was unattractive.
The thought of sitting in meetings all day and not participating in clinical practice
was depressing. I worried that I would never again have the opportunity to walk
around and talk to colleagues and get to know all the people personally. I thought
I actually would not like it at all.
I asked a couple of other physicians whom I thought would do well at the job and
said I’d be happy to support them in what would inevitably be a political selection
process.
“No way,” they replied.
At that point in the selection process, it became clear to me that the people who
were interested in the job were not ones that I wanted to work for. So that was
really the piece that drove me to step forward.
STRATEGIC INFLECTION POINT
Even before becoming CEO, as a physician-in-chief and a member of the Board of Directors,21
Dr. Pearl had a first-hand look at the strategy that had made Kaiser successful—but also nearly
21
The Board of Directors at The Permanente Medical Group comprised the physician-in-chief and an elected
representative from each medical center, as well as the CEO.
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p. 9
drove it to ruin. Dr. Pearl described how this strategy had only minimally evolved from the lowprice mindset that Dr. Garfield had developed nearly 60 years earlier:
What began as a tactical solution for Dr. Garfield in the Mojave Desert, driven by
necessity, remained the dogma and organizational strategy for how to succeed,
despite an ever-evolving health care landscape. Along the way, what the Kaiser
leadership lost in the 1990s was the relationship of price and cost. You cannot
lower prices without a clear operational strategy for lowering your cost structure,
and the organization did not have one.
Kaiser’s Positioning on the Value Curve
Using price as a variable to define Kaiser’s strategic positioning, Dr. Pearl laid out three general
directions the organization could go:
In analyzing the competitive landscape, I could see that we had to make a choice.
We could continue to price 15 percent below the competition and introduce the
restrictive approaches of the HMO competitors. We could try to achieve quality
differentiation with high prices similar to a luxury brand. Or we could price
competitively with other health plans but use our competitive advantages to
achieve market-leading quality and service.
I did not think the low price point was possible because the actions that would
need to be taken—putting in gatekeepers, authorization processes, and the like—
would simply not be acceptable to our doctors. It also would not be acceptable to
the patients, even though given the market dynamics, they might not have any
choice.
High pricing would not work either, because it leads to adverse risk. Remember:
this was an insurance world before the Affordable Care Act, when every company
is slicing and dicing the risk pool, and if you are high priced, you only attract the
very sick. So, the only price and strategy I thought viable was a competitive
price.
Immediately upon taking office, Dr. Pearl’s first strategic action was to convince his health plan
partners to raise prices by 10 percent, putting Kaiser more in line with its competition.22 He
invested the added revenue to hire more physicians and staff in order to provide exceptional
quality and access, not only for those with emergent problems, but also for those with routine
ones as well.
How could a struggling health system with customers accustomed to think they were on the
lowest-price option get away with such a significant price hike? The answer depended on the
relative inelasticity of demand in health care, at least in the short term. On Kaiser’s side was its
strong market share—about 34 percent of the San Francisco Bay Area—which meant that Kaiser
22
Exhibit 1 showcases a visual example of Dr. Pearl’s strategic thinking and how it built upon a framework
developed by Professor Robert Burgelman.
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was essentially a necessary option for most employers to offer. And for patients, most of the
added cost was borne by their employers. At the same time, Dr. Pearl knew he did not have
long—two years at most—until purchasers and enrollees rebelled if the quality and service
differentiation was not implemented as well.
The Big Bet
Strategic leadership is defined as making consequential decisions—those that cannot be easily
undone without major downfall.23 Dr. Pearl had just firmly drawn his line in the sand. He
described the new strategy that he was staking his career on, along with the entire Kaiser health
care system:
If you are competitively priced, and therefore no longer simply the low-cost
option, then you must differentiate yourself on another dimension. To me, it was
going to be around providing superior quality outcomes, and personalized service.
The reason I emphasized service was that most patients have trouble evaluating
clinical quality and use their service experience as a surrogate. While nationleading quality outcomes was going to be essential at the employer/purchaser
level, the key to attracting new members and retaining the ones from the past
would be changing Kaiser from a service laggard to a service leader.
Quality, measured mainly by improved clinical outcomes, was relatively clear: maximize
prevention, reduce medical errors, and decrease mortality.
Service was a more obscure metric, with fewer signposts to direct Dr. Pearl’s efforts.
Fortunately, there was a particularly illuminating study that Dr. Pearl had come across several
years earlier, commissioned by Kaiser to understand what patients valued most from their health
care experience. The study had been repeated three times over a ten-year period, each time in a
different location with a high degree of sophistication and rigor. Every single time, the study
came back with the same results about what Kaiser patients wanted:
1) a personal physician,
2) to see that personal physician when sick,
3) timely access to specialty care (within two weeks),
4) to have their phone calls answered in under three minutes, and
5) a pleasant, comfortable office experience.
What struck Dr. Pearl was that even with such clear, convincing data, no one had acted upon it—
physicians wanted to be known for their arcane medical knowledge and pedigree, not the quality
of service they provided. Physicians presumed patients would be most interested in where the
physicians had trained and their professional achievements; patients instead valued access,
convenience, and relationships much more highly.
Robert A. Burgelman, Strategy is Destiny – How Strategy-making Shapes a Company’s Future
(New York: The Free Press, 2002).
23
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Dr. Pearl was optimistic that if all of Kaiser could fulfill each of these five expectations, then
patient satisfaction and perceived value would rise. As physician-in-chief at Santa Clara, he had
focused on each of these areas, and achieved a dramatic increase in brand perception,
membership growth, and member retention.
Now he needed to do the same for the entire organization. No matter how many different
options he considered, one stood out: “I kept returning to the same theme: going from art to
science.”
ART TO SCIENCE
Dr. Pearl knew the direction he wanted to take the organization. It would begin by hiring
excellent physicians and committed staff and helping them understand that if they wanted
patients to perceive them as excellent, providing great service was essential. But he also
recognized that improving the in-office service experience alone was insufficient.
“Service is to a large extent about access, which does not require doctors to make Herculean
personal sacrifices to see more patients per day,” Dr. Pearl explained. Instead, he saw that much
of the challenge around access could be solved mathematically. “And that was the big leap in
my thinking and organizational performance.”
Dr. Pearl had started programming computers back in high school, and math was always one of
his favorite subjects. Dr. Pearl described how one of his mentors during residency, Dr. Ernie
Kaplan, had inspired him to look for the patterns in medicine:
Ernie had taught me that medicine in general, and surgery specifically, can be
mastered in one of two ways—rote memorization or pattern recognition. Doctors
can commit to memory a long differential diagnosis or the 30 steps for a particular
procedure, or they can extract the key overarching principles and derive all of the
subsequent items and steps on the list.
This pattern recognition skill is particularly applicable to reconstructive plastic
surgery. The specialty includes hundreds of operations performed from the top of
the head to the bottom of the feet. And the underlying principles of one
procedure, such as a tendon repair of the hand, can be applied to others, such as
for children whose eyelids fail to open completely.24
Dr. Pearl termed this approach “art-to-science,” teasing apart the underlying fundamentals that
can transform an otherwise esoteric, labyrinthian problem into a solvable, measurable one.
Robert Pearl, “What I Learned From Four Exceptional Surgeons About Operating and Leadership,” Forbes,
January 5, 2017, https://www.forbes.com/sites/robertpearl/2017/01/05/what-i-learned-from-four-exceptionalsurgeons-about-operating-and-leadership/#485600c27af8 (July 13, 2019).
24
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The Underlying Principle behind Kaiser’s Transformation
One of the more important applications of this principle in his new leadership role was the idea
of encouraging every patient to choose a personal physician. When Dr. Pearl became CEO, only
half of the members of Kaiser had a specific individual responsible for all of their care. Doctors
worried that by being personally responsible for the care of patients, the demands on their time
would increase exponentially. Many of these physicians had joined Kaiser for the flexibility the
position offered, and now they feared losing that control. However, when a patient chose a
specific doctor from a list of alternatives, and saw that individual on a consistent basis, patient
feedback surveys showed that value and satisfaction with care increased by almost 20 percent.
He stated: “That is 20 percent added satisfaction at no additional cost. For the doctors
themselves, it is actually easier to care for someone whom you know, which in turn generates
trust in their judgement and recommendations.”
Even more important in the art-to-science approach, and the key to actually providing every
patient with a personal physician, was Dr. Pearl’s awareness that patient demand for
appointments was finite, not elastic. Contrary to what physicians feared, most patients only
wanted to go to the doctor to the extent necessary, and thus Dr. Pearl could solve access as a
mathematical calculation. In primary care, he would model out the total number of visits a
population of patients would require, determine a panel size of patients per physician consistent
with this calculation, and hire the exact number of primary physicians necessary to care for that
panel of patients. Specialty care followed a similar logic, accounting for variables like the
number of referrals received and procedures performed.
Simply defining the average number of patients to be seen each day was not sufficient to resolve
the issue of access. Dr. Pearl had to adjust individual physician schedules to account for
variation in demand and the percentage of patients who failed to come to their appointments each
day. If every doctor’s schedule only had availability to book the average number of patients
seen, the process would fail for multiple reasons.
First, about 15 percent of patients failed to come in for their appointment and therefore the
allocated time would go unused. Second, although demand could be accurately predicted by the
year, there was a large day-to-day variation for individual physicians. As such, on any given
day, if Kaiser limited the schedule based on the average patient load, then half of the physicians
would have insufficient availability to meet that day’s demand, while the other half would have
unfilled slots.
Dr. Pearl up-ended the entire appointment and scheduling framework with the art-to-science
approach. He concluded that the underlying problem was not insufficient physician supply, but
rather the large standard deviation that occurred when looking at the demand for a specific
physician; the “n=1” challenge. He concluded that if physicians were willing to be flexible on a
day-to-day basis, patients could receive superior access without excess cost.
The key would be offering more appointment slots each day than would be needed. By putting
patient preference first, Dr. Pearl recognized he could dramatically improve patient satisfaction,
perception, and retention.
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Doctors also had tasks that did not have to be completed on a particular day, such as reviewing
medical records or checking up on patients with chronic diseases. Theoretically, physicians
could spend more time on these tasks on the days when their panel of patients did not require as
many visits and, correspondingly, spend less time when patient demand was at its peak. Better
yet, if physicians were willing to work later on some days and leave the office earlier on others,
the model would be even more successful.
To illustrate this approach, Dr. Pearl gave the example of a doctor who saw, on average, 15
patients a day in her office. In order to actually have 15 patients appear on any given day, that
doctor would need to schedule at least 17 or 18 appointments, due to the inevitable cancelations,
re-scheduling, and no-shows. Taking into account both daily flux in patient demand and the
ability to offer same-day access, then that same physician’s schedule would need to include the
possibility of scheduling as many as 21 appointments a day.
When Kaiser physicians first heard of this approach, they thought it would be unsustainable,
certain they would end up seeing 21 patients most days. The math, however, explained why this
would not happen. To help Kaiser physicians get over these fears, when Dr. Pearl spoke to
groups of primary care physicians across Northern California, he began with the following
question: “If a doctor caring for a specific panel of patients on average sees 15 patients a day,
and now offers 21 appointment slots a day, how many patients, on average, will she now see?”
Immediately, most in the audience assumed the answer was 21 patients. Slowly, as Dr. Pearl
worked through the math, they saw that the answer was exactly the same as in the past—the
average demand for appointments remained unchanged at 15. He was transparent about the
variability involved—some days could be extremely busy with 18 office visits, and yet other
days would have just 12 visits. The physicians in the audience may not have liked the busier
days this approach created, but they left the room understanding that offering more appointment
slots than needed was reasonable and workable.
For specialists with backlogs, the calculation was different. When these physicians offered more
appointments, the slots quickly filled up from patient demand. The reason was not added desire
to see a specialist, but rather the backlogs that had built up over time.
The crucial insight was that backlogs were finite. Once the backlogs were eliminated, daily
demand would become stable, predictable, and, thus, manageable. Dr. Pearl calculated the
backlog in each specialty department, and the corresponding number of doctors and shifts needed
to whittle it away. This was an area where raising prices at the health plan level became crucial,
as this enabled Dr. Pearl to hire the physicians necessary to reduce the backlog and achieve the
desired levels of access.
Upending the Logic for Delaying Care
As he percolated art-to-science in different areas of the organization, deeper levels of efficiencies
began appearing. “All of a sudden, the telephones, which were never able to be answered in a
timely fashion, were now being promptly answered” explained Dr. Pearl. “Turns out it takes a
lot more time to talk someone out of needing an appointment rather than scheduling one for
them.”
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Dr. Pearl also challenged another long-held belief that, in fact, “still exists today among doctors
across the community—that the most efficient way to provide care is to make patients wait,
particularly those with more routine medical issues.” While it may be easier for physicians to
manage variation in demand this way, this approach is not more efficient for the health care
system. With equal parts passion and exasperation, he explained his viewpoint:
If you look at it objectively, delays in patient care are very inefficient. You are
eventually going to see the patients, so the time spent in the office is identical. In
addition, if you have delays in care, you must create an entire system to triage
patients and move the sickest to the front. Then you need additional staff to
schedule them, and if the delay has medical consequences, an entire system to
take care of the complication. So how is making patients wait more efficient? It
is exactly the opposite. Yet it is the mindset that I think exists in so much of
health care today.
Dr. Pearl applied the same logic to its extreme. If the math indicated that delays were less
efficient, then why not offer everyone a same-day appointment when they required a referral for
specialty care? As Dr. Pearl reasoned:
The whole process by which doctors approach referrals is inefficient. The primary
care physician has to send the referral, and the specialist has to evaluate it and
decide how soon the patient needs to be seen. Then the patient must be called by
a receptionist to schedule, and if the time ends up being inconvenient and the
patient fails to keep the appointment, the whole process starts anew. If we just
saw the patient today, think of how much inefficiency you take out of the system.
By applying this model at Kaiser, 40 percent of people with non-emergent
problems are now treated the same day. When I took over as CEO, waits for
routine specialty care were six weeks or longer—and my initial goal was to bring
it down to two weeks. By the end, however, nearly everyone was offered a sameday or next-day appointment. Satisfaction improved as patients who declined a
same-day appointment did not blame the doctor’s schedule, but their own. Mind
you, these statistics do not include all the patients who present with serious,
emergent problems and thus are treated immediately. If we consider those
patients as well, the percentages for same-day or next-day access go up
significantly.
The power of this type of strategic thinking was that each solution would lead to a next set of
questions and opportunities for improvement. Maybe not all of the patients with non-emergent
problems had to be seen in-person by a specialist. Expertise was needed, but was there a better
way to provide it? Much of the time what primary care physicians wanted from specialists was
their brains, not their hands. Sometimes they might need specialists to operate or perform a
complex diagnostic test, but often what they sought was simply information. Dr. Pearl pressed
further:
Why even physically send the patient to the specialist then? Why not just call the
person or use video while the patient is in the primary care physician’s office?
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This way, without leaving the primary care doctor’s office, the personal
physician, the specialist, and the patient can all participate in a brief conversation
and together solve the problem immediately. If you do that, the next time around
the primary care doctor is a lot more knowledgeable and may not require a
consultation at all.
Returning to the Operating Room
Scanning different departments and functions, Dr. Pearl also saw an immense opportunity for
increased efficiency in his own specialty—surgery—by bringing a mathematical perspective to
the challenge of access and productivity in the operating room. He elaborated:
Rather than trying to improve productivity by speeding up the operation itself,
which may be negative for the patient, why not focus on and shorten the time
between surgeries? You have a surgeon, an anesthesiologist, and at least two
nurses all running around doing different things, but the time is “wasted”—no
surgery is actually being performed. The reason turnover time is being prolonged
is because of a sequential, rather than a parallel, approach to managing the
operating room schedule.
In general, after the surgeon operates, she talks to the family, writes the admission
orders for that patient, and dictates the operative report. From a purely medical
perspective, this makes sense. Yet during this time, the next patient is waiting to
be moved from the pre-anesthesia area to the operating room.
Instead, if the surgeon first sees the next patient and clears that patient for surgery,
then while she is speaking with the first patient’s family and completing the other
tasks the anesthesiologist and nurses can bring the subsequent patient into the
operating room and prepare him for surgery.
For operations that are relatively short, the traditional approach results in the time
between procedures being as long as the operations themselves. By cutting the
interim time in half by doing the two sets of tasks in parallel, 20 to 30 percent
more cases can be completed each day at no increased staffing or capital costs.
CENTERS OF EXCELLENCE AND THE FOUR PILLARS
Perhaps even more profound than the changes Dr. Pearl managed to instill in operating room
efficiency was a fundamental shift in what specialists, particularly surgeons, focused on in their
professional careers. A major determinant of quality for surgeons was the volume of procedures
they performed. Across much of American health care, physicians were generalists in their
specialty, and enjoyed doing a little bit of everything.
Sub-Specialization and Volume
Patients fared better, however, when doctors focused on a limited number of procedures and
developed deep expertise in each one of them. To implement this type of focus, Dr. Pearl
examined particular procedures and calculated the number of times the specific procedure was
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performed across all of Kaiser hospitals each year. He then consulted clinical experts to define
the optimal number of cases that a single surgeon, and the facility supporting that surgeon,
needed to perform each year to achieve superior outcomes.
“Often that optimal number differs dramatically from the minimal one proposed by specialty
societies and used by many hospitals to continually justify offering highly profitable services,”
Dr. Pearl remarked. For the more uncommon, complex interventions across the Kaiser system,
Dr. Pearl limited the number of facilities and surgeons performing them. Unlike the set-up in
Kaiser Permanente community hospitals, where every facility and surgeon performed a little bit
of everything, he consolidated the operative sites into what he defined as “centers of excellence.”
Depending on the patient’s condition and the procedure required, treatment would take place in
facilities with adequate volume. Doctors with exceptional experience would perform the
treatment, to consistently achieve the superior outcomes Dr. Pearl sought. He explained:
If, instead of expecting an orthopedic surgeon to do ten jobs, I give her one—such
as total joint replacements—she is going to spend a lot of time thinking about how
to make the care provided optimal for patients needing total joint replacements.
As a consequence, she, along with the entire surgical team, will find innovative
ways to make that operation more efficient and effective, and achieve better
outcomes for patients.
Dr. Pearl pointed to a powerful example. Three years after creating centers of excellence for
total joint replacement, Kaiser was completing over 60 percent of the procedures as outpatient
surgeries, whereas previously patients would spend, on average, three days in the hospital. For
the most complex procedures such as liver, pancreas, and esophageal operations, establishing a
few sites with large volumes dramatically reduced complications, improved outcomes, and
lowered costs. When questioned about how patients would respond to having to drive an
additional hour for care at a hospital other than the one closest to their home, Dr. Pearl asked the
following question: “If I told you you needed heart surgery and I said, ‘There’s this heart
surgeon in New York or London who is 20 percent better than anyone else in the world,’ would
you stay at your local hospital or be on a plane tomorrow?”
Personally Validating a Center of Excellence with His Own Knee
When a gentleman slipped in a stairway and fell on top of Dr. Pearl after a particularly stormy
deluge in January 2017, Dr. Pearl found himself personally experiencing the benefits of these
centers of excellence to treat a fractured knee. He described his experience:
As a pretty intense athletic competitor, I’ve had my share of orthopedic
procedures. When I fractured my knee, I immediately drove to Kaiser Santa
Clara to see an amazing surgeon I know very well. He evaluated me, ordered the
necessary x-rays and then said something surprising: “For your injury, I can do
the procedure, but there’s a surgeon 20 miles down the road at Kaiser San Jose,
who specializes in it.”
I never met my surgeon in person until the day of surgery, when I was on the
gurney in the preoperative area. But before the procedure, we had a video
consultation. He had my x-rays because all the clinicians at Kaiser share a
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common electronic health record. I was completely confident in his ability.
Technology saved me from having to drive there, which would have required a
painful ambulance trip, given the severity of my injury. As part of the video visit,
he was able to show me the operative approach in greater detail than if I were
there in person. And by doing the consult virtually, it saved him from having to
schedule an appointment.
“My entire surgical experience was superb, and it was not special for me, but what would have
been offered to everyone with my particular injury,” he commented. Dr. Pearl saw his own
experience as a powerful example of what he calls “the four pillars.” He explained how these
four pillars create the foundation upon which he believes the United States could, as a nation,
build a superior health care system:
None of this would have or could have happened if my physicians did not work in
an integrated medical group. In addition, I doubt the first orthopedist would have
passed up doing a high-priced surgery in a fee-for-service world, even if the result
was likely to be better with a more specialized surgeon. And, without the
technology, both the electronic health record and the video capability, the
consultation could not have been done, and duplicate radiology studies would
have been ordered. Finally, without physician leadership organizing the process,
the necessary coordination and collaboration would not have occurred. While it
all sounds so easy in theory, even with all of those competitive advantages
intrinsic to the Kaiser model, making it happen is difficult. Simply telling doctors
what to do never works.
The hard parts of creating centers of excellence are getting people to give up the
variety in their practice and to admit when someone else can achieve a better
outcome. To physicians, narrowing their scope of practice feels like a loss, and
behavioral economics teaches how much greater loss feels to people than an
equivalent gain. Helping surgeons recognize that if they only perform a
procedure five times a year that their skill cannot be as great as if they did the
operation 10 times as often opens their mind to the possibility of change. As they
accept that low volume erodes their clinical skills year over year, and risks
complications, they become more receptive to the idea of consolidation. It is a
long process, but once they begin to imagine how they will feel after a
complication, they are willing to consider giving up doing the procedure while
they are ahead of the game. Once again, getting them to that stage is easier said
than done.
HOW TO ENABLE ART-TO-SCIENCE?
When Dr. Pearl first implemented the changes to physician practices, physicians were highly
resistant—whether the change involved sub-specializing as surgeons or opening up their
schedules. He recounted:
You tell hard-working physicians who are seeing 15 patients a day that they could
theoretically see 21 patients on some days, they go crazy. Even if the chances are
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one in a thousand, they immediately visualize having to explain to their spouse
why they have to stay two extra hours in the office every day. That is how our
minds work during periods of change. But after a month or two, when they
realized that they were still seeing the same volume of patient visits and those
patients were more satisfied, the fear and resistance quiet down.
The Main Job of a CEO
Articulating the strategic vision for an organization, identifying the necessary operational
changes, and helping people overcome their fears and move forward to implementation is “the
art of being a CEO,” Dr. Pearl explained. “It is not a trivial job.” Carlos Ghosn once remarked,
“Leaders get people to do what they don’t want to do…with enthusiasm!”25 What was the
approach, then, that Dr. Pearl adopted to push past the resistance? The key was personally
meeting with those most impacted by the change, helping them understand the mathematics, and
engaging both their hearts and minds.
For Dr. Pearl, it boiled down to what “strategy is in the first instance: a mindset.”26 To drive
change in his organization, then, Dr. Pearl spoke about altering the physicians’ mindset about the
risks versus the opportunities:
Changing medical practice feels risky. Think of it as having to leap over a brick
wall. Without understanding the positives on the other side, the effort seems
dangerous and even foolish. Once you can see the change leading to something
better, making the leap does not feel as difficult. The true test of a leader is
whether, at the end of the process, the people of the organization are glad they
took the chance and would not go back if given the opportunity. As daunting as
providing personal physicians for all or offering same day access to primary and
specialty care seemed at first, few if any physicians would return to the past way
of doing things.
The Slow Process of Changing Medicine
The resistance to change applies to the entire field of medicine. To illustrate how the medical
community often is obstinate, even in the face of persuasive facts, Dr. Pearl recounted the
discovery that stomach ulcers were caused by bacteria:
For a long time, we thought stomach ulcers were caused by spicy food and stress.
It made sense because, when you have an ulcer, if you eat spicy food or have
stress, you produce more hydrochloric acid and it burns your stomach. But
neither is the etiology: they are the effect, not the cause. And the cause is an
infection from helicobacter pylori.
25
Robert A. Burgelman, Webb McKinney, and Philip E. Meza, Becoming Hewlett Packard
(New York: Oxford University Press, 2017), p. 83.
26
Robert A. Burgelman, “Strategic Leadership: What it is, and why it matters” Lecture Material,
Stanford Graduate School of Business.
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There were two physicians in Australia who looked at pathology specimens from
stomach ulcers, saw these bacteria, and published the findings. No one believed
them or changed medical practice. So one of them, Gregory Marshall, took a
scope, passed it through his mouth and looked at his own stomach. He
documented there was nothing abnormal there. Then he took an entire petri dish
of the bacteria, drank it, re-scoped himself, and documented the resulting ulcer.
Finally, he took antibiotics, scoped himself for the third time and proved he had
cured himself. This is the classic four steps needed to prove an infectious disease
etiology, and still no one believed him. Little changed until 15 years later when
he won a Nobel Prize for his work. Only then did surgeons reduce the percentage
of times they took out two-thirds of the stomach to treat gastric ulcers and instead
prescribed antibiotics.
Another example was scurvy, a lethal disease caused by a lack of Vitamin C—and its prevention
and treatment by eating citrus fruits like oranges and lemons. In this case it took almost 250
years between the time an association had been observed for this approach to become standard
on all prolonged naval journeys. Persuading physicians to change practice proved hard,
particularly when doing so involved economic consequences.
On average, it took 17 years from the demonstrated efficacy of a new practice for it to become
the standard of care in medicine. Dr. Pearl pointed out multiple reasons for this prolonged
timeline. First, there was often resistance when changing practices might negatively impact a
doctor’s personal life or income, which the stomach ulcer narrative powerfully illustrates. The
second reason is that mindsets often clung to what is comfortable, distorting perception. Dr.
Pearl found Nobel Prize laureate Daniel Kahneman’s work on cognitive biases—those automatic
judgments that stemmed from associations stored in memory instead of logically working
through the information, or deliberate reasoning gone awry—extremely insightful.27 This
research allowed him as CEO to understand where the resistance to a new mindset would most
likely arise from, as he explained:
Both the availability bias and confirmation bias that Kahneman describes apply as
much in health care as elsewhere. Once you have a viewpoint, it is hard to see, no
less believe, the alternatives. For a long time, you over-weight data that supports
your belief and dismiss evidence to the contrary. Leaders need to confront these
misperceptions head-on.
The idea that you should offer more appointments than you need seems absurd,
and the assumption that on average you will not see any more patients than in the
“It can be dangerous to rely too heavily on what experts call System 1 thinking—automatic judgments that stem
from associations stored in memory—instead of logically working through the information that’s available. No
doubt, System 1 is critical to survival. It’s what makes you swerve to avoid a car accident. But as the psychologist
Daniel Kahneman has shown, it’s also a common source of bias that can result in poor decision making, because our
intuitions frequently lead us astray. Other sources of bias involve flawed System 2 thinking—essentially, deliberate
reasoning gone awry. Cognitive limitations or laziness, for example, might cause people to focus intently on the
wrong things or fail to seek out relevant information.” See Jack B. Soll, Katherine L. Milkman, and John W. Payne,
“Outsmart Your Own Biases,” Harvard Business Review, May 2015, https://hbr.org/2015/05/outsmart-your-ownbiases (July 13, 2019).
27
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
p. 20
past appears ludicrous. Initially, doctors will remember the one bad day when
they had to work extra hours, but will not recall the other days when they finished
early.
Getting people to alter their perceptions is a crucial skill for a leader. And that
requires repetition. It takes 17 exposures to a new word in a foreign language to
internalize its meaning. It takes at least that many explanations for physicians to
become comfortable with modifying medical practices they believe worked well
in the past.
Overcoming Resistance to Change at Kaiser
Persuading doctors at Kaiser to adjust their approach to the workday proved difficult. Physicians
were used to having blocks of protected time during which no patients would be scheduled, and
appreciated the predictability this offered. Doctors used the protected time to review laboratory
data on earlier patients, for example, telephone patients for follow-up, and go home at a
predetermined time.
In the new approach, physicians would have just as many hours over the course of a week, but
they would need to be flexible relative to timing, which meant protected time could no longer be
guaranteed. When appointment demand on a particular day was low, doctors could spend
extended time reviewing routine laboratory and radiological data, but when demand rose, they
would need to see additional patients first. For doctors, however, the idea of not having
protected time felt like more work.
Similarly, when most patients did not have an assigned personal physician, they were scheduled
to see whoever had openings that day. As a result, doctors knew exactly when they would be
able to leave the office. Under the new patient-focused system, physicians would be expected to
accommodate the preferences of their personal panel of patients, which meant that on any
particular day, they might have to stay later. Even though this also meant doctors would leave
earlier on other days, the trade-off felt unequal, as Dr. Pearl explained:
Taking time off is a really good example of the convenient tug-of-war between
physicians and patients. Mondays and Fridays are very high-demand days for
patients, but they are also the days physicians like to have off. Similarly, holiday
weeks are times when parents like to bring their kids in for medical care because
they are off from school and the parents don’t have to miss work.
Simultaneously, these are the times when doctors like to be away with their
family.
How many doctors would need to be in the office during holidays? Viewed from
the physician’s perspective, only enough to cover major emergencies. In a
pediatric department, this may mean two of the usual eight physicians being
present; after all, the requests that come in during those times are routine checks
on healthy children, and they can wait until after the holiday. From the patient’s
perspective, however, that means missing a day of school and work, so Christmas
week or Saturday morning would be much better.
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p. 21
The task then fell to Dr. Pearl to convince them that the increased patient satisfaction that
resulted from the workflow shift was essential in enabling what they ultimately desired—longterm financial security and recognition for their clinical expertise. When speaking with older
physicians, Dr. Pearl would show them the link between strong patient satisfaction and a healthy
organization that would be able to fund Kaiser pensions. For all physicians, Dr. Pearl asked that
they treat every patient in the same fashion they would treat their family. “It is really hard to
argue against that,” explained Dr. Donald Dyson, “because when you start thinking about how
you want your family to be treated, that your patients should have something less than that.”28
Dr. Pearl also re-structured compensation to both recruit talented new physicians, as well as
retain existing ones. For young physicians fresh from residency, Dr. Pearl offered to pay off
their substantial medical school debt in full—on average, about $180,000—but only if they
stayed with Kaiser for at least seven years. To retain senior physicians, Dr. Pearl set up the
retirement program that based pension benefits on a physician’s three highest annual salaries—
this helped retain outstanding individuals, as the eventual pension would be higher each year
they stayed in the organization.
These financial structures played an important role in recruiting talented physicians to fuel Dr.
Pearl’s strategy, particularly in the early days when Kaiser’s reputation among physicians was
still bruised from a predecessor CEO’s decision to lower physician salaries by 10 percent.
Moreover, they also dramatically reduced the expensive and disruptive process of turnover for an
organization now focused on the physician-patient relationship: 98 percent of physicians who
spent three years at Kaiser ended up spending the rest of their careers at Kaiser.
CHANGE MANAGEMENT: FROM 17 DOWN TO 3 YEARS
Looking at dozens of major change initiatives, Dr. Pearl estimates that he and his team figured
out how to shrink the 17-year cycle down to 3 years. When asked to elaborate, he remarked:
The first year you implement enough pilot programs, and achieve sufficient
success in those pilots, that people begin believing the initiative may just work.
The second year, you spread those pilots across the entire organization so that
everyone is moving forward. The third year, you are now solidifying it as the
way that we simply do care. So by year four, people see the change not as
something new, but as the way we always did something. As one physician told
me, “I’ve learned to accept that what at first seems impossible, then becomes
improbable, and finally inevitable.”
28
Dr. Donald Dyson began working at The Permanente Medical Group in 1982 as an obstetrician-gynecologist and
became a member of the executive staff reporting to Dr. Pearl in 1999. Interview with Dr. Donald Dyson on October
10, 2018. Subsequent unattributed quotes are from this interview.
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
p. 22
Pilot Programs and Enlisting the Zealots
Dr. Sharon Levine, one of Dr. Pearl’s direct reports and part of the executive staff, had several
observations on how Dr. Pearl uniquely effectuated change at Kaiser.29 She remarked about the
sheer amount of time he spent with the physicians, holding at least three dinner meetings at every
single medical center within his first 18 months as CEO and learning rapidly from the
conversations. By meeting so many of the physicians, Dr. Pearl was able to identify and enlist
the “zealots” who undertook pilots to produce not just the data but the anecdotes that could sway
the hearts and minds of the other physicians.
“Culture change is in the heart, not the head,” Dr. Levine remarked. “There was a lot of fear
associated with opening up access and correspondingly drowning in work.” Hearing from living,
breathing colleagues—as opposed to only numbers on a spreadsheet—helped support Dr. Pearl’s
promise that workloads would not change, and convinced otherwise resistant physicians to at
least give the ideas a try. With year-over-year success, a virtuous cycle came about as physicians
trusted Dr. Pearl to deliver on his promises and were more willing to embrace the ideas and
change their mindset.
Data & Culture to Encourage Change
As powerful as personal interactions and communication were, data played an integral part in Dr.
Pearl’s management style. For example, he recounted how he used the “Member-Patient
Satisfaction Score” to measure progress and demonstrate what was possible:
It is called “member-patient” because not everyone comes in for care each year.
Patients are the ones who come to the office; members are ones who might not
come to the office in any given year but will still make an enrollment decision
annually: whether to sign up for Kaiser, or a competitor.
To help all physicians measure their success in service, we mapped the memberpatient feedback against each of the five areas identified by the focus group work
and translated the answers into what we called the “Five Strategic Imperatives.”
We then created a 500-point scale, 100 points for each area, scored to particular
questions. To make the survey statistically significant, we obtained at least 100
confidential surveys from each physician’s patients and on a quarterly basis
distributed the information.
Finally, we aggregated all the data for each medical center to establish the
facility’s overall service performance. Across the region, every year, for 18
consecutive years, the aggregate scores rose. We started with medical centers
scoring 280, then 300, 320, 360…and ultimately above 400. The process was
powerful and satisfying. Each year the lowest of the various facilities scored
29
Dr. Sharon Levine began working at The Permanente Medical Group in 1977 as a pediatrician and became a
member of the executive staff in 1991, reporting directly to Dr. Pearl’s predecessor, and began working with Dr.
Pearl in 1999. Interview with Dr. Sharon Levine on July 30, 2018. Subsequent unattributed quotes are from this
interview.
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
p. 23
above the average of the year before, and every two years the average for all
medical centers was higher than the best in the past.
One of the big decisions I made on the Member-Patient Satisfaction Scores, or for
that matter, any of our quality or service measurements, was not to hide the
numbers. I told all of the physicians and the chiefs of the various departments:
“There is no secret data. We will share the information at departmental meetings
without hiding the names of the individuals. That is the only way for everyone to
improve and learn from those already achieving success.” Without question, the
transparency of sharing that data improved everyone’s performance.
Dr. Pearl demonstrated that the Member-Patient Satisfaction Score and quality outcomes data
were of utmost importance to him—checking each month as soon as the figures became
available and calling the physicians-in-chief if their centers’ scores were flagging. After several
years, the results were stunning, with access and service that exceeded the local competition by
close to 100 points, as rated by J.D. Power and Associates, or at the national level as rated by the
National Committee for Quality Assurance.
Finally, Dr. Pearl invested extensively in leadership training. Out of the 10,000 physicians in
The Permanente Medical Group, over 2,000 participated in extensive leadership development,
starting early in their careers and expanding as they took on more demanding roles. In his view,
it was important to think of leadership development as akin to capital investment. The ROI
happened across a career, not over a few months or years. Dr. Pearl published an article in the
Catalyst, part of the New England Journal of Medicine, recommending that all medical students
in their final year spend a month in business school learning to lead teams, facilitate change, and
improve operational performance. As Dr. Levine remarked, “a good leader makes a good
follower,” and such training cemented the mindset shift that was required across the
organization.
USING TECHNOLOGY TO ENABLE ART TO SCIENCE
It was by instilling technology into the fundamentals of the organization that Dr. Pearl ultimately
helped the physicians in Kaiser to achieve significant quality and service differentiation. In
particular, a major decision by Dr. Pearl was the implementation of a comprehensive electronic
health record (“EHR”) in 2004 through EPIC, a fledgling EHR.30 At that point EPIC offered just
an outpatient system, without any large health institutions as customers. At that time, EHRs only
had 20 percent adoption across the United States.31 Kaiser had already spent over $1 billion—
twice—first trying to develop its own internal system, and then another attempt with IBM. Dr.
Pearl and the health plan leadership decided to write off the IBM effort, and took a multibilliondollar gamble with EPIC to create an integrated outpatient and inpatient system.
Jessica K. Cohen, “Epic, Cerner make up 50% of hospital EHR market share, ONC data shows,” Becker’s
Hospital Review, July 17, 2018, https://www.beckershospitalreview.com/ehrs/epic-cerner-make-up-50-of-hospitalehr-market-share-onc-data-shows.html (April 5, 2019).
31
“Office-based Physician Electronic Health Record Adoption,” Health IT Quick-Stat #50, Office of the National
Coordinator for Health Information Technology, December 2016,
https://dashboard.healthit.gov/quickstats/pages/physician-ehr-adoption-trends.php (April 5, 2019).
30
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p. 24
The comprehensive EHR did eventually come to fruition under the guidance of Dr. Pearl and Dr.
Homer Chin, a colleague based in the Pacific Northwest. The new system not only facilitated
interactions among different physicians, but also changed how medicine was practiced at Kaiser.
Quality improved as physicians in every department had comprehensive information on each
patient. Physicians were able to use the EHR to immediately access expert clinical guidelines on
best practices and approaches to a wide range of medical problems. As a result, physicians had
the essential information they needed to provide their patients with the most up-to-date and
effective medical care.32
In addition, Kaiser trained staff to help patients obtain the preventive services they needed, and
the computer system “back swept” the data to let everyone in the medical offices and hospitals
know whether each patient had obtained necessary services. The combination of a clear strategic
vision, availability of data, and leadership oversight helped physicians and staff in Kaiser
achieve a 90 percent success rate in reversing hypertension and restoring normal blood pressure;
and a 90 percent colon cancer screening rate for members in the appropriate age group. For
comparison, doctors in the rest of the nation were able to help their patients achieve normal
blood pressure only 55 percent of the time, and screen only 60 percent of the relevant group for
colon cancer. This difference might translate into a 30 percent lower mortality rate from colon
cancer, and a 40 percent higher chance of avoiding a heart attack or stroke.
CHANGE FATIGUE AND A TIME FOR CHANGE
The years after the introduction of the Affordable Care Act (“ACA”) were by all accounts banner
years for Kaiser. One of the largest impacts of the ACA was the creation of the health care
insurance exchanges, which opened up a new market of individual purchasers and introduced an
element of fluidity around insurance enrollment. The first full year of implementation was 2014.
At the end of 2013, the Kaiser health plan worried about what would happen. The organization
would need to drop 200,000 current members whose insurance plans did not meet the new, more
stringent ACA requirements and hope these customers turned to the insurance exchanges, and reenrolled. But analysts estimated that many would not, either because the process was too new
and complex, or a less-expensive competitor would attract them away. Sales and marketing
estimated membership to end up somewhere between a loss of 20,000 or a gain of 30,000. Dr.
Pearl took the most optimistic forecast and hired a full complement of physicians to provide care
for these potential new members.
The first three months of 2014 seemed to align with the projections, but all of that changed in
April as the deadline for coverage approached. Suddenly, instead of anemic growth,
membership soared, adding ten times the estimate—close to 300,000 new members. Rather than
being fully or even overly staffed, the organization needed to add nearly 10 percent more
clinicians. Unfortunately, newly trained doctors all graduate in June, and make commitments for
jobs six months earlier. By April 2014, the hiring window had closed, and it would be 14
months before a full slate of new physicians would be hired. If growth were as rapid the next
year, it could potentially take at least two years to return to fully staffed status.
32
In his 2017 book Mistreated, Dr. Pearl gives a personal example from his own life on how having the systems that
Kaiser had in place could have saved the life of a loved one.
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p. 25
Kaiser faced two choices on how to react to the deluge of new members: (1) Go back to triage
and tolerate delays for non-emergent patients; or (2) ask everyone to work longer hours to keep
the levels of quality, access, and service as consistent as they were before the ACA.
Dr. Pearl understood that most doctors did not want to work longer hours, even though they
would have been paid well for the time. Doctors at the end of their career did not want to
commit to a full-time schedule for the next couple of years. Neither did the younger vanguard,
many of whom strongly valued a clear work-life balance and had very different expectations
versus the previous generation as to the desirability of working full time in medicine. Dr. Dyson
pointed to the fact that at this point in time, there were more physicians working part-time
schedules than those working full time.
To reduce the workload, Dr. Dyson recounted how Dr. Pearl was asked to relax some of his
trademark service and quality standards, such as responding to a patient within 24 hours of a
non-emergent email. Dr. Pearl understood that it could take a decade to build a world-class
brand—but just a few months to destroy it. He refused to compromise these standards, believing
that the long-term benefits would outweigh the short-term difficulties.
He reiterated what Chip Heath, the best-selling author of leadership books such as Switch, once
told him: “Always make sure you drive your organization a little bit more rapidly than it’s
comfortable.” By this he meant that the long-term consequences of underperformance were far
worse than the short-term discomfort and the unhappiness it engendered. In fact, the main
reason Kaiser was experiencing massive growth from the exchanges was because of the quality
and service differentiation that these standards had created over a decade of hard work.
It was not that Dr. Pearl asked anyone to work harder than he himself worked. Dr. Dyson, in
fact, described Dr. Pearl’s work habits by saying, “he is fortunate in that he has a constitution
that allows him to go 20 hours a day easily and get by on four or five hours of sleep.” Yet for
physicians who had spent their whole careers at Kaiser carrying the organization to its peak,
“change fatigue,” as Dr. Levine coined it, had set in.
The Next Chapter
Over the subsequent two years, Kaiser hired 2,000 physicians, an unprecedented number not
only for Kaiser, but for any health care organization in the United States. Kaiser went from
being a minor player in the individual California health care exchange market to having the
highest enrollment of any plan. By 2017, Kaiser was once again fully staffed and, rather than
declining, performance as well as quality and service continued to improve. For both the
organization and Dr. Pearl, however, the time had come for change.
Dr. Pearl had spent 18 years as CEO, a dozen more than the five-year median in the nation.33 He
had accomplished more than he could have hoped, and had completely changed Kaiser’s
strategy, performance, and reputation. The company’s market share had risen from 34 percent to
46 percent. Kaiser was now the only organization out of close to 1,000 across the country to
33
Dan Marcec, “CEO Tenure Rates,” Harvard Law School Forum on Corporate Governance and Financial
Regulation, February 12, 2018, https://corpgov.law.harvard.edu/2018/02/12/ceo-tenure-rates/ (April 5, 2019).
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p. 26
receive a five-star rating from both the National Committee for Quality Assurance (NCQA) and
Medicare.34 Dr. Pearl was confident that the time had come to pass the baton and take on a new
set of challenges:
As a surgeon you have the opportunity to “go deep” and spend hours, sometimes
even days, saving the life of a single patient. But the breadth of your efforts
impacts only a few thousand people. As a CEO, you become responsible for
several million people. You learn to do so not directly but through the work of
those who report to you. In this next phase, as a book author, keynote speaker,
and health care writer, I will have the opportunity, hopefully, to improve the
health and lives of hundreds of millions of Americans. Of the three careers, none
is better than the others, but simply different. In many ways, it is a natural career
progression.
For Kaiser, the time for change had also come. The physicians would need to decide whether
they would remain committed to providing nation-leading quality and service, or embrace a
different strategy, one that balanced the preferences of patients with those of doctors. On June 1,
2017, Dr. Richard Isaacs, MD, became the new CEO of The Permanente Medical Group, the
fifth CEO in its nearly 70-year history.
THE FUTURE OF KAISER
When asked what he thought was the greatest risk facing Kaiser, Dr. Pearl responded that “the
greatest risk to the organization is internal, not external.” He pointed back to the “four pillars”—
integration, capitation, technology, and physician leadership—that, when combined with
Kaiser’s scale and history, propelled the organization to achieve performance and outcomes far
beyond any competitor, at least in Northern California. “Our superior outcomes were not
random. The fact we moved from having difficulties hiring physicians in the 1990s, to now
having 10 applicants for every opening” demonstrated that the model worked for both patients
and physicians, he concluded.
As to what he would want to accomplish if he were still CEO, Dr. Pearl stated three strategic
goals:
I would continue to drive performance until Kaiser is recognized as the best
organization at taking care of every problem patients get. Think about how
audacious that is: the best at every problem. But why not? We have the data and
ability to determine the right number, not the minimum number, of operations or
procedures to achieve superior performance. We have the structure and leadership
needed to ensure those standards for superior performance, for excellence, are met.
Then we can hire the best doctors, the ones who take professional satisfaction from
clinical excellence.
34
See Exhibit 2 for a summary-level quantitative comparison of Kaiser immediately before and after Dr. Pearl’s
tenure.
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p. 27
Second, I would invest heavily in modern technology, ensuring that video,
artificial intelligence, and data analytics are incorporated into every doctor’s
practice and in every patient’s care.
Finally, I would instill in every person in Kaiser the mentality of avoiding
complacency. It is exceedingly difficult for organizations to remain “great.” Just
look at the list of companies touted in Jim Collins’ book, Good to Great, and how
few remained market leaders a decade after publication of the book. When you are
a market leader, your competition can learn from you and emulate your successes
in far less time than it took you to achieve it. Being great demands change and
taking consequential action. When the slope of improvement flattens,
organizations fall back into the middle of the pack.
Rather than identifying a current competitor as the greatest external threat to Kaiser, Dr. Pearl
believed it to be a future change in law or regulation that would alter the rules of the game in
health care, forcing organizations like Kaiser to choose “margin or mission.” For example, he
pointed at efforts to erode the ACA with the introduction of far cheaper, “skinny-coverage”
insurance offerings that would draw away healthy patients and leave behind the very sick, and
thus very expensive, patients. In this scenario, the path to success would tend to reward
organizations that excluded the sick and offered as little coverage as possible, not necessarily
those offering superior quality, service, and clinical performance. He voiced his concern:
Were those insurance options to become ubiquitous and prevalent, the people of
Kaiser Permanente would experience challenges to their values and personal
commitment. If we emulate the for-profit competition, we would compromise our
values and our mission. If we do not, we compromise our margin and need to pay
the personal price. I hope that day never arrives, but if it does, a future CEO will
need to lead the debate and be certain the organization does not fracture into two.
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Exhibit 1
Framework for Kaiser’s Strategic Positioning
The following framework, developed by Professor Robert Burgelman, conceptualizes business
strategy into the optimization of two variables: perceived value and delivered cost. The ability of
a firm to provide a good or service to a customer that maximizes perceived value at a particular
delivered cost demonstrates that firm’s position and performance in the market (with the
assumption that market dynamics will eventually drive customers to a better-placed competitor).
The possibilities frontier represents the maximum performance available to all firms at the
current level of operations or technology, with the vast majority of firms located within the
curve. Firms along the curve are roughly equivalent and represent different parts of the market
(i.e., low-end, mid-end, high-end). In rare instances, companies are able to utilize new
technology or operational techniques to shift the possibilities frontier.
Source: Robert A. Burgelman, International Encyclopedia of the Social & Behavioral
Sciences, 2nd edition, Volume 23 (Oxford: Elsevier, 2015), pp. 508–514.
When visualizing the strategic positioning of Kaiser, Dr. Pearl would draw a 4×4 matrix, with the
“y” axis of the matrix representing perceived value of the health care offering to a customer, and
the “x” axis representing the cost of the health care offering to both the customer (i.e., the price
paid) and to the health care system to provide that particular offering. Dr. Pearl would plot out
each player—Kaiser vs. for-profit—on the matrix to demonstrate their relative strategic
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
p. 29
positioning. This matrix is a derivation of the framework created by Professor Robert
Burgelman.
Historically, Kaiser offered a product that was lower priced and of lower perceived value than its
competition. However, in the 1990s, as the competition moved down-market, Kaiser cut its
prices to maintain its relative strategic positioning yet was unable to commensurately reduce the
delivered cost of its service.
Dr. Pearl completely changed the strategic positioning of Kaiser, making it not only competitive
in terms of price and perceived value, but even superior in perceived value to its competitors. As
discussed in the case, Dr. Pearl implemented numerous changes that both reduced the delivered
cost to Kaiser and also increased it (such as hiring additional physicians) the delivered cost to
Kaiser, but on balance was equal if not lower than competition. The term “perceived value” is
important, as some of the changes that Dr. Pearl engineered, such as assigning each patient a
personal physician, did not necessarily have additional economic value to patients, but was
considered outstanding service and thus raised the perceived value of Kaiser’s offering.
Source: Notes from Dr. Robert Pearl.
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Dr. Robert Pearl and The Permanente Medical Group of Northern California SM-333
Exhibit 2
Statistics for The Permanente Medical Group Northern California,
During Dr. Pearl’s Tenure *
Membership
Market share
Physician count
National quality
ranking
Member-Patient Score
(out of /500)
Revenue
Margin
Physicians who rated
themselves as highly
satisfied (in California)
Physicians in TPMG
who rated themselves
as highly satisfied
1999
2016
2.6 million
34%
3,700
50th percentile
4.2 million
47%
9,000
#1 system in the nation
280
410
$4 billion
– $200 million
80%
$25 billion
+ $1.6 billion
60%
60%
80%
*Note: Excludes Mid-Atlantic Region takeover.
Sources:
Membership and physician count numbers from 1999 c…