Regional Oral History Office University of California the Bancroft Library Berkeley, California

Regional Oral History Office University of California The Bancroft Library Berkeley, California

DANIEL WAGSTER

KAISER PERMANENTE MEDICAL CARE ORAL HISTORY PROJECT II YEAR 2 THEME: KAISER PERMANENTE “CORE VALUES”

Interview conducted by Martin Meeker In 2007

Since 1954 the Regional Oral History Office has been interviewing leading participants in or well-placed witnesses to major events in the development of Northern California, the West, and the nation. Oral History is a method of collecting historical information through tape-recorded interviews between a narrator with firsthand knowledge of historically significant events and a well-informed interviewer, with the goal of preserving substantive additions to the historical record. The tape recording is transcribed, lightly edited for continuity and clarity, and reviewed by the interviewee. The corrected manuscript is bound with photographs Illustrative materials and placed in The Bancroft Library at the University of California, Berkeley, In other research collections for scholarly use. Because it is primary material, oral history is not intended to present the final, verified, or complete narrative of events. It is a spoken account, offered by the interviewee in response to questioning, and as such it is reflective, partisan, deeply involved, Irreplaceable.

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All uses of this manuscript are covered by a legal agreement between The Regents of the University of California and Daniel Wagster, dated September 16, 2008. The manuscript is thereby made available for research purposes. All literary rights in the manuscript, including the right to publish, are reserved to The Bancroft Library of the University of California, Berkeley. No part of the manuscript may be quoted for publication without the written permission of the Director of The Bancroft Library of the University of California, Berkeley.

Requests for permission to quote for publication should be addressed to the Regional Oral History Office, The Bancroft Library, Mail Code 6000, University of California, Berkeley, 94720-6000, and should include identification of the specific passages to be quoted, anticipated use of the passages, Identification of the user.

It is recommended that this oral history be cited as follows:

Daniel Wagster, “Kaiser Permanente Medical Care Oral History Project II—Year 2. Theme: Kaiser Permanente ‘Core Values’” conducted by Martin Meeker, 2008, Regional Oral History Office, The Bancroft Library, University of California, Berkeley, 2008.

Copy No. ____

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Discursive Table of Contents—Daniel Wagster Interview #1: 05/10/2007

Audio File 1 1

Personal background and upbringing in Kelso, Washington—Raised by foster parents—Drafted into the army during the Korean War—Playing football for the army—Admission to Yale and attending the college as an undergraduate—Post-graduate years in New York City—Hired into industrial relations in Kaiser Industries—Overlap between Kaiser Industries and Kaiser Health Plan and Hospitals—Transfer to Southern California, new position as health plan manager— Scope of work for health plan manager: seeking qualified physicians, conflicts with the local medical society, hospital construction—Industrial relations and the health plan—Marketing and customer relations—Professional liability—More on marketing to employers

Audio File 2 17

Health plan manager as Wagster’s favorite job—Competition and price advantage of the Kaiser Health Plan—Kaiser’s ability to maintain lower hospital utilization than other plans, and other systematic advantages in a group practice, prepayment program—How and why Kaiser Health Plan began to lose systematic advantages: changes in government regulation and the health care marketplace—Impact of Medicare on the health care marketplace—Beginning to develop member utilization statistics vis-a-vis Medicare reporting and payment

Audio File 3 33

Negotiating a capitation agreement with the Social Security Administration—Passage of the 1972 HMO Act—Medicare and the emergence of “cost finding” in the organization—Southern California expansion into San Diego—Establishing the geographic divide between northern and southern California—Expanding established regions vs. establishing expansion regions— Troubles integrating computer services—Becoming an Assistant Regional Manager in northern California—Leadership transitions, elevation of Jim Vohs—Changing leadership in the medical groups

Audio File 4 49

Reputation of Kaiser, including the health plan—Transfer to southern California in 1971 to become Regional Manager of Health Plan and Hospitals—Medical economics and the construction of new facilities—Relationship between the health plan and medical group in southern California, and leadership problems within the medical group—National healthcare and public policy—Community benefit and outreach to local service agencies

Interview #2: May 11, 2007

Audio File 5 63

Conflict between health plan and medical groups, and between Jim Vohs and Bruce Sams— Sams as a candidate for health plan president—Gaining recognition as a federally-qualified HMO in 1977—HMO vis-à-vis “managed care”—Reasons Kaiser Permanente became a qualified HMO—Kaiser and Permanente names—Differentiating KP among other HMOs— More on marketing and public relations—Transfer to Northwest region to be regional manager, then transfer to Central Office in Oakland—Marketing and limiting new members—Overturning ban on advertising within the organization—Advertising, marketing, national reputation, and regional autonomy

Audio File 6 80

Dealing with medical inflation—Costs and emergence of new medical technology—Cost controls and national health care policy—Relative roles of “love” and “expense” in medical decision-making—Perverse incentive among fee-for-service physicians—Regional autonomy versus centralization and problems with maintaining national accounts—Insulation of the medical groups from rates and the marketplace—Physician compensation in relation to the marketplace—Employer groups and the extent of services and benefits provided—Reflections on the multiphasic exam and preventive medicine

Audio File 7 93

Work in the Mid-Atlantic region, with a focus on integrating Georgetown University Community Health Plan into the program—Problems with other regions, including Ohio—Electronic medical records and other new technologies—Story about Mitch Greenlick and Edgar Kaiser—More on national accounts and regional autonomy

Audio File 8 112

Transfer to Hawaii as regional manager—The Wagster-Sams report on expansion regions

Dan Wagster Interview 1: May 10, 2007

[NOTE: This transcript has been substantially edited by the narrator and does not closely match the original recording]

[Begin Audio File 1 wagster_dan1_05-10-2007.mp3]

01-00:00:32 Meeker: Today is the 10th of May, 2007, and I'm at the home of Daniel Wagster in Bend, Oregon. This is the Kaiser Permanente Oral History Project. Let's just get started. I want to get a little personal background. I know that you were born in Port Angeles, Washington.

01-00:01:01 Wagster: Right

01-00:01:02 Meeker: So, maybe you can tell me when, and the kind of circumstances into which you were born. Maybe the kind of work that your family did, and so forth.

01-00:01:12 Wagster: Okay. My birth date is 11/27/27, which has always been an advantage, to have those two 27's. Therefore, I'm 79 as we speak. I'm beginning more and more to think I'm a survivor. As I look around, I lose friends. I was born in Port Angeles, but I think of my hometown as Kelso, WA; Port Angeles is on the top of the Olympic Peninsula; Kelso is in Southwest Washington, just north of Portland, about 40 miles on the way to Seattle. My folks moved around a lot. My dad was mostly a mill worker. He had been in the Navy as a young man. Ran away from home, very little education, all those things. Met my mother by chance on an assignment with the Navy. They got married, I had an older sister—she's deceased. We had a very simple, modest, family life. It might even be called humble background, or environment that I grew up in. Some of the houses that we lived in didn't have indoor plumbing, for instance. Our family was also a product of the time because of the Depression. In the late 1930s my parents separated and later divorced. My sister and I went with Mom to Port Angeles and lived with Mom’s folks–my grandparents. Mom was working but not doing well financially, so it was my decision to go live with my dad in Kelso and start high school. After a year he moved to Vancouver, Washington. I wanted to finish high school in Kelso. The football coach helped me to find a family to board with–Roy and Pat Mohr. After two months my dad stopped paying for my room and board (twenty dollars per month). The Mohrs literally took me in. Roy Mohr was a county engineer and became a great influence in my life. Helped me in all kinds of respects, including philosophical outlook on life itself. But specifically he had a hand in my ending up with a scholarship to Yale, which really changed my expectations and changed my life. The Mohrs later became the grandparents to my kids. I have two youngsters, Dan and Wende. Wende's the older. 2

01-00:03:35 Meeker: You said that Mr. Mohr influenced your philosophical outlook. What do you mean by that?

01-00:03:41 Wagster: He was an honest, strong—but kind—and positive man. Would not let problems be problems. He would simply think of them as things we could work out. And it was his belief you can do almost anything, or, really, anything that you choose to do. Inspiring kind of guy, a diamond in the rough. They did have a very comfortable home. Roy was extremely well respected in the community, and he was a lot of fun. He was a rugged Westerner. He had virtually raised himself, gone to Kelso High and put himself through college. He was a self-made man in all kinds of respects. One of his objectives was to earn enough money, and retain it, so that he and his wife would never have to go into a nursing home. And he did that. He ended up with enough capital to carry them through to the last days of their lives in their own home. He was an absolutely inspiring, wonderful human being, in every respect. Encouraging, and supportive. I played sports in high school, and Roy saw every game I ever played in three sports. I lived with him for two years to finish high school, and he saw most of our practices as well. He was just a very kind and wonderful man. When my father stopped supporting the board bill after two or three months, I learned about Roy immediately, because his response was, "Well, we can't worry about that. This summer we'll raise some beans." (Which we did—a commercial bean project.) "And we’ll earn enough money to come out all right." So here I am, living with a family I did not know, I'd been there two months, and I have no money and no way to deal with my problem. Roy made it clear to me that it was no problem to them.

01-00:05:49 Meeker: How old were you?

01-00:05:50 Wagster: It was the fall of 1943, I guess I was 15, just short of 16, actually, when I moved in. The high school coach whom I'd gone to for help, to get room and board somewhere, was Emmet Schroeder. He and Roy were good friends. That's how I got connected with the Mohrs. I came “home” each summer during college. Over time, I really became the son in their family. They had an adopted daughter, and—

01-00:06:28 Meeker: They didn't have any children of their own?

01-00:06:30 Wagster: No children of their own. The adopted daughter was a class ahead of me in high school. Not a very good person. If you'd believe it, she was adopted about age nine, and Mom Mohr—once said to me that Rosanna had never called her Mom or Mother in all the years that she'd lived in their home as their daughter. They treated her like a daughter. She did not treat them as her parents. At any rate, I was delighted to adopt them as parents. Mom Mohr became equally important in my life, because of her values–strong Christian beliefs, and again, the kind and 3

generous person that she was. So, anyway. That's, I guess, my background. I came out of college, went to work on Wall Street in New York, and when the Korean war came along in 1950, I was drafted. The local draft board had deferred me in the draft to keep me in college, because they had a lot of guys around town who weren't doing anything, so they drafted those guys. World War II was over. I started college in July of '45, and the war was over within weeks thereafter, but the draft went on for several more years. And was, of course, still in place when Korea happened. I was drafted into the Army. I went to Fort Ord. It was a very unusual time for the Army. People were being sent to special kinds of assignments based on their backgrounds in a program called SPP, Specialized Professional Personnel. If you were an accountant, you could be assigned to an accounting job somewhere. And other soldiers after a few weeks' basic training were sent to the front lines in Korea. In my case I stayed at Fort Ord with one assignment or another for six months when the commanding general decided to from a division football team, so I spent the rest of my time in the Army playing football, while I was at Fort Ord. Never got to Korea. We had a very successful team, by the way. We did lose a couple of our first few games, and the general sent our coaches to Korea. That made the team even better than it was before. It’s called motivation. We won all the rest of our games. Within two or three years, Fort Ord football teams became national service champions for several years. And those players organize reunions that we all go to each year. It's really fun.

01-00:09:08 Meeker: Did your participation in sports have anything to do with the fact that you never made it to Korea?

01-00:09:15 Wagster: The understanding was if you made the football team, you would not be sent to Korea.

01-00:09:20 Meeker: Interesting. Okay.

01-00:09:21 Wagster: And that commitment was essentially honored. Some people were sent to Korea, but this was all going on before, or it was part of the reason for, the congressional investigation of coddling of athletes in the service. The army in particular, and Fort Ord specifically. Some of the guys who were on the team I played with in 1951 did get sent to Korea, however, it was for the express purpose of being siphoned off and to play football for Camp Drake in Japan. That all came to light in the investigation that occurred in the late 1950s. I believe it was unintentionally started by Billy Martin, who was a soldier at Fort Ord. It seems he didn't think he was being coddled enough, and so he wrote a letter, oddly enough, to Cohen, the lawyer on McCarthy's staff. The letter was set aside for some period of time, and then for some reason it was brought into somebody's consciousness. The congressional investigation ensued. A lot of military people had some very uncomfortable moments, and probably should have. Athletes were given 4

remarkable breaks, and—you know—life's not fair. Who says that's fair. But at any rate, that's what I did.

Some time after my Army discharge, one of my teammates who became a lifelong friend, Roy Ended up—because of one of the connections, a life-long friend, Roy Muehlberger, sent me a letter, in which he suggested I interview with the Kaiser Companies, and that's how I got into Kaiser Aluminum, as a trainee in Industrial Relations.

01-00:11:01 Meeker: I'm interested about your years at Yale. Were you a particularly outstanding student in high school?

01-00:11:08 Wagster: Well, it was a really small school, and I think it was probably pretty easy to be one of the higher rated students. Also, I kind of always felt, in retrospect, that you got graded more on personality and effort than maybe what you produced. But at any rate, yeah, I had good grades in school. The Ivy League has no athletic scholarships, but Yale and the other Ivy League schools—I'm sure—have scholarships devoted to special objectives or purposes. The scholarship that I was awarded was a Medill McCormick scholarship, and it was intended to be given to high school students who had demonstrated balance in extracurricular activities, academics, and athletics. I also, because of Roy Mohr, I had entered a statewide competition among Washington high school students which was put on by the state Elks program. The Elks are a very strong organization in the community in Kelso, and very supportive of the schools. Roy wanted me to submit my application and credentials. By that time, I was certainly going to do anything Roy wanted me to do. So I entered the thing, and I won it.. I was awarded the $1000 scholarship as the outstanding senior boy, among those who applied, in the state of Washington. Coincidentally, that was exactly the same time I was being interviewed by a scholarship committee of Yale alumni who had come to our high school. I don't think there is any question the Elks scholarship had a great deal to do with my being admitted to Yale with a four-year scholarship. I keep interrupting myself, but Roy also had insisted, after I had been in his home only a matter of days, that I enter into a Latin, I must tell you, a Latin class at Kelso High. He had enjoyed Latin when he was in Kelso High all those years before, and he thought it was important to take. So I started first year Latin two months late. It was really hard for me to catch up, but it worked out when I got the acceptance letter from Yale. The scholarship system is twofold: you must have 100 percent of the money you need, and then you are admitted to the class. Even if you have the money from family and/or scholarship, you still have to get admitted to the class, of course. In the admissions letter to me they said that despite my having no modern language (which was an absolute requirement—two years of high school modern language) I had had two years of Latin, and they would accept that as satisfying the foreign language requirement. 5

So in retrospect Roy had done two things, the state Elks competition and getting me into Latin, which contributed to my ending up with a scholarship at Yale. The Ivy League has no athletic scholarships, so it wasn't for athletics, but I did play football while I was there. By the way, I also worked out one day with the baseball team in the summer of 1945 and George Bush (he was called Poppy Bush then) was the first baseman. But as it happened, I wasn't able to continue going out for baseball and ended up playing football instead.

01-00:14:35 Meeker: What college did you live in?

01-00:14:36 Wagster: Timothy Dwight. You know Yale?

01-00:14:38 Meeker: I was just back there giving a series of talks.

01-00:14:42 Wagster: Timothy Dwight. Ordinarily, the freshmen live on the old campus. The idea is to unify the new class coming into the school, and then as sophomores send them out to the residential colleges. It was July of 1945, the war was still on. Yale was in what was called the "accelerated program." Freshmen, in our class, were actually assigned directly to the residential units, because the old campus was totally occupied by military units. V12, V5, a whole bunch of the Marines, the Army. All service branches were represented there. The war, of course, was over in mid-August, and so the accelerated program was stopped immediately, and I spent the rest of my career on the cusp, as it were, ultimately graduating in February of '49. So I was a second term freshman in the fall of '45, and then a sophomore in the spring of '46. It was a great, wonderful, wonderful, wonderful experience.

When I went off to Yale, I had never been north of Port Angeles, south of Salem, OR, or east of the Cascade Mountains. I was seventeen years old, and by now I had the support and backing of the Mohr family. Of course, my mother and sister in Port Angeles continued to encourage me. But I really was on my own, and it was a great experience. I just couldn't believe how big a country it is. Also, when I got to the East, I could hardly understand the foreign language spoken there. [laughter] It was just incredible. Eastern culture—if it's different for a Westerner today, and I think there isn't a question that it is, it was really different in the mid- 40s. It seemed like every time I met somebody with a name that sounded familiar, he probably was the real McCoy If it was Ford, he probably was one of the Fords, Hal Upjohn was from the pharmaceutical company, and George Weyerhaeuser from the lumber company family. The list was long and impressive. At any rate, I found a way to fit into Yale. Ended up with a very enjoyable college career, and involved in a great deal of activities. A number of activities in a cultural system which had been so foreign to me at first.. I even earned greatly needed money in student agency jobs while I was at Yale. My scholarship covered all the tuition, books, and board, but I didn't have any spending money, so I earned my spending 6

money with the student agencies. It limited my social life a bit, but then, no girls attended Yale at that time anyway, so it really wasn't that much of a factor.

01-00:18:06 Meeker: What did you study while there?

01-00:18:08 Wagster: Sociology was my major. That was just a chance occurrence. I took a soc class the first year. Really liked it. Then I took some psych, and I really liked that. I had to take a science—botany—and I had to take math—calculus—but I really didn't like either one of those, so I just gravitated into the social sciences. The softer sciences, as it were. But I enjoyed it. My only disappointment in myself at Yale is that I learned more about taking tests than I did learning how to think. That's not Yale's fault. I just learned about the system, and what I had to do to succeed, without realizing that the real opportunity was to enrich your life forever. I came away with a lot of that, but I didn't consider myself, years later, in retrospect, a very well educated person, because I was much more concerned about getting the grades and keeping my scholarship than anything else I was doing. And I think it was good judgment, it just didn't have to be that narrow.

01-00:19:28 Meeker: So, it was clear that you were going to be drafted into the Army upon graduation?

01-00:19:34 Wagster: No. There wasn't anything going on. I went to work in New York as a trainee for First Boston. I had no concern about the Army. I ended up in New York in the fall of '49, working as a trainee at First Boston, the investment and securities dealer. By the time the summer of '50 rolled around, I was doing my thing, living with nine other guys in a four-story house; all of my roommates but one was a Yalie. Just having a great time, learning a little bit about the financial business. Korea hit, and I was among the first to be drafted. Up to then I had been deferred and deferred. Every time my name came to the top, it got taken off by the local draft board officials. With college completed and the Korean conflict starting there was no reason to defer me anymore. I was out of school. I wasn't even in Kelso. So, the local draft board didn't have any problem drafting me. That was fine. And then, I've talked about what happened while I was at Fort Ord. And I met this wonderful lady, Rhea Plunkett, whom I ultimately married before I got out of the service. She was the mother of the two children, Wende and Dan. After twenty- four wonderful years of marriage she died of ovarian cancer in 1977. I really thought I'd never be happy again, but I met Sarah a short time thereafter, and it turned out I was wrong. I could be happy again, thanks to her.

01-00:21:28 Meeker: Well, let's see. What was your term of service in the military? How many years were you there?

01-00:21:36 Wagster: Two years. September '50 to September '52. Married in September of '52, just before I got out. 7

01-00:21:42 Meeker: You didn't consider making that into a career at any point?

01-00:21:45 Wagster: Well, oddly enough, prior to the football thing coming up, I had, in fact, applied to a leadership school preparatory to OCS. I had decided that, "If I have to stay in the Army, I might as well try to do something worthwhile and get something out of it." I had my application accepted for OCS and leadership school, when the football team decision was announced. I didn't think it would be any problem for me to make the team. So, I resigned the leadership course and withdrew my OCS application. That is, terminated, whatever the process was. At least one of the officers on the post worked very hard trying to get me sent off to Korea before I could make the football team, because he thought resigning OCS was the wrong thing for me to do. It was kind of interesting. But his appeal finally stopped at the General's desk, who said, "Wait a minute. We're not sending anybody until we know whether they can play football or not." That moment changed any possibility of staying in the service longer. Otherwise I obviously, if I had been successful—would have gone to leadership school, sixteen weeks, then off to OCS. I don't know how long that would be, maybe ninety days. And almost certainly I would have ended up in Korea in combat, at that period of time.

01-00:23:14 Meeker: As an officer.

01-00:23:14 Wagster: As an officer. At that point in the war, what they needed officers for was to lead the troops in the front lines.

01-00:23:19 Meeker: Well, then once you finished your service, did you have a sense about what you wanted to do? Were there any leads as far as career?

01-00:23:25 Wagster: Not really. My guiding priorities, I guess, were: new bride, getting started with a substantial company, not going back to New York, because that wouldn't have been suitable for either one of us, really. I did get the company’s okay to resume work with First Boston in their San Francisco office. So with that in my pocket— Rhea was willing to move to Seattle with me, and I wanted to get back to the Northwest. I ended up going to work for a guy who had been involved in the interview process when I got my scholarship to Yale, a guy named Charlie Clise, who had a bunch of businesses in Seattle. That's where we went to go to work. My job was assistant manger of Shorewood Apartments, a large complex on Mercer Island. It was after a few months of arguing with ladies about whether to paint their kitchens, or not, that I felt this really wasn't anything I ever wanted to do, and I couldn't see how I would get out of that and do something worthwhile with Charlie Clise, so I started interviewing. Serendipitously, within two or three weeks of my decision to start interviewing, I got this letter from Roy Muehlberger asking me to come to an interview with one of the recruiters from the Kaiser Companies. Roy had by that time become a trainee in Industrial Relations for 8

Kaiser Steel. I went in for an interview, and as a result, I became a trainee for Kaiser Aluminum in Industrial Relations at Spokane in their reduction plant, the Mead Works. That started me with the Kaiser Companies.

01-00:25:11 Meeker: So, briefly, this was, I guess in the first ten years of your involvement. You were involved in industries, and then it looks like about '63, you started in the medical program—or Health Plan, rather. A brief overview of those ten years, particularly where you were—

01-00:25:31 Wagster: Spokane for two years. Promoted from trainee status to Employment Supervisor, later Wage and Salary supervisor, and later Labor relations Representative. All those things were within the Industrial Relations Department at the reduction plant in Spokane. Both our kids were born in Spokane. Then I was transferred in 1954 to work for the manager of Labor Relations for Kaiser Aluminum, whose office was in Oakland. Worked for him for some time. Out of that office, I got to know a lot of other Industrial Relations people working for other Kaiser Companies, including Jim Vohs. I went off on a special assignment with the top guy in IR for all Kaiser companies at that time, a guy named Sonny Farrell. He became a mentor of mine, and was a mentor of Jim Vohs, by the way. At Sonny Farrell's retirement party, which involved IR guys from all the Kaiser Companies throughout the country. Sonny devoted the key parts of his talk on that occasion to people in Industrial Relations who had made it as managers and executives with other Kaiser Companies. By this time Vohs had become Executive Vice President, if he wasn't already President of KFH and KFHP. At the end of his talk, Sonny threw a set of cuff links, diamond cuff links, over to Jim Vohs, thanking him for making it to the top of the line. It was a wonderful thing for Sonny to do.

At any rate, back to my story. There was a really big labor problem in the two Kaiser plants operating in Eastern Pennsylvania. Sonny went back to try to sort things out. He determined—very unusual for the Kaiser Companies as a matter of policy—that we would take the union on, because they were virtually running the plants and making efficient operations almost impossible. Two operations there, a metal stamping plant, and an exotic metal milling operation for defense purposes, rocket engines. We ended up with a prolonged strike. Really difficult time. I got well acquainted with Sonny during that process, and he ended up asking me to work for another fellow, who was appointed Industrial Relations Manager there, a guy named Bob Likins. In a few months, Bob was asked to take over the Industrial Relations job at Kaiser Steel in Fontana, California, and I was promoted to Industrial Relations Manager of the Bristol, Pennsylvania plants. Toughest job I ever had. Impossible for me on a personal basis. The union had been successful in lying, cheating, and stealing—the leaders—for all those years. They were still the same guys, still doing the same things. I was hand fighting people in all directions. Some kind of a confrontation, and some ugly exchanges virtually every day. It just consumed me. So I said to the guy I had a dotted line reporting relationship to in Oakland, a guy named Andy Gensey, who worked for Farrell 9

(Andy later became the IR manager for Kaiser Health Plan/Hospitals). But at that time, I said to Andy, "I've got to get out of this. I can't do this. And I want to try my hand at management, and get out of staff work." So, I got half a loaf. He arranged through Farrell and Trefethen a transfer for me into Kaiser Engineers International, where at first, I was going to be a contract administrator on one of the major projects they were working on at that time outside the US. This was like 1960 or '61. It just so happened that there was a worldwide recession, and the financial markets dried up suddenly. I was supposed to go off on an assignment in Australia, but the project was postponed. The guy who was responsible for that geographic area from Oakland was a guy named Frank Davis, who was the Vice President of Asian Affairs and Australia. He took me on as an Administrative Assistant. Later in 1963 I was asked to take over the IR manager’s position for KEI because they canned the guy who had that position, and they needed someone at least for the interim.

It so happens that in the medical care program, Vohs had gone to Southern California and served as Health Plan manager of that region, reporting to Karl Steil. Also, Fred Tennet, whom I had met (Steil I had never met) when he was one of the IR guys, Fred had become the Regional Manager, Northern California Region. Dr. Keane, President of KFH and KFHP for good and sufficient reasons fired Fred Tennet. (Fred later by the way ended up running the San Diego Health Association into the ground, and that's why we took over the San Diego program). Therefore, Steil was asked to take over both California regions. He already was Regional Manager of the Southern California Region. Karl chose to move to Northern California to consolidate his position as Regional Manager there. At the same time, Karl made Jim the acting Regional Manager of Southern California. Jim had been the Health Plan manager in SCR. So now Jim needed a Health Plan manager in Southern California. This was in the summer of '63. I was not going anywhere in Kaiser Engineers International. I was very clear that not being an engineer, and with only IR experience, it was unlikely I was ever going to be a significant management position candidate in that organization. I'd really added nothing to my dossier other than some business development activities and administrative things I was doing in Oakland. And Jim, whom I had met during my earlier IR days, contacted me and asked me if I wanted to be Health Plan manager and move to Los Angeles. I checked that out with Rheacy. We decided that would be a wonderful thing to do, and it was the best decision I ever made, without question. The Health Plan manager job in Southern California, I've said many times, is the best job I ever had. So in the fall of 1963, I reported to Jim Vohs and he reported to Karl Steil.

01-00:32:43 Meeker: Can you describe a little bit about what it is that a Health Plan manager does? I understand that the Regional Manager is the head of the Health Plan Hospitals in the particular region. In contrast to the Health Plan manager, what is it that he does? 10

01-00:32:58 Wagster: The Health Plan manager is responsible for the Health Plan functions, which vary a little bit from the different regions, but they include first, the most important one, all customer relations and what would now be called marketing, for customers of the Health Plan. Also, the membership accounting function, which is the billing and membership eligibility processing part of the organization, and then there may very well be other administrative services that serendipitously become part of the Health Plan manager's job in any particular place. It's the Health Plan manager's responsibility to set—with the Regional Manager and the medical director—enrollment goals, and to achieve them. To do anything that's necessary in the way of relationships and activities to retain the customers that we have. Somewhat ironically for me, during the period of time when I was Health Plan manager, the Health Plan was closed to new groups. The entire time. It didn't mean we shut down the Health Plan enrollment. But it did mean that we were struggling, in every part of the organization, to deal with about 10 percent growth a year from groups we already had. We called that internal growth.

01-00:34:41 Meeker: Was this because of a limitation on the facilities, or—

01-00:34:45 Wagster: Yes.

01-00:34:45 Meeker: —or a limitation on how many physicians you could hire?

01-00:34:49 Wagster: Starting with physicians, it was a problem of getting quality physicians to meet this inordinate, remarkable growth of membership. We were growing at 10 percent a year. 10 percent's a bigger absolute number every year. Ray Kay was doing everything humanly possible, I think, in retrospect, to deal with the physician recruiting problem, but we had problems in all directions. At that time, not everybody was in love with living in Los Angeles. If you could live in the Bay Area, that was considered to be better. So if you're going to join our program at all, why not join in Northern California?

01-00:35:39 Meeker: As a physician?

01-00:35:40 Wagster: Yes. In addition, physicians elsewhere in the country were not knowledgeable, generally, about our system. The medical establishment was doing its best, at that time in history, to throw road blocks in our way and put questions in people’s minds about everything in our organization. The ethics of prepaid medicine, the quality of the medicine delivered, the problems of physicians being accepted in medical societies. Without membership in a medical society, a physician couldn't get a staff appointment to practice in a hospital. The physicians in our program were just coming out of the worst part of the medical establishment opposition, but we were entering into a new phase. It might be called, “no longer with the fist, 11

but with the elbow.” Recruiting physicians was a very difficult thing. Here was Ray, not only having to retain the doctors that he had, but needing to add scores of doctors every year. Very difficult. The other constraint was the facilities. At that time, we thought that eight years was more like the timeframe you needed to build a hospital, maybe you could get it done in six from the day you thought you were going to do it. That's a difficult lead time. The commitment of Kaiser Permanente to hospital-based group practice was absolutely categorical, and originally it had come about in part because of the discrimination of the medical societies against Permanente physicians. They forced us into getting our own hospitals, so our doctors could be part of the staff. Dr. Cliff Keane used to say you can always tell a Kaiser hospital, because there's a construction shack outside. There was some kind of expansion going on in our facilities—all of our facilities—all the time. But we had, for instance, in Southern California, just opened Panorama City, which had been in the planning and construction for a considerable period of time. As soon as people saw that facility, they joined our program. The hospital was filled up in a hurry. Unfortunately, the design of Panorama City with circular bed towers prevented us from expanding it for more beds. We then planned to build, by the time I was on the scene, Bellflower. The reason was we were going to take the pressure off of Harbor City, which was in terrible trouble facilities-wise.

01-00:39:06 Meeker: And that was the first hospital down there, right?

01-00:39:09 Wagster: The first hospital was at Harbor City, but the first hospital that we built, and was considered the mother hospital, was at Sunset.

01-00:39:19 Meeker: Oh, okay.

01-00:39:20 Wagster: So they built Bellflower, and by this time I was down therein Southern California, and involved with all that. Within days of opening Bellflower, it seemed that Health Plan membership skyrocketed in the Bellflower service area. Harbor some relief. Nonetheless, it was just remarkable how members kept coming in. It was all word of mouth, and it was all through open seasons (open enrollment contracts) with employers that we already had contracts with. When a new Kaiser facility opened up in a neighborhood, we would get internal growth from people living near that facility. Essentially immediately. It was just absolutely remarkable.

01-00:40:02 Meeker: The main groups that you contracted with, as far as employer groups. Were these private corporations, or were they public employee groups?

01-00:40:11 Wagster: Both. Very importantly, union support, which included union trust funds. Almost always the unions were interested in benefits for their members. The employer was concerned about the cost, and their money contribution, and cared less about the benefits for their employees. Unions such as Auto Workers just took our plan 12

with them wherever they went, where we had facilities. Union relations was a third part. Business, public, and unions. All of them, as Health Plan Manager you were expected to have good relationships with, deal with their needs, work with them relative to medical services being provided, and I think, in retrospect, importantly, responding to requests and requirements for new benefits. For example, unions demanding expansion of already the comprehensive benefits that they were negotiating with their members’ employers. Auto Workers having led all that during WWII, because. it was a way to get around the wage stabilization law and its control on wages and prices during wartime. You didn't get more money, but you got more benefits, which of course cost the employer more. In time, it became a way of life in labor relations and comprehensive benefit health plans became a right for employees in many industries.

01-00:42:08 Meeker: Did you also deal with Industrial Relations in the context of the health plan, so the unions of nurses, and so forth?

01-00:42:17 Wagster: Actually, no. In every region, as far as I know—or can recollect—we had an Industrial Relations Manager. Vohs had actually gone down to Southern California as the Industrial Relations Manager, was promoted to Health Plan, then promoted to Acting Regional Manager, later promoted to Regional Manager, ultimately moved to Oakland to become the first Executive Vice President and then President of KFH and KFHP..

01-00:42:44 Meeker: There was no—considering your background in that—there was never a sense that that's the kind of work that you would be doing in the context of Health Plan?

01-00:42:54 Wagster: Well—let me try to answer that.

01-00:42:57 Meeker: Okay.

01-00:42:58 Wagster: The Health Plan is totally distinct from Industrial Relations. The Health Plan Manager was dealing with union representatives and trust funds as a very important part of the Manager's job with respect to the enrollment of new groups and maintaining relationships with existing groups. For instance, with the Teamsters, we had a number of Teamster trust funds. But there were other groups as well with companies with employees who were Teamsters. So by doing a good job developing relationships with professional insurance consultants who usually had more than one of those trust funds as clients, you could ultimately work your way into a contract for Health Plan coverage for other trust funds. But the Health Plan manager had no internal responsibility for Industrial Relations functions inside the Kaiser Permanente program. For example, KFH and KFHP and Medical Group employees who were covered by unions, and most were. 13

01-00:44:01 Meeker: Who would that responsibility have gone to?

01-00:44:06 Wagster: The person?

01-00:44:06 Meeker: Yeah. I mean, what sort of entity within the Health Plan would have dealt with the Industrial Relations component of—

01-00:44:16 Wagster: There was an Industrial Relations Manager, who reported to the Regional Manager. He/she was responsible for IR inside KFH/KFHP. That was different a person and activity distinct from Health Plan Manager duties. The Health Plan Manager reported to the Regional Manager and did the Health Plan thing.

01-00:44:29 Meeker: Sure. I guess the question was, since you had previously done Industrial Relations work, I was wondering if there was never an effort to get you involved in that in the context of the work that Kaiser Permanente was doing. So—

01-00:44:44 Wagster: No.

01-00:44:44 Meeker: —Industrial Relations for instance, with nurses' unions and so forth.

01-00:46:46 Wagster: No. That was always an Industrial Relations function, was a staff function on the regional staff, and the person who did that was distinct from and never confused in person or in function with the Health Plan Manager.

01-00:45:06 Meeker: Okay

01-00:45:07 Wagster: But for the Health Plan Manager experience with dealing with the unions, and the experience of having been involved with the employee benefits side of an employer's organization, all of that was relevant to what you did as a Health Plan Manager. So that's why a number of Health Plan Managers early on came out of Industrial Relations. Vohs, myself, and Carl Berner, we had been in Industrial Relations.

01-00:45:32 Meeker: What was the relationship, then? What did you gain from that?

01-00:45:39 Wagster: Working with unions is its own—I guess, problem. It's certainly different from working with employers, in terms of the type of people you're going to encounter, what their objectives are; they're political people, they're not businesspeople. They're concerned about their political standing, which ends up being translated 14

into benefits from a Health Plan standpoint—as opposed to a businessperson who's concerned about the cost and whether you're a really good outfit or not. Unfortunately, in those days at their country club, conventional wisdom fostered by community physicians held that Kaiser doesn’t do good medicine, et cetera, et cetera. Very different kinds of approaches, and people, and techniques to establish interpersonal relationships. So the value of the Industrial Relations background, in my view, was essentially one of working with people that you needed to work with effectively in order to do your job of marketing and selling. Membership service, by the way, is another function of the Health Plan Manager. In membership service, there was contact with the members, trying to deal with the problems they had with the system, and in every region we had membership accounting, membership service as functions that reported—and then sales reps, Health Plan reps. And peripheral activities, like our publication "Planning for Health," which was also part of the Health Plan Manager's responsibility.

01-00:47:21 Meeker: You said that one of the responsibilities was customer relations, and that would have also encompassed marketing. What sort of customer relations or marketing was being done at a point of time in which you weren't actively seeking new participants—new members?

01-00:47:37 Wagster: Well, ironically—Lockheed, as an example—we had a very successful program going on in Panorama City. The facility was now full. Lockheed was a very important employer, contributing many employees who were our members in that service area. Lockheed officials were unhappy, because they had pressure from the union and employees to allow more employees to join the Health Plan. Our problem, and it's a really good problem, but anyway the problem we had with Lockheed was making them understand and believe that we should not take in more employees, because we were having trouble maintaining adequate facilities and physicians to ensure the provision of necessary medical service for the Health Plan members we already had. The fact is, to keep Lockheed happy as a customer, we really needed to make sure they knew what we were planning. They knew how we were trying to do things, and they knew how effectively we were producing, wherever we were, the product that they wanted for their people as well. That kind of thing was not unusual. Another problem was turning people down who asked to join the Health Plan, I'm talking about customers, businesses, in such a way that you could go back there and get them to join at some later time, knowing that sooner or later this thing's going to open up and we’ll want new groups. So there was some amount of time devoted to that. Mostly, it was a matter of dealing with the rate increase that was coming up, dealing with concerns that anybody would have of any kind about why they should be doing things with Kaiser Permanente. Obviously, including individual claims and problems that might be service related, as well.

01-00:49:53 Meeker: Malpractice issues, and so forth? 15

01-00:49:55 Wagster: The Health Plan Manager had a key role in, we called it professional liability in those days, in the malpractice process, along with the attorney. We used Thelen, Marrin, and Bridges in Los Angeles, Jim Baldwin was the managing partner we worked with. The Health Plan Manager, Baldwin, and select physicians from the Medical Group made up the committee responsible for reviewing professional liability cases. That was another function of the health plan managers, essentially managing that process. Not the cases, but make sure that the process was effective, that the meetings were being held, that they were actually doing something. The Health Plan Manager also had a hand in the ultimate resolution of some of the higher priced cases, working with, in Southern California, Fred Charles, the second in command of the medical group. By the way, during those days—here’s a fun story. As Health Plan Manager, I succeeded Jim Vohs, but he remained in SCR and I reported to him. Dr. Ray Kay was his own kind of guy, and everybody has Ray Kay stories, or had, let's say. I hit it off with Ray personally, and everything was going well except for one thing—Ray always called me Jim. That went on for the two years, or whatever it was, that I was Health Plan Manager. Later, after I had been transferred to Northern California, and Carl Berner succeeded me as Health Plan Manager in Southern California, I called Carl one day. He had been there a few months, and I said, "How's it going, Carl?" He says, "Oh, fine." Then Carl says, "I really only have one problem. Ray Kay always calls me Dan." So I made it, with Ray, but only after I left the region—

01-00:51:55 Meeker: That's funny.

01-00:51:56 Wagster: —which was really fun. He was a wonderful little man.

01-00:52:00 Meeker: Yeah. The point about marketing is really interesting. Particularly during this period of time in which there was no advertising, and that you weren't actually seeking new members. Yet there's still an essential marketing component that you have to deal with. I mean, one is dealing with some of the liability problems that you mentioned. Another, I think, is the general quality perception of Kaiser Permanente at this point in time, probably largely exacerbated by the problems with the medical societies, who didn't like the practice.

01-00:52:42 Wagster: Oh, absolutely. Yeah.

01-00:52:44 Meeker: So, how, then does one pursue a marketing program without a specific advertising, without the need to acquire new members, but also with some substantial problems that have to be overcome?

01-00:53:02 Wagster: Well, again—it was finding ways to get doors open. One of the ways was to establish and maintain good personal relationships with a union, or lots of unions. 16

Then as they either organized employees in new companies or as they had X number of plants under a collective bargaining agreement and the Health Plan was not offered in all of them, anticipating the day in which the Health Plan would open again, one way to get the doors open was through assistance of the union representatives involved with that company or organization. Another way was through the Health Plan reps who were charged, as I recall, for covering geographic areas. They would spend their time making sure that the largest employers in their area were aware of out program, whether it was trying to get them to offer the Health Plan, or whether it was trying to build up our image with them so they would join the plan when we get the chance to bring in new groups, or keeping existing groups happy customers, i. e., questions about our prices, membership complaints, whatever things associated with members and member relations that needed attending to. It was not, at that time, in any way a sophisticated marketing program. There was an expectation that the Health Plan reps knew their territory and the reps would deliver appropriately when the time came. If we were late with a facility that was a typical problem that we needed to address with major employers whose employees were going to be unhappy because they couldn't get care at that facility yet, and they may have joined on the prospect of a new building opening near their home.

01-00:55:33 Meeker: Well, let's take the example of a facility not being ready when it was anticipated to be ready. And I think about—of course not all employers are engaged with unions, but during this point in time, I'm guessing that was probably a pretty major component—

01-00:55:51 Wagster: It was for us.

01-00:55:52 Meeker: Okay. Was there a sense that it was most important to address the concerns of the employers or of the unions? In that configuration, was there a sense that the unions or the employers were the more powerful make or break decision makers when it came to maintaining the relationship with Kaiser Permanente?

01-00:56:19 Wagster: It's interesting. It's a little bit different than what you might suspect. At that time in history (Vohs did this to me, so it happened to me personally), a few years before I had been the Industrial Relations Manager in the Kaiser Metal Products and Kaiser Fleetwings in Bristol, Pennsylvania. Shortly after I became Health Plan Manager, Jim asked me one day, "What kind of a program did you have in Bristol?" And I said, "In essence, it was an insurance plan, and it cost so much per employee." And he said, "Tell me about the benefits." I couldn't. It was a good lesson. I realized that the employer's objective at that time was to have the least cost possible for the employee insurance plan, whatever benefits satisfied the union and the employees was something else. We appealed to the employer on both bases. First and foremost, cost. Absolutely, cost. Secondly, answering his questions, “Is this really a good thing? Do you guys really do good medicine? I 17

hear it’s socialized medicine." So we had to dispel the rumors which had been constructed carefully over all the years by the medical establishment trying to keep us down, if not from their viewpoint hopefully even out of the competitive picture. Unions, on the other hand, wanted benefits for their members. At that time in our history, we had more comprehensive benefits for less cost than anybody, across the board. So we were a good sell or good buy, whichever. The employers said, "What's the cost here?" "Here's the cost. But our members get more benefits than the guys who have the insurance plan.” The union would say, "Are my people really going to get the service? Are they going to get in, and get care when they need it?" So, we had to deal with the union concern for the employee, the benefits and the services. Once we got past the employer, with respect to cost, we had to deal with the employer from the perspective of dual choice, or multiple choice. Lots of employers hid behind dual choice and/or insisted it was a big deal, even as new technological equipment solved their administrative problems. Even with what would be thought of as antiquated stuff today, dual choice wasn't all that much of a problem then.

The fact is, many employees didn't want us. They had no problem with insurance. They paid the insurance guy, and he took care of the claims. The company had nothing to do with it. There was something about taking us on and offering us as a choice that suggested the employer had to accept some new responsibility, or worse yet, if an employee had a problem getting service from us, it was going to be the employer's fault. All of a sudden, the employer felt the need for excuses not to offer our kind of plan, because he didn't want to be involved with his employees’ health care. That was another aspect of what Health Plan reps and so forth had to deal with. The reps had to get employers to understand that adding us to their existing, easy, hands-off system was not going to be a real problem for them. After all, members of our Plan had chosen us. The employers were not at increased risk. It was just another aspect of the bag of tricks that the Health Plan reps had to employ because we were new and different in most employers’ experience. We got a membership service department. Reps used that and many other things to respond to those kinds of problems. So, short answer: businesses were concerned about cost, and the cost of administration was a barrier we had overcome. If they signed up, company reps felt they might expose themselves to the risk of employees coming to them if a member became unhappy with our system. The real people who promoted us, who wanted us to get in there because we were providing more benefits for the buck and who felt we were delivering to members’ satisfaction, were union representatives.

01-01:01:32 Meeker: Okay. I do have to change the tape now.

[End Audio File 1 wagster_dan1_05-10-2007.mp3]

[Begin Audio File 2 wagster_dan2_05-10-2007.mp3] 18

02-00:00:00 Meeker: Recording again. You did say you thought that the Health Plan Manager job was your favorite job that you've had

02-00:00:07 Wagster: Right.

02-00:00:09 Meeker: Do you want to explain why that was?

02-00:00:11 Wagster: Well, it's just the best of all worlds. First of all, Regional Managers are responsible for everything, including whatever's going on next door where he lives. I mean, it's just incredible, the scope of responsibility for Regional Managers in the Kaiser Permanente program, at least in the time I was involved. But a Health Plan Manager's functions are limited in scope. Yet, all of the things that I realized I enjoyed about becoming a general manager are available in that job. And, by the way, the key word for me that distinguishes a general manager from someone who's committed to or interested in staff work is the willingness to assume responsibility. To me, that's the defining line between someone who understands some function and wants to work at it, and someone who wants to be a general manager.

02-00:01:10 Meeker: It's where the buck stops?

02-00:01:11 Wagster: It's the desire, maybe the compulsion, to be responsible for things. At any rate, it has general management characteristics and requirements. Virtually everybody that you are going to be talking with, there's a basis for enjoying it. At that time in life, the Health Plan was delivering a very fine product. Less cost and more comprehensive benefits than anybody could get from anybody else for the money; the quality of care was good. So, the strength of the product was part of the enjoyment of the job. Also, I was part of a vigorous, healthy, growing organization that attracted people who wanted to be in that kind of environment. The job required dealing with people inside the organization, managers as well as physicians, and dealing with people outside the organization, customers as well as individuals. So the interpersonal relationships were challenging, and, from my standpoint, really enjoyable. The problems were tough. They required a lot of thought. But we had people who were not 9 to 5. They'd work at whatever needed to be worked at. The resolution of the problems, it was, I think, in retrospect, it was the first time I had been allowed to be a leader with respect to the function that I was responsible for. I really enjoyed exercising my desire to help people out, and to get them together and make things better, than if I hadn’t been there. All those things, you had available to you in the Health Plan Manager's job, and, my gosh, limited responsibility. Which was, at the time, very important, because I was trying to learn how to be a Health Plan Manager, so I needed some kind of fences to help me with all of that. I just enjoyed what the job required, and what the job offered. 19

02-00:03:50 Meeker: Back a little bit to some of the things that we were talking about before I changed the tape—in reading about some of the problems with the post-1980 expansion regions, one of the diagnoses, if you will, particularly in relation to the Carolinas—or North Carolina, I guess—was that while at the beginning, the Kaiser Health Plan was less expensive than the more traditional programs that also were offered by employers, those savings were not given to the consumers, and so there was no motivation for the consumer of the Health Plan, the person who would choose one health plan or another as part of what their employer was offering—it wasn't cheaper to them, it was only cheaper to the employer. And some analysis said that this was one of the reasons that Kaiser Health Plan didn't succeed in the way that perhaps it could have. When you were Health Plan Manager in Southern California, and Kaiser Permanente was much less expensive, and also provided greater benefits, was this an issue? Did the employees get the savings directly, or did those savings go directly to the employers? Or was there a mix, perhaps?

02-00:05:21 Wagster: To the extent that there were dollar savings per employee, the money went to the employer, without any question. But as the pattern of more comprehensive benefits grew, and there was more employer-paid coverage, a greater percentage of companies moved to full employer-paid. That trend had been going on for years, and was still going on, really at an accelerated rate at that time. It was easy for the employers to make the change, because the Health Plan package amounted to less cost per employee. So nobody had any reason to object to the dual choice. Members, employees had no reason to object because if you chose to join the Kaiser Health Plan, you would have available to you better protection for catastrophic episodes, and less cost for any medical care big or little, and less out of pocket requirements outpatient or inpatient. Employers also reaped the savings from those who chose the Health Plan. Employees just weren't getting the difference from the employer when the employer paid X less for employees who became Health Plan members. If a guy joined the insurance plan that was costing more, they didn't have to pay the difference. I don't think anybody worked their way through to become unhappy with the employer. I just don't think that was a factor at all in employer/employee relations. But more benefits, less cost was powerful for everybody, including us. We thought we were very good and doing good.

02-00:07:27 Meeker: I know this is a really kind of impossible question to answer, but from your sense, particularly during this period in time—1963 to '67—and of course you continued to participate in the program after that, but—other people have described that period of time also as a Golden Age, and similar to the way you just described it. Part of it, I think, is attributable to this positive situation in which the costs were low, and the services provided were higher than in other programs. That's a situation, of course, that has changed over the years. The costs aren't as low in comparison to others. At this point in time, what are some of the main factors in 20

being able to maintain that advantageous ratio? The ratio of lower costs and higher benefits?

02-00:08:37 Wagster: Well, some of the advantages that we were working with inside the program are lost. The most important one all through this period of time was the differential in hospital bed utilization—days of utilization by health plan members. It was huge. We were far less than the community. Very powerful. Huge cost advantage. Another—

02-00:09:00 Meeker: How was it that you maintained less hospital bed utilization?

02-00:09:06 Wagster: Two, I guess, fundamental things. One is, in fee-for-service medicine, everybody gets more money if you keep them in the hospital longer. So, the perverse incentive is at its worst with respect to a stay in a hospital. Doctors and hospital administrators are essentially predisposed to keep the hospital bed days as high as you could More money for the hospital and better for the physician. When Medicare came along, if that was bad before, it got worse. Because now, Medicare was going to pay on a cost basis for the hospitals: more days, more money; more cost, more money. Physicians got more income when patients are in the hospital than for outpatient visits. It's just incredible how Medicare and Medicaid fueled inflation during all those years. As that occurred, it prolonged the advantage we had with comparatively less hospital days. It exacerbated the entire picture in terms of medical inflation. I mean, the entire situation was worse, from the standpoint of cost to whoever was paying the bill, and made the hospital days differential an even more important competitive factor, on dollars as well as days. Because the dollar cost was going up for the community. So I would think that's probably the single most important factor. I can't, without a few minutes of thought devoted to it in advance, give you a list of factors, but virtually everything that we felt was important in our program contributed to it. Without question, group practice and prepayment.

Why? Because a multi-specialty group practice refers patients within the organization. The cost, we got into terrific cost problems in expansion regions because our plan had to use outside physician consultants; patients were referred to community specialists. That cost had always been inside our program by design, by concept. Prepayment creates the potential, and we think we realized that potential, of our physicians providing appropriate and necessary medical care. Medical Group physicians have no economic incentive to do esoteric things, to do experimental things, to in fact do more things than necessary, because they don't get more money for extra or more extensive services. Now, that sounds like I think doctors, if they aren't prepaid, are going to gouge, and so on and so forth. It's a subtle thing, and I don't think it's appropriate to assume that there's something wrong internally with a physician, because he does more, and he happens to be getting paid fee for service. I just think there is a mentality that goes along with fee for service, almost like a "Why not?" And I don't think the 21

question is asked by the professional person, "Will I really get something better for my patient out of this? Will it really make this case better?" I think the thinking is more, "I will practice medicine better if I do this." And I don't know whether I'm being clear here, but in a group practice prepayment program, you actually even have to defend yourself with the other physicians about whether that is a medically appropriate way to deal with this kind of case, and what result you expect to get for doing that. Their concern was much more about the availability of a certain piece of equipment for their patients than it was about getting a fee for some service on that equipment. So, they really cared about being part of a prepaid group practice and rationally organized the services. We had the same equipment in the hospital for inpatient and outpatient diagnostics. The Medical Center was created with medical offices in the Medical Center. So, one set of equipment. No duplication. Capital equipment costs money. You have to repay capital by earning money. So all of those organizational concepts are distinct advantages to us. A lot of things have changed a bunch over time, but that's what we had going for us at that time. Technology essentially had to be efficacious and proven for it to be commonly used inside our organization. There were no such constraints on the use of technology and so forth in the community.

That kept us, obviously, from being on the leading edge, but on the other hand under indemnity insurance, I personally had an operation in 1960 for an ulcer. The reason I had for the operation was to get out of all the dieting and so forth I was struggling with. A third of my stomach was removed and the vagus nerve cut. Well, guess what? Everybody in the world knows today that that has nothing to do with ulcers. Cutting the stomach out was absolutely nonsense from the standpoint of treating ulcers. One of the regimens Now for most ulcer problems is a few days taking an antibiotic. My point being that that was what was really good medicine—that was leading-edge stuff. Well, too bad for me—but on the other hand, it helps me with my snacking. I don't put on weight as easily.

At any rate, the basic tenets of our program were all contributing to the answer of this question. A very complex matter, but we essentially had powerful ideas which all moved in the same direction: better incentives, no perverse incentives; doing the right thing for somebody is good quality of care, and economical with comprehensive services and no co-payments. If you remove the barriers to access to care. Early detection is less costly care than a medical condition left unattended. All the basic concepts went in the same direction and contributed to differences which gave us competitive advantage. However, some got eroded over time, at different rates and some for different reasons, but almost all of them started eroding the advantages we had, because the world was changing outside. Not because something happened inside.

02-00:17:06 Meeker: Well, I think that overall, what we want to do today and tomorrow is get your perspective on how and why those elements eroded. The degree to which, also, portions of those key elements remain the same or remained in practice. But while we're doing this general overview, I'm wondering if you can begin to help me 22

construct a narrative about what eroded and why, over a period of time. Because the question I originally asked was, "How was it that this positive ratio of cost to what is provided as far as benefits has been lost over the period of time?" And a lot of the things that you just brought up—not all of them, but a lot of them— from my understanding of Kaiser Permanente over the past ten years are still there. But what I guess I don't understand are the subtleties of the ways in which these things have changed. So, when I talk to physicians today, and health plan directors, and so forth, they still talk about group practice prepayment, they still talk about a lack of the perverse incentive, they still talk about how the financial incentive is for empty beds, not full beds—those kinds of things—about how Kaiser Permanente doesn't put itself on the leading edge of technologies or pharmaceuticals and instead waits until those have been proven to, in fact, work, and in some cases have avoided catastrophe by doing so—the Vioxx example might be one. So, from your perspective, what has changed?

02-00:19:15 Wagster: Well, okay. The two major environments are the government and its intervention and the marketplace and its changes—structural changes over time. I don't think I'm going to answer this very well, but what comes to mind, because I'm coming off the top of my head, here:

Healthcare cost became a bottom line issue for employers, or became visualized as a bottom line issue (it always was). If you can reduce the healthcare cost and everything else is the same in their business, the bottom line improves. And vice versa if health care costs rise. That was not lost on businessmen. It also became a remarkably important factor as you increased health insurance cost rates and they got more visibility, it became critical for business to do something about that. So the market changed. And all this happened, really in the mid-80s, and a lot of these talks I was mentioning earlier to you that I was making had to do with the structural changes in the market. The employers became activists, and, in the process, they wanted those costs reduced no matter what. And they got it. Somebody would respond to their requirements in some form. Our program had the most difficult time responding to a number of them. It was very easy—in an indemnity plan—to reduce the benefits, if you could get the union and employees to accept it. Because you just changed a piece of paper. No problem. In our program, reducing benefits starts eroding all these things that we've been talking about earlier that are going in the right direction together.

02-00:21:47 Meeker: Okay. For instance?

02-00:21:48 Wagster: So, if you take out comprehensive services, and you install co-payment and barriers to getting care, all of a sudden, early detection—all these things that are going just the right way—are either stopped or, possibly, going in the reverse direction. Just exactly what you don't want to do.. 23

02-00:22:13 Meeker: So, just to clarify—when comprehensiveness becomes a problem according to employers because of cost—

02-00:22:20 Wagster: The payers. Whoever the payers are—

02-00:22:22 Meeker: The payers.

02-00:22:23 Wagster: —it includes the government.

02-00:22:23 Meeker: Okay. It includes the government. You start losing the competitive health advantage, if you will, of a comprehensive system that allows for early detection, allows for things like physical therapy, and so forth, that then would prevent more expensive injuries, and health problems—

02-00:22:50 Wagster: Absolutely. It's a zero problem to change benefits in an indemnity insurance plan. Such changes may threaten the price margin advantage of a group practice prepayment plan immediately. The more of it, that is the higher the co-pay, the more intervention by government regulations, and the more indemnity benefit changes that the employer has available to him with alternate systems, options, and new approaches put more and more pressure on our Health Plan to do something about matching the competition. The closer you get to matching the competition, which may be in most instances, only a financial transaction, the more likely you will impact the concepts, providing care within a comprehensive health care system. Not doing appropriate and necessary medical care violates a cardinal rule—

02-00:23:59 Meeker: I guess this question of matching the competition seems to me inherently incomprehensible, when it seems it's an apples and oranges kind of thing, when you have the indemnity plans organized around fee for service medicine, and then you have the prepayment group practice. I don't see how it would be possible for a PG to match the indemnity plan.

02-00:24:29 Wagster: Therein's the rub. If the employer can get away with it, because of concerns about cost, pushing cost off onto the employee, we are limited as to what we can do in our system. So if the employee has to accept more cost for his health insurance, to meet the competition with copay or deductibles may reduce the efficaciousness and the effectiveness of our system. Fundamental, critical problem. Hard to resolve. Once employers (and they'll never go back) employers become activists and the market is driven by the payers, by the people who are actually paying the bill, this problem is inevitable. 24

02-00:25:26 Meeker: So this is predicated, though, on the notion that in prepayment group practice the preventive medicine is, in fact, a bankable reality.

02-00:25:45 Wagster: Yeah. Unfortunately, preventative medicine is a term that I think we've always had trouble with, per se. We almost always add something to explain what we mean by that. So, you say, "Preventative medicine, early detection, and health promotion," and you have a series of things that are not inherent in the meaning of the words "preventative medicine."

02-00:26:15 Meeker: All right. So, preventative medicine in its purest form would be actually preventing disease, and it seems like that it's a very difficult thing—

02-00:26:21 Wagster: Immunization is about the only thing you can come up with that's right on that.

02-00:26:25 Meeker: Well, I guess a medical care practice that minimizes expenses of disease is kind of what I'm talking about, right?

02-00:26:39 Wagster: I'm not clear on this.

02-00:26:41 Meeker: Well, minimizes expenses associated with disease, so it reduces the impact of disease and illness on the healthcare system. That's kind of—

02-00:26:56 Wagster: Our program can and should do that?

02-00:26:58 Meeker: Yeah.

02-00:26:58 Wagster: Yeah. I see it as the right thing for it to do.

02-00:26:59 Meeker: It seems that it does.

02-00:27:03 Wagster: I think it does.

02-00:27:03 Meeker: Okay.

02-00:27:06 Wagster: But what we're talking about is the marketplace, and the reality of the marketplace is, "Well, you have a beautiful machine there, but I'm going to buy this other thing, because that's all the money I want to spend, and I'm going to save some money and use it for my business, and da da da da da." So, the marketplace—I started 25

this with two things, and the marketplace was one. The marketplace has been dictating these adjustments, changes, and new requirements. By the time I left the huddle in the mid / late 90's, our program was continuing to reassess itself, find other ways to rethink the problem, analyze and review the new situation but consistently coming back to: we're a group practice prepayment program. That's our core business. Because of that, without putting up resistors, we would try to find ways to accommodate to the customer without disturbing our core business. Now, how much damage have you done to the core business with an added co- payment? "Oh my God, people make money now like never before. They have all these dollars, so what's a dollar a visit?" I can tell you, a dollar a visit in 1960, 1970 had some significance. Five dollars was considered a barrier. Five dollars may not be a barrier now. Things change, and maybe you can do things with co- payments because of the effect of inflation over time. A dollar doesn't have the same value. So that's judgment. It's not black or white, but it's degree, and it's a judgment call. Each change we have to consider in combination with the critical mass that is group practice prepayment, and stay successful as a competitor in the changing medical world. You now look at the marketplace, and say, "Can we keep this mass together?" And it's a judgment call as to what you can tinker with, what you do in making changes on the margin. The outcome has to be acceptable without affecting the integrity of the system. Potential members still have to be favorably disposed towards you in open seasons. The company may cancel you entirely. A whole bunch of things are part of the downside when you take steps to accommodate to what the marketplace demands, which may not be consistent with the basic concepts of our program. The government comes into the picture both as a payer and as a regulator. Our program did a remarkable job with Scott Fleming, and Gibson Kingren and Bob Erickson, as well as the string of people after them: Steve Zatkin, Joe Criscione. They are just wonderful people, did a great job for our organization in trying to get group practice prepayment understood by legislators and regulators in order to avoid being discriminated against intentionally or unintentionally by the decisions they'd make and/or preclude costing our program significant amounts of money in order to accommodate to new law and regulation requirements. The government role in this is really significant, starting with the inflation-caused by Medicare / Medicaid programs initially. Really the United States has never recovered from that period of rampant inflation. We'll never recover from what that did in this country, in reality as well as to perceptions to people inside and outside the medical profession.

02-00:31:24 Meeker: So, the right to health—the right to healthcare, at least, notion—

02-00:31:28 Wagster: No, I'm really talking about providers getting more money for taking care of people that they didn't used to get money for taking care of. I mean, the elderly and the poor suddenly produced huge amounts of revenue for those in the medical business. People quickly got used to doing things in order to get that money. They installed computer systems which are keyed to higher cost codes. A doctor's 26

office visit can be called X, Y, or Z, depending on what do they call it. The hospital coding of episodes associated with it give a disease is another example. If you code it one way, you're going to get more money than if you code it another, so they set up computer systems to maximize revenue. Well, that kind of mentality, as opposed to doing only things efficacious for the patient, and making sure it is the most economical care you can provide, is going in exactly the wrong direction. Also, I mean, it's just remarkable how the whole government involvement has contributed to the problem that end up being worsened for group practice prepayment plans, because law makers and regulators in general are fee for service oriented. You asked earlier about the hospital day business. When I was in our Northwest Region, it was the period in time when, I can't think of what the diagnosis coded hospital stay system was called, but Medicare administration required uniform standards of care (number of hospital days for a given diagnosis) to be developed in communities. And in Portland, somebody tumbled on to—

02-00:34:02 Meeker: Is this the quality assurance stuff that you were talking about?

02-00:34:04 Wagster: Well, it was the quality assurance idea, certainly, but introduced by Medicare to control costs. Somebody in Portland tumbled to the fact that our ENT guys were doing eyes—cataracts—and people were being discharged after one day, or maybe not at all—maybe never admitted. Versus a community practice that was in the four and five day hospitalization range. The group that uncovered this very aggressively went after it. "Ah-ha! We've got Kaiser Permanente right where we want them!" And when they got through with their investigation, and all the facts, outcomes, et cetera were reviewed, the standard for the community became our practices. It was good medicine. No one going into the study of community practices anticipated it would result in endorsing what Permanente physicians were doing. What they thought was, "Ah-ha! It's Kaiser saving money at the risk of patients’ health. We're going to see poor results here, and quality issues, et cetera, et cetera, et cetera. But it was a wonderful example of Permanente doctors having figured out that good outcomes and good quality medicine required less hospitalization. The patients really didn’t need more days in the hospital. In our system, that's a real plus. Here are some hospital days that nobody needs to pay for. Maternity is another example of the early discharge (“Early”—I've used the outside world’s word for that, haven't I? "Early discharge.") Isn't that an interesting concept? I should say proper discharge for women having normal births. Mothers and babies going home after very short periods of time, like twenty-four hours. All of those hospital days are to the Health Plan's competitive advantage until the community realizes that it’s good medical care, it's good quality service, and/or the government payer comes in and says, "We won't pay for longer stays." Not true for maternity, of course, because very few sixty-five- year-olds have babies even these days. Anyway, there was a government role and responsibility in all of this and it had an effect on group practice prepayment and the integrity of our system. 27

02-00:36:47 Meeker: So, when you talk about this government role as having, perhaps, a negative impact on that positive cost-benefit ratio—

02-00:36:58 Wagster: Yes.

02-00:36:59 Meeker: So, am I hearing you right in saying that because of the good example about proper care, and the proper cost of care, and setting that example not only for Kaiser Permanente but for other care providers, whether it's fee-for-service or other HMOs, that the government has then come in and basically forced them to abide by—

02-00:37:24 Wagster: Yeah, that's an example of the other side of the issue.

02-00:37:26 Meeker: Okay I guess what it means is—that's actually an example of deflation, as opposed to inflation of cost.

02-00:37:35 Wagster: Right. That's the other side of the issue.

02-00:37:36 Meeker: But it still does remove part of the cost advantage from Kaiser Permanente.

02-00:37:42 Wagster: It ends up with the medical establishment having to meet our standard, and as a result we no longer had the advantage of a differential in cost versus the community.

02-00:37:51 Meeker: Okay. Interesting.

02-00:37:52 Wagster: There also is another aspect in the government side of these things. We were subject to all the efforts on the part of government to regulate and control facilities and equipment, i.e., certificates of need. Such outside constraints and restrictions on a group practice prepayment plan can be detrimental to the efficiency and the effectiveness of the system we're running. No matter that you know how to plan, and you have the statistics demonstrating what is necessary to provide necessary medical services for a given population. It all goes out the window if some bureaucrat, or community-minded citizens involved in this certificate of need process just says “No.” And now what do you do to make sure you're giving the quality of care that you want to give, that your care's really accessible? If you turn off people and groups because of your inability to organize and provide the services that you're contractually obliged to do, then that becomes very harmful to the system, and to its continued success, Worse yet, if may limit the growth of a new organization or an expanding region. Tough problem. 28

02-00:39:47 Meeker: I’d like to ask you a little bit more about Medicare and Medicaid. When in your career did you first have to deal with it? When did you feel the impact in relation to—

02-00:40:04 Wagster: I was the Health Plan Manager in Southern California in 19sixty-five. Most people think of Medicare starting in '66. That's true, because it was enacted in 'sixty-five. We had, that is, Erickson, Fleming, and others had been working for years to get group practice prepayment plans included in the law’s language.

[brief irrelevant text deleted]

02-00:40:41 Meeker: Could you talk about Medicare and Medicaid, and your first interactions with it?

02-00:40:45 Wagster: Okay. So, the first problem was for our total organization, and our leader at this point. After the legislative process dance was over, we did have some language inserted in the law, but to our dismay, however, we soon learned that the bureaucrats would tell us what our words meant. They were our words! But they knew better. The first thing we had to do as an organization was figure out how to deal with what we came to call two universes: 1) the sixty-five and older members, and 2) all other members. Walt Palmer was a very key guy in the conceptual thinking here, but our leader in all respects—conceptually, and so forth—was Art Weissman, who was a certifiable genius. He just is a wonderful, wonderful human being. He was able to help people understand how to think about Medicare and Medicaid fitting into our system. How to approach the medical economics problems, as well as what to do about the statistical needs for supporting a two- universe system in order to satisfy the requirements of the government. The key need was to get some kind of a capitation plan for our Medicare members and a Medicare supplemental plan in a fee-for-service law with some mention of capitation. Worse yet, a bunch of bureaucrats would determine what it meant. The other thing we had to do was to develop the Medicare supplemental plan to help us with where the law fits and where it doesn't' fit our comprehensive coverage. Associated with that, if not a third thing, was a requirement to enroll all of the sixty-five and older people in the health plan they already belonged to. If you didn't re-enroll them, you couldn't keep them as members, the government said. So we had to figure out how to do all that.

02-00:43:32 Meeker: What do you mean by that, enrolling them in the health plan that they already belonged to?

02-00:43:36 Wagster: We were only talking about Health Plan members, but they could not become a part of the government Medicare supplemental plan in the Kaiser program unless we asked each member individually whether they wanted to be members in our 29

supplemental Medicare plan. The sixty-five and older members of Kaiser Health Plan who wanted to stay with us had to sign a new enrollment card to do so.

02-00:43:55 Meeker: So, to be members of the Kaiser Medicare program?

02-00:44:02 Wagster: Supplemental plan for Medicare.

02-00:44:05 Meeker: Medicare.

02-00:44:08 Wagster: We also had to—and this is not just incidental, but it was an order of magnitude different than these other problems—develop an administrative system that, at our various points of service recognized a Medicare person when it saw one, in order to generate the new statistics required for capitation of Medicare supplemental plan members. We were not a fee-for-service system but we needed to price out our Medicare supplemental plans with the confidence that we were not only conforming to the government requirement they pay for sixty-five-year-old costs and sixty-five-year-old costs only, but we were also needed to protect the other Health Plan members from having to subsidize sixty-five-year-old people.

02-00:45:07 Meeker: And this is the first time the program had to actually pull out specific costs vis-à- vis specific populations? They hadn't done this with employer groups, for instance, like health plans before that?

02-00:45:19 Wagster: Not costs. Utilization statistics. Group experience rating was something we had never done. Community rating is what we did. And community rating worked on statistics relative to utilization of the entire Health Plan community. We needed separate statistics for each of our two universes—Medicare and all else.

02-00:45:29 Meeker: So this was the beginning of group experience rating?

02-00:45:33 Wagster: Actually, no.

02-00:45:33 Meeker: Okay

02-00:45:34 Wagster: What we did with Weissman leading the way, and Palmer importantly helping with the implementation, was figure out how to collect certain statistics that we use to calculate a monthly prepayment which would cover the cost of their services. We did some amount of cost finding, but we mostly were able to devise ways that we could represent the care cost of sixty-five-year-old people with utilization statistics and the use of our underlying accounting system. The 30

Medicare supplemental plan members were a subset of our Health Plan member statistics. The utilization statistics were the key to projecting what Medicare would pay us and what the supplemental plan dues should be. We had the Health Plan card, and it was blue, and so we created red cards for Medicare supplemental plan members. We used the Health Plan card for embossing. We hadn't figured out a way to identify records with embossing separately on them. But statistics for members with red cards were hand tallied at the point of service. We had some fun things happen, by the way, in this whole process. A bunch of stories. One which always appealed to me was a lady who brought her red card into a medical office of ours threw the card on the counter and said, "I'll never, ever, ever use this." The clerk said, "Well, you have to. This is all part of the government system, and that's the only way it can work." And she says, "My husband thinks I'm sixty years old, and this card means I'm sixty-five or more, and I'm never going to use it!" (laughter)

02-00:47:44 Meeker: That's a good one.

02-00:47:45 Wagster: Every problem you could have in reenrolling these people, and getting them to understand the new requirements of the system, etc., we had. Art Weissman also was the major designer of the supplemental plan—its architect. We all worked with Art, but I was guilty of coining a terribly complex phrase we used in marketing the supplemental plan and explaining our rates to our customers. Credit rate differential. But the point here is that Medicare also didn't fit our three-party rate system. Medicare was a single person plan. It covered an individual only. So if there was a married couple, you had to have two one-party rates, and you had to have each of those individuals separately enrolled. If there were two people Medicare eligible with a dependent, all of the sudden our family rate for two people with a dependent didn’t work. We had to do something about it for the employer and the government. We had to tease out what the value in the rate was for each person, and a value for the dependent. Because Medicare was paying us something for two of them (three-party family rate vs. two people in the supplemental plan and a dependent under sixty-five) there was a differential there. By identifying that differential, (and I don't think I'm being clear here, but this was a long time ago) we were obliged to expand our three-party rate system to six rates (single, couple and family, Medicare member, Medicare member with a dependent, and two Medicare members with a dependent).. We could have single, two party, and a family rate by using this differential. People get a rate credit because Medicare is giving us reimbursement for each individual in the supplemental plan based on utilization statistics.

02-00:49:49 Meeker: So, when you talk about the individual rate versus probably what in essence was a spousal rate, versus a family rate—were these rates specific to people who enrolled as individuals as opposed to part of an employment group plan? 31

02-00:50:11 Wagster: No, no. The things I'm talking about essentially were the employer group plans. The individual plans were much simpler to work out. But the employer had a group of people, and Medicare required that we separate out everybody in that group over sixty-five. We also had to separate out dependents of Medicares. Of course it wasn't a large number, a lot of people retire by the time they get sixty- five, but some number of employers covered their retirees health insurance. Sixty- five-year-old people also may have married a younger person. Anyway, we had establish the supplemental rate for those people versus the Health Plan rate for the under sixty-fives. It became a very complicated thing. I'm not doing very well in explaining it now, because in part I don't remember enough about it, but I do remember that it was my obligation as Health Plan Manager to organize presentations for all our groups. Make every employer and all unions that we did business with understand what this new law requires, what we had to do because of the new law, and the new complex rate structure. Previously the rates were comparatively simple: single person, two-party, and family rates. Now we had five and six variations, because you can have a single person with a dependent, married person (one Medicare or both) with a dependent. You can have, I mean, it was just incredible what we had to do, and then explain it so that employers understood it. It took countless hours. In fact, one of my more amusing days was spent with one of the Teamster funds. I was to be the first person on the agenda. I got there at the appointed time and sat down in the conference room. They opened the meeting. Someone raised his hand and introduced a dental coverage problem. The company and union trustees of the fund got into a heated discussion about an amalgam cap versus a gold cap. Clearly it was a political issue for the union because of who the claimant was. The employers thought it was a matter of principle, (really cost because of the precedent of allowing gold when the benefit in the contract said amalgam only). This argument went on for two hours! I just sat there. Then the chairman of the trustee board, who happened to be a business, an employer representative (apparently they traded off business or union every other year) raps his gavel. He says, "I'm going to exercise the prerogative of the chair. On this issue, we're going to do what this trustee board does best: nothing. Dan, you're up." [laughter] It was really funny.

02-00:53:23 Meeker: Well, back to that meeting, what was it that you were there to explain to them?

02-00:53:30 Wagster: The new rating system, and the fact that we had to reenroll all sixty-five and older people individually into the Health Plan. My objective was to get them first, to believe it was true, and then to understand, to the extent they wanted to understand, the basis of the rating system, the fairness of it, the equity of the credit rate differential—it was going to cost them less. We were passing on the savings to the payer—employer, trust fund, whomever. Hopefully, getting their cooperation on the various things we were going to have to do, some of which were going to involve them. So it was an exhausting aspect of my work at that time, meeting with all the people we had to talk to. This was all, by the way, going on before we had an understanding of exactly how the government was 32 actually going to pay us. We knew what we had to do within the Health Plan— supplemental benefits, rates, re-enrollment, red cards, hand tallied statistics, et cetera. We knew what we had to do with our rates. We just didn't know what the Social Security Administration was going to pay us and how they were going to get money to us. So, in the spring of that year, a small team was charged to reduce things. Weissman went with us a time or two, but mostly it was Erickson, Palmer, and Wagster who were sent by Steil, Vohs, and Keene to Baltimore. Our instructions were simple enough: “You're not to come back unless you have this worked out as to how we're going to get paid and how much for outpatient care.” (Hospital was locked up as cost reimbursement).

So, we spent weeks, virtually full-time, in Baltimore. I remember the first day. We met with four different groups. It took up the entire business day. Only one person sat in all four meetings, and he never spoke a word. There was no continuity at all on the government side. Some of the groups were as large as twenty people. We had the same thing to say. We had the need to get something worked out, and it was quite clear at the end of the day, and I said to some of the other guys when we sat down to dinner, "We're going to die here. They're just going to absorb us. This is like hitting an 800 pound marshmallow with your fist. It is going to produce nothing but a sticky hand. We are in real, real, real trouble here." Which was not news to my colleagues, of course. I was just commenting on it in my own way. But after a while, Walt started making some progress with the people who had the most to do with the finance collection—not collection, payment. The fee-for-service payment oriented guys in SSA were tutored by Walt in the intricacies and concepts of group practice plans. He helped them understand how cost reimbursement doesn't work for us, and showed them ways we could accommodate to Medicare requirements through utilization statistics.

At that time, there was an organization called the Group Health Association of America, GHAA. KRHP was a prominent member. HIP in New York was also a prominent member. The guys who ran HIP were Jim Brindle, president, and a guy named Marty Cohen, the number two man. Both of them had come from the social security department of UAW, and they were the key guys down in Washington, along with the three of us trying to get our programs understood, and trying to get some kind of a prepaid mechanism for the Part B of Medicare. By sheer chance, in retrospect, serendipitous anyway. Brindle and Cohen both knew the Secretary of Labor from their UAW days. The Secretary’s name at the time was also Cohen. He had been, early in his career, associated with the social security department of UAW. So Brindle and Cohen had access to Secretary Cohen. They got an appointment and convinced him that group practice plans had to have a capitation type agreement. Jim and Marty came back to our motel. We met them that night at dinner. They described to us the elements that had been agreed between them and the Secretary. Walt Palmer's eyes lit up. We all agreed to meet the next morning for breakfast. The next morning at breakfast, on a yellow piece of tablet paper, with very few cross-outs, Walt Palmer had written down the provisions, which were later written almost word for word in the regulations, for group practice prepayment reimbursement Part B. As opposed to 33

what I do, he probably didn't have six corrections and no strikeouts on this four or five page write up he'd done. Bob Erickson and I when handed this draft repaired to our rooms to check it over. I tried first to fully understand it. We were from our own viewpoints to make contributions to it. Mine were very limited, if any. Bob's were more grammar and clarity of expression than anything else, and there were very few of those. When the finished draft was presented to the SSA guys, it was accepted totally. As far as I know, what Walt wrote up is still the way in which group practice prepayment plans are reimbursed. It was an absolutely phenomenal personal accomplishment by Walt Palmer.

[End Audio File 2 wagster_dan2_05-10-2007.mp3]

[Begin Audio File 3 wagster_dan3_05-10-2007.mp3]

03-00:00:07 Wagster: Okay I want to first, before I explain anything, make sure you understand the time here. It was 1966. That was more than 40 years ago, and I have been retired—as an employee and an officer since 1994, and from the KFH/KFHP board since 1997. With that caveat, this is my recollection.

03-00:00:35 Meeker: Okay

03-00:00:37 Wagster: A capitation financial arrangement had been finally negotiated with the Social Security Administration by our team in the spring of 1966, and the Medicare law enacted in the summer of 1965. The law based on fee-for-service for outpatient and cost reimbursement for hospitals, with provisions for some kind of an arrangement to be available to group practice prepayment plans and other, two or three other types of plans were specified in the law. What we had developed in the capitation arrangement that was agreed to, ultimately, by Social Security, was an outpatient prepayment per capita system that involved keeping track of utilization statistics and costs to the government's satisfaction for reimbursement. Further, the Health Plan had to make adjustments and arrangements with employers, with a new rating system that gave them credit (savings) because we would begin getting money for supplemental plan members from the government. The Health Plan also head to chare a monthly premium to enrollees for supplemental plan elements not covered by Medicare but historically part of our services. Hospital portion was cost reimbursed, and the effect of that was to improve our competitive rate c position, because we were getting a whole bunch of money from the government that we didn't get before, for the same people, and for the same services. That cost reimbursement portion was without capital repayment, by the way. Unfortunately there was no capital portion, which was very important to us, but we were not able to negotiate a capital piece, because the law didn't say so. When the HMO law in 1972 was passed, we had worked very hard during the intervening years to get a capital component in that thing, and get into the position where we ultimately could have a capitation system for the hospital side of the 34

equation as well. Now, please don't ask me questions about that, because that's all I remember.

03-00:03:10 Meeker: Okay My ability to ask those questions is probably limited, as well. But this question about the impact of Medicare, and then the subsequent impact of the HMO Act is something that I'll be learning about over the next couple of years, and so—[overlapping dialogue; inaudible]

03-00:03:28 Wagster: And it is absolutely gigantic. I mean, I don't think anything is even close to the importance of that impact.

03-00:03:38 Meeker: You know, one of the things about the impact or the implications of this for Kaiser Permanente, and basically for the first time—and correct me if I'm wrong—Kaiser Permanente has to show an external source how much everything is costing. With prepayment—basically billing isn't necessary, is it? I don't know if billing happened—

03-00:04:08 Wagster: Oh, yeah. We have to bill the employer the rate for each of the employees—if he's single, two part or three party. We bill the employer for the proper rate—because most of this was—

03-00:04:23 Meeker: But it's a single billing. It's billing for a rate, not a billing for—

03-00:04:28 Wagster: Billing for a rate. Had nothing to do with the cost.

03-00:04:31 Meeker: Yeah. So, I mean as far as generating accounting of specific costs, did Medicare—had that already been happening on an internal basis, or had Medicare's requirements really produced the first accounting of specific cost within the context (overlapping dialogue; inaudible)—

03-00:04:55 Wagster: It was all-new, as a requirement. Having said that, any good manager is interested in their cost. We just didn't have a very sophisticated cost finding system, but we had an awful lot—well, I'll say it another way. It's very important to know that by this time, we were borrowing millions of dollars from institutional lenders. You cannot borrow money from an institutional lender unless you have a solid accounting system, good auditing to support it, and reveal—periodically and consistently—the results of your financial performance. No lending institution wants to own a hospital. They want you to earn the money and pay them back. So, it has to reflect your ability—historic ability—to earn, and, wherever it was pertinent, your projected expectations, and whether you met those expectations. So, all that stuff—good chart of accounts, good accounting systems, "understanding" your costs, in quotes, was absolutely critical not only for the 35

running of the business, but because outside eyes—the lenders—were looking at us. Very important aspect of the financial development of the system. Medicare took that into another level, if not another universe. We never did get really, really—in my opinion—really sophisticated in our cost finding, because we kept successfully getting into these arrangements, where we were getting a per capita that was related to statistics, and we had various cost centers, and we were able to—particularly Palmer, who, again, is a certifiable genius, in my opinion—Walt really led the effort to rationalize all that, and to keep us ahead of the problems that we would have, because Medicare was different. It was new, and different, and it had rigid requirements.

03-00:07:33 Meeker: So, what Medicare ended up paying Kaiser was not based on real cost findings, it was based on mathematical estimates.

03-00:07:49 Wagster: Utilization statistics, primarily. As a part of the cost of running an operation. And I can't get any closer to that right now. I used to know, because it was my business to know. But I don't now.

03-00:08:04 Meeker: Forgive me if I'm asking too many questions you're not going to be able to answer, but you had mentioned that the accounting system that of course was required to get loans, and so forth, went into a whole new universe when it came to Medicare—

03-00:08:21 Wagster: Medicare added requirements, some of which our accounting system could deliver, and some of which it couldn't, and that caused us to have to make significant changes.

03-00:08:33 Meeker: Well, can you characterize some of those changes?

03-00:08:35 Wagster: I can't, really. I was just trying to think of it as I sat here, and I can't.

03-00:08:45 Meeker: Maybe without enumerating the specific changes, it is possible to give me a sense of how those changes that were really mandated or inspired by Medicare ended up influencing the business of Kaiser Permanente?

03-00:09:04 Wagster: Well, first of all, I don't know that—there was some cost associated with the new requirements. Because of what we were able to work out, initially, and then ultimately in the 70s, we became federally qualified HMOs, all six established regions, in 1977. The law passed in '72. Of all the things I was involved in as a Health Plan Manager, that was least important to me, because that all worked well with Weissman, Palmer, etc. As Regional Manager, later, in '70, all that stuff was 36

pretty good in place. We weren't spending a lot of time addressing that as an issue, so I'm really not going to be helpful.

03-00:10:07 Meeker: Okay Why was it, do you suppose, that you were one of the main negotiators, if you will, that were sent back to Baltimore?

03-00:10:16 Wagster: At the time, if you thought the Health Plan should be represented, the Health Plan Managers were Frank Jones in Northern California, Jim Crockwell in Oregon, and Ace Hutkins in Hawaii. That would be a reason I would be selected out of those four guys as the most likely guy to do that. Secondly, I guess, I had worked for Jim directly before, except for the period of time I was working for Steil in California, for a lot of years. So, Jim had a lot of confidence in what I could do, or should do. I guess thirdly, almost anything of program magnitude at that time had to be dealt with by one of the two California regions, and so it really had to be a Southern California or Northern California representative in this thing. Steil was calling the shots. He was still running both California regions. Art Weissman was our medical economist, was our key architect. Bob Erickson was our Governmental Relations guy. He was a lawyer, knew about the law, and also had the government relations responsibility for the Federal Employees Program. Walt Palmer was far and away, heads and shoulders, the highest guy on the financial side of things. He had already done a whole bunch of very creative things, advancing our programs, financial techniques and building confidence in our accounting system. So, I think that Carl and Vohs just put their heads together, and said, "Okay. We've got to have more than one person. We've got have the Central Office represented, and the legal staff, and so forth. Art can go in and out, and he will help these guys. Palmer can handle the finance thing. But we have to have the Health Plan represented, because everything comes back to the Health Plan, and selling this damn thing, enrolling the members, getting people to understand the new requirements, developing the supplemental benefits and rates, and getting people to understand them, and so forth. And I had a lot to do with the development of the rate stuff and the supplemental plan stuff with Art. So, I don't think it was a hard decision. I would be the logical guy to do that.

03-00:13:31 Meeker: I just want to spend a little bit more time on your work as a Health Plan Manager, in particular, ask you about the expansion plans in San Diego. It's interesting in thinking about the way that expansion is talked about in Kaiser Permanente. It seems to me that obviously San Diego is an expansion, but later on, and more recently—expansion out to Davis, and the Central Valley—I mean, those are, in fact, expansions, although they are expansions of an already established area, right? So they're much different than, say, the expansion to Kansas City, or to Georgia, or something like that.

03-00:14:15 Wagster: Oh, yeah. Oh, yeah— 37

03-00:14:17 Meeker: But they're also expansions, and it seems like those kinds of expansions, from what I understand, have always been much less troubled or fraught. You know, the expansion to Vancouver, WA, and the—

03-00:14:34 Wagster: Well, we always were in Vancouver.

03-00:14:35 Meeker: Okay, you were always in Vancouver, but Longview—that's what I meant. Have gone off with much less difficulty than new expansion regions, is, I guess, what I'm getting at. So what was your involvement in the expansion to San Diego, and what were the ways in which some of the feared-of problems that come with expansion were dealt with in those first years.

03-00:15:07 Wagster: Okay. Starting with San Diego.

03-00:15:11 Meeker: Sure.

03-00:15:13 Wagster: The unique aspect of San Diego, as opposed to Northern California's expansion to Sacramento, for instance, is that the San Diego Health Association existed, and they were going broke. It's important to say, at the outset, the San Diego Health Association had been in business in San Diego for some period of time. I don't now remember how many years. They had gone so far as to—with Fred Tenet's leadership and direction—had gone so far so to build a hospital. The cost of carrying that hospital loan, and the way in which their system was functioning at that time was driving them into bankruptcy. The last thing in the world the bank wanted was that hospital to be turned back over to them, because of a default on the loan. Jim Vohs was the acting Regional Manager of SCR. This was 1966. Steil had gone to the Harvard Advanced Management Program—a year or so before. In the fall of 1966 Vohs was the second person in our program to go there. I was made interim Acting Regional Manager in his stead. The San Diego thing came about through some series of contacts involving Fred Tenet and people in our program. It might have been to Karl Steil, I don't even remember when the first call came. Anyway, Steil was really excited about the prospect of taking over SDHA, Dr. Ray Kay, Southern California Permanente Medical Director, was very pleased to consider the possibility, and we entered into a series of investigatory meetings. I was in attendance at all that stuff, but I was low man on the totem pole. I was more or less an interested observer, and a cheerleader, and tried to keep from screwing anything up. The guy who really carried the ball was Karl Steil. There wasn't any question about Dr. Ray Kay's enthusiasm. He had a lot of questions about whether, given all the problems we had in Southern California with recruitment, with facilities, with internal growth, despite the program being closed to new groups, and the pressures felt by Permanente physicians, he had a lot of concern about selling San Diego to his medical group, and his board of directors. We went through a series of meetings with San Diego Health Plan 38

people, Dr. Keene, Dr. Kay, and others. We did a significant amount of due diligence, with the help of the people from the Central Office, like Scott Fleming, Walt Palmer. It came to the point that all systems seemed go. Steil was relentlessly pressing for this to happen. However, Dr. Kay took the question to his board, and they turned it down. This was a great disappointment to Steil, but not that surprising to Ray. He had given it his best effort. Somehow, Steil and Ray figured out a way to present the same issue, going to San Diego and taking over the San Diego Health Association again with new elements that didn’t look the same as what they had rejected. This time SCPMG Board approved. Now, my guess is they only did that, that is, they bought it up again, after having worked on the no voters. Steil and Kay of course knew exactly who they were, and putting all kinds of pressure on them. No idea, because I was the Regional Manager in title only at the time, reporting to Steil. (Vohs reported to Steil, and I was acting in his stead.)—Steil was clearly in charge of the SDHA negotiation, and he made it happen. San Diego as part of SCR became a really important part of the Southern California program, and membership grew quickly down there.

03-00:19:56 Meeker: Was there ever a sense that coming from Ray Steil that—

03-00:20:02 Wagster: Karl.

03-00:20:03 Meeker: Oh, sorry. Karl. Ray Kay, sorry—that San Diego should be a different region from Southern California?

03-00:20:10 Wagster: No. In fact, that was Dr. Kay's primary interest. If we were going to go to San Diego, it was going to be the Southern California Permanente Medical Group. It was not going to be anybody from the NCR. It was not going to be somebody creating a new program with a new medical group, so forth. The prospect of some outsider moving in to San Diego really was what Steil used to incent Ray Kay. Ray didn't need a lot of convincing on that one. He was absolutely adamant that it's either Southern California Region and SCPMG or nobody. There had been, by the way, years before, an abortive effort, inappropriate in all respects, by the Permanente Medical Group (NCR) to open up an operation under their control in San Diego. The Medical Group in SCR considered this and invasion of their territory met the threat with opposition. Ultimately TPMG backed off. I don't remember what the reasons were. I don't remember the circumstances of all that. I just remember that the attempted intrusion was still a burning issue with Ray Kay. When the SDHA financial problems surfaced, , the first thing out of the chute he did was to make damn sure Karl understood that he would not accept TPMG taking over SDHA whether SCPMG approved going there or not. I mean, Ray was really adamant about it. I remember that in the meetings. Probably Steil used that to motivate Ray to present the issue of our SDHA takeover a second time to his board. 39

03-00:21:31 Meeker: You know, I want to follow up on that, but I actually have a footnote question about what you just said, because I remember reading about that, and then there was an agreement reached that said Southern California would be basically south of Tehachapi—

03-00:21:44 Wagster: Right. Bakersfield.

03-00:21:45 Meeker: —and Northern California would be north.

03-00:21:46 Wagster: Right.

03-00:21:46 Meeker: But Southern California then subsequently came in and did Bakersfield, which was in the Northern California region.

03-00:21:51 Wagster: Well, that was done with care. I wasn't in Southern California when that was done, at least I don't think I was—gosh, I might have been—but at any rate, a great deal of time and effort was devoted to making sure that Northern California agreed that Southern California should go into Bakersfield before there was a comment by SCR to do so The Southern Region didn't sneak in under the dark of night. The TPMG adventure in San Diego was always kind of characterized as a commando raid by guys swimming from the SF Bay Area into Mission Bay in San Diego. There really was a lot of irritation and hostility Southern California associated with that. To my knowledge, everything about SCR going into Bakersfield was acceptable to the medical group in Northern California. If there was any problem, I really don't remember anything about it. And it's not the kind of thing that would pass unnoticed.. If there was some irritation and /or SCR had snuck in there and taken over some territory coveted by NCR, that's the kind of thing that would be cocktail conversation at KP committee meetings and so forth, over time. You'd hear about that. And I don't remember any issue associated with the SCR move into Bakersfield. Now, who worked it out? What did they say? When did they meet? I don't remember anything about that.

03-00:23:10 Meeker: Okay. So, now I think about these two ways that Kaiser Permanente expands. One, by establishing a new region, which means basically a new Health Plan outpost, and a new medical group. And then the expansion of currently existing regions. It seems that actually the first one that I mentioned is much more in line with the decentralized ethos of Kaiser Permanente, and the expansion of the existing regions might actually challenge that. But it seems that the expansion of the existing regions has been much less fraught with problems than the creation of new regions, which actually would seem to be much more in line with the decentralized ethos. Do you see what I'm getting at? 40

03-00:23:56 Wagster: Well, yes and no. But let me be sure that you're clear about Colorado and Ohio. That was done after a great deal of discussion within the then fledgingly—then— Kaiser Permanente Committee. The expansions into new regions initially was done by Northern California sponsoring Ohio, and Southern California sponsoring Colorado. In order to anoint that organizationally, both Karl Steil and Jim Vohs were made Executive Vice Presidents, because they now had two regions reporting to them. Earlier, Jim as Regional Manager of SCR had been unhooked from Karl, and Vohs became a vide president reporting directly to Dr. Keene. As the expansions were taking place Vohs became Executive Vice President. So did Steil, at the same Board meeting. The concept of sponsorship was tantamount to ownership, but neither established region wavered in their support of their respective expansion region financially, consulting, etc. Ohio was different circumstance than Colorado, because Colorado was startup situation and in Ohio we were taking over an existing plan that was floundering and up against it, because in their case they needed but couldn't build a hospital. They might have gotten the money together to do it, but they were having trouble in the community getting approvals because of it. So, rather than to San Diego, the better comparison would be Sacramento. Northern California went to Sacramento where NCR already had some number of Health Plan members, especially from the CA state group acquired a hospital facility there. SCR actually had some number of members in San Diego, but they were mostly south of SCR’s service area and north of San Diego. As you know, people in Southern California will drive twenty minutes to get a cup of coffee. It's a very different view of geography they have down there.

Anyway, the fact is that NCR really did own Sacramento, and the SCR did own San Diego. The two regions sponsored but did not own Ohio and Colorado. The sponsorship idea seemed to work, but areas that were owned by a region would not be allowed to fail. That's important, but the simplicity of those concepts was lost in the expansion program later. Without people thinking they were adding risk to expansion efforts, we went from the clarity of ownership to successful sponsorship, and then to kind of a nebulous, "We'll all work together to make the new expansions work out." In point of fact, some of the expansions was an opportunistic takeover of another plan (maybe excepting Texas, North Carolina, or Georgia). Where it was a takeover that determined the location, it determined the timing, and in some respects, the history of the former plan stamped the character of that expansion region. So you also can't underestimate—nor can you generalize, the effect of taking over something that wasn't succeeding and in a community that didn't know us. That was really, in my opinion, very important. But we took it over without any established region being in charge of their development. There were liaisons between some existing regions and some expansion regions. At any rate each expansion region grew out of very different situations. I think another way to say it is that we thought of San Diego as growth of SCR, and for sure Colorado as expansion to a new region. I think inside the organization there was an assumption when you move the boundary of your service area, that was simply thought to be the region of growth, as opposed to the 41

program expanding to a new place. For SCR there were an awful lot of people in San Diego. They knew about Kaiser Permanente. Many had been members in Los Angeles, and so forth. As you know, it is a very mobile population in Southern California.

03-00:28:58 Meeker: Well, the expansion to Colorado and Cleveland happened in 1969?

03-00:29:02 Wagster: Yes, '69.

03-00:29:05 Meeker: I believe you were in Central Office at that point in time?

03-00:29:09 Wagster: No. In '69, I was in Northern California region as Assistant Regional Manager.

03-00:29:14 Meeker: Okay. Well, I want to talk about that in a second, but as far as this question of expansion, was there ever any discussion of these being growth regions rather than expansion regions? Not just being sponsored by, but in fact being owned by the existing medical groups, or—

03-00:29:32 Wagster: Ask me that again.

03-00:29:34 Meeker: So, with Cleveland—or, Ohio—and Colorado, was there ever any debate about whether it shouldn't simply be sponsorship of Northern California for one and Southern California for the other, but—

03-00:29:49 Wagster: That's what they did.

03-00:29:49 Meeker: —ownership.

03-00:29:50 Wagster: Oh, Okay. I think, first of all, I was just beginning to be involved in all of the key conversations and policy questions within KP about something like this. However, not yet involved in all the key decisions. My surmise has always been that neither Northern California nor Southern California medical groups wanted the regions to be financially responsible for Colorado or Ohio. And you can do that with sponsorship. You cannot do that with ownership. Ownership means a region is going to be financially responsible for the new region. I really believe that the medical groups might have even made the price of admission too high by saying: “If you're going to go to Colorado, you're not going to go with any of our money. We'll send you people and we'll help work out problems and so forth.” I think that it was the Kaiser side going to Colorado, and the medical group staying home and kind of agreeing to do certain things, but not agreeing to do other things. I think 42

that was the case. But I repeat, I was not privy to the key conversations that led up to the final decisions. I learned about things that were public knowledge in the Kaiser Permanente Committee setting, but not what people were really saying later behind closed doors.

03-00:31:23 Meeker: Well, we'll just let that stand. Let's now move onto your next position, which was Executive VP of Permanente Services?

03-00:31:33 Wagster: Yeah. That was a phony title. There are regional services, and Steil wanted me to get up to Northern California, mostly because he wanted to work with me directly to see if I was all right or not.

03-00:31:47 Meeker: What does that mean?

03-00:31:48 Wagster: Well, because there are other things, maybe, I might be doing, but I worked for Vohs—I was Vohs' guy—and Steil was going to figure out for himself whether I really was competent enough to do larger things in the organization. That's always been just a guess of mine. I haven’t any idea whether that was true. But at any rate, there were a lot of things going on in Northern California at that time. The worst problem was a massive computer program that had been pushed by Karl, and he had hired a guy named Forbes Smith to be in charge of it. Forbes was just running amok. I mean, it was incredible what he was running around doing. He had no sense of organization, no understanding of the sensitivity of the partnership— Kaiser and Permanente. It was really a serious problem.

03-00:32:52 Meeker: What was this computer program designed to do?

03-00:32:55 Wagster: To introduce computers into the regional operations. Ultimately medical records would be in computers. Essentially the expectation was to run the region with a computer system yet to be developed. Not just business applications, but the running of the whole region medical services, too.

03-00:33:12 Meeker: So, was it a medical group program, or...?

03-00:33:14 Wagster: No, no, no. No, it was Karl Steil's doing, and I've forgotten who all he had involved with it before I there, but the town was under water.

03-00:33:24 Meeker: Is this related to what Morris Collen was doing? 43

03-00:33:28 Wagster: No. Morrie was never on the business side of our organization. He was running the Research Center in NCR. He was doing multiphasic stuff. He had computers associated with his research, but they were not ever devoted to medical records. I mean, they didn't work out a medical records system. They might have tried; I don't remember.

03-00:33:47 Meeker: Well, that was one of their initiatives. That was ended, I think, around '74, when the money dried up for it.

03-00:33:54 Wagster: But it also really didn't get very far into the Regional medical care delivery system.

03-00:33:59 Meeker: No, no. It wasn't. It was never an active medical record, but that was the goal.

03-00:34:03 Wagster: Medical records were not then part of the running of the region, the regional business side. So this was an attempt to implement a computer system through PSI, Permanente Services, Inc., which was a skeletal, shadow organization. The plan was to simply house the various regional services, which include computers, outside the medical group, and outside the hospital, and outside the Health Plan. They had consolidated regional services in Northern California. The region was getting bigger, and there were important support activities that had to be managed. It made sense in Steil's view, and mine, that those activities should be actually run by somebody, with the managers of the support services reporting to one person. Having said that, the real underlying problem was this runaway, massive computer program project. It was just a terribly headache. And that's what I was charged to get control of, make it make sense. Or get it modulated to the point where it actually would be accepted as a way of doing business and of course make the related changes acceptable. Ultimately, Forbes Smith left, which wasn't all that unsurprising. But the very, very difficult problem of developing a regional support computer system was not solved by the time I left the region to go back to Southern California. Before I left, I ended up as the Assistant Regional Manager in Northern California, charged with the responsibilities I have been talking about as well as others which had been added by Steil.

03-00:36:29 Meeker: So, what did it mean to be Assistant Regional Manager in Northern California? And how was that different, say, than a Health Plan Manager.

03-00:36:43 Wagster: Well, first of all, the Health Plan Manager is not responsible for anything other than the Health Plan, and a limited number of operational support components which vary from region to region. For instance, in Southern California, I was responsible, as Health Plan Manager, for the pharmacy operation. In Northern California, pharmacy operations were part of PSI. So, I did have some of the 44

things reporting to me in NCR that the Health Plan Manager there might otherwise have assigned to him. Frank Jones was a very, very fine guy, and a great contributor to our program as the Health Plan Manager in NCR. He should not be accused of being a broad gauge general manager, and no one expected that from him at the time. He did a great job for our organization as HP manager. So it wasn't at all surprising that Steil wanted to move things which might otherwise be handled by a Health Plan Manager into a separate package in NCR. Becoming Assistant Regional Manager was really more of a status thing than it was a functional thing. Steil, by that time, had gained enough confidence in my contributions that he felt I should be recognized. I'm reasonably certain that I was a Vice President at that time. I was made Vice President by Steil to give me added recognition as an officer of the company. As to functions I was responsible for, I frankly don't really remember much changing. At the time, it was an odd collection of activities. For instance, my recollection is that the Regional Controller reported to me, which is very unusual. You know, the Regional Controller really should be reporting to the Regional Manager. However, he reported to me probably because of the relationship of accounting to the computers, which made some amount of sense. Then, I think the Regional Audit Manager reported to me, too. I don't remember at what point in time these things were assigned to me, as opposed to the activities and functions I had started with. But I think Steil was essentially offloading those things which he thought I could handle. Obviously it meant fewer people reporting to him, and I was involved to a greater extent in the running of the region.

03-00:39:27 Meeker: So, in essence, that was the crux of your—looks like two to three years in Northern California.

03-00:39:36 Wagster: Yeah, the computer thing first. Secondly, taking on administrative responsibilities that freed up Steil, made Steil open to concentrate on other areas, or work on regional and program issues which were that simply more important to him. He also never really got enthusiastic about administrative details. I mean, that wasn't who he was. He as a very fine general manager, great broad scope guy. I mean, really very much so. But I think it was also convenient for him to offload administrative things, because there was no fun in it. He had all these other things which he felt were really important, and he preferred to spend time working at them. Like expansion of NCR, program expansion, going to Cleveland (where a lot was going on and not all that smoothly).

03-00:40:33 Meeker: The way that you described his position confused me a little bit, that you said he was in charge of both Northern and Southern California. Now, explain this?

03-00:40:40 Wagster: Yeah, it confused everybody. The sequence starts with Fred Tenet being fired as NCR Regional Manager for bad personal activities. 45

03-00:40:54 Meeker: Is he still alive?

03-00:40:55 Wagster: Don't know. I haven't seen Fred in years. Actually, I don't remember having seen him since the San Diego negotiations. Keeping him on was not part of the deal. Edgar Kaiser and Cliff Keene, it's my understanding, asked Karl to take over both California regions. He said yes, of course. He was at the time Regional Manager of Southern California. With the new assignment I'm quite certain he was not made a Vice President. It seems to me that came several years later, when he was named VP and Manager of California operations. Keene was the only officer then. He was Vice President and General Manager and on the board of directors of KFH/KFHP.

03-00:41:39 Meeker: Was there a native response to a single person being in charge of both regions that wasn't the overall CEO—?

03-00:41:47 Wagster: Would have been if it weren't for Steil. But Steil was already the key guy in Southern California. Everyone went to Karl outside the medical group. His going to Northern California was really only acceptable, in my opinion, because Vohs by that time had become a very important and very effective person in top management in the Southern California region. The leaders in SCR really didn't want to lose their relationship with Steil. I'm talking about the medical group particularly. The physician leaders had every reason to believe that their relationship to Kaiser managers, the Kaiser Permanente Partnership, was going to go right on under Vohs just like it had under Steil. And it did. So, Vohs was Acting Regional Manger for a year or two, then he becomes Regional Manager, and was sent to the Harvard Business School Advanced Management Program in 1970. Cliff Keene called Vohs while he was at Cambridge, and the conversation included one of the real ironic statements of our time. Keene said, "The Board of Directors has just elected you Vice President. What do you think of that?" And Vohs says, "Well, why don't I stay on for the next term and go for President?" Which is incredible, because Vohs ultimately did become President.

03-00:43:14 Meeker: Chosen over Steil, right?

03-00:43:16 Wagster: No, not directly at that time, Vohs had been elected Vice President, and Regional Manager of Southern California in 1966. No longer Acting. Steil was still Manager of California Operations and had become a Vice President when Vohs went to Harvard. Ultimately, after X period of time, and I can't remember exactly when, Vohs convinced Keene that it made no sense for a Vice President to report to a Vice President. It was not a sound managerial organization structurally. And it should be fixed. I say that Vohs did that, I don't know that Vohs did that. Somebody did. Coincidentally, the Northern California / Ohio, and Southern California / Colorado sponsorship was happening at about the same time. I think 46

that caused Keene to make both Steil and Vohs Executive Vice Presidents. And in that way solved the organizational problem, as far as Cliff was concerned. I went back to SCR in 1970 as Assistant Regional Manager. I became Regional Manager SCR at the end of '70 when Vohs was appointed Executive Vice President, Manager of Operations for KFH/KFHP and moved to Oakland. Steil was still Executive Vice President. Scott Fleming and Art Weissman had been made Executive Vice Presidents. The organizational officer pattern was very confusing, and needed fixing. Vohs set about to do so. I was promoted to Senior Vice President, which was '73 or something, Steil’s and Fleming’s and Weissman’s title were changed to Senior Vice President.

03-00:45:38 Meeker: So that's a lower rank than Executive Vice President.

03-00:45:41 Wagster: Absolutely. And both Steil and I—Regional Managers, Northern California, Southern California, respectively, reported to Vohs. There had been a period of time in the past when, I don't remember the details now, there was some confusion, or at least there was some discomfort, in Steil reporting to Keene, as well as Vohs reporting to Keene when the two were Executive Vice Presidents. But that all got resolved by the time Vohs came into the Central Office at the end of 1970.. Something had to be done with the Executive Vice Presidents all over the place. I was put in the job in SCR first as Vice President and Regional Manager, and then by the end of a year or two I was made Senior Vice President. By that time, Vohs had also been, when he went to the Central Office, he been made a Director. He was the first of the management team after Keene to be elected to the Board as a Director.

03-00:46:36 Meeker: So, what happens to Steil is that he was Executive VP, and then also had of Northern and Southern California Health Plan. Is that correct?

03-00:46:47 Wagster: After several years as SCR Regional Manager, Steil was appointed Manager of Operations, California. That was about 1963 when Fred Tenent was fired as NC Regional Manager. Then Steil was a Vice President, and had the Southern California Regional Manager (Vohs) reporting to him. Next four Executive Vice President positions were created—Steil in the North, Vohs in the South, both guys reporting to Keene, and each responsible for sponsoring a new region (Ohio and Colorado, respectively) Weissman and Fleming who were on the Central Office staff in Oakland.

03-00:47:12 Meeker: Okay. So then, when Vohs—

03-00:47:14 Wagster: Then Vohs became a real Executive Vice President and Director, responsible for all KFG/KFHP operations, in Oakland reporting to Dr. Keene. Then Steil was reduced to Senior Vice President. The other guys who were Executive Vice 47

Presidents were also made Senior Vice Presidents. Art was one. Scott was another. All three were named Senior Vice Presidents, under the Executive Vice President, all reporting to him.

03-00:47:37 Meeker: I believe that I've read in some of the previous interviews that there was a consideration that Steil might be the successor to Keene?

03-00:47:45 Wagster: Yes.

03-00:47:47 Meeker: But it was Vohs, and that seemed to be somewhat controversial?

03-00:47:51 Wagster: Well, the—I'm trying to think of how I knew this, and how long ago it was. Steil had every expectation of succeeding Keene, and somewhere between Keene's office, Edgar Kaiser’s and Gene Trefethen’s, that appointment got stopped. The intent was, it's my understanding—for Steil to become the Executive Vice President, reporting to Dr. Keene. Up to that time, when all this was happening, Steil was running the bulk of program operations. He didn't run Portland, because Ernie Saward did. Sam Hufford had the Regional Manager's job, but Ernie ran the region. And Hawaii was out there in the Pacific kind of saying, “Don't bother me.”

03-00:49:04 Meeker: Yeah. In Hawaii.

03-00: Wagster: In Hawaii. And Mr. Kaiser was so close to Hawaiian region operations, nobody wanted to tangle with it anyway, because you'd have to deal with Mr. Kaiser. At any rate, once it was decided by whomever that Steil would not succeed Keene, then the question was, "Well do we really need to do that?" "Yes, we do. Da da da," and sometime later the nod went to Vohs. That created, of course, a very, very difficult situation that never fully went away, between Vohs and Steil. When Steil reported to Vohs, he did all the correct things, but it was quite clear that Steil knew he had been passed over. Worse yet, he had been literally demoted, because he now only had one California region, not both. Et cetera, et cetera. Karl was a very proud guy, a very competent guy, very complex, but very competent—and was, in my onion, the real implementer of the Kaiser Permanente partnership management system after the Tahoe days. If somebody else says they really did that, in my opinion, they're straying from the truth, or they don't have a correct perspective.

03-00:50:30 Meeker: What are some of the key elements of that system, as you see it?

03-00:50:34 Wagster: Well, the Tahoe meetings concluded with agreement was that we'd manage the program together—Kaiser executives and Permanente physician leaders. And 48

Steil made it clear at all times that he would not, and did not, make unilateral decisions on operational and program matters. He developed the Regional Manager/Medical Director partnership model of behavior—the role, the way you do it, the things you do. Vohs was trained in that mode by Steil, while he was Health Plan Manager and later SC Regional Manager. When I came on the scene as Health Plan Manager, succeeding Vohs, both by observation and by specific instruction and comment, it was very clear to me how the partnership should work, how we should do things together in the Region. Steil by then had gone on to Northern California, and created, for the first time, in Northern California, the Kaiser Regional Manager/Permanente Medical Director style of joint management. When Vohs moved up to his Executive Vice President role in Oakland, he went there with the intent, understanding, and expectation that that's how the program should work in all regions. Jim was confronted, probably that's not the best word, was aware that Portland was run by Ernie Saward, and not Sam Hufford. But Saward left the scene in the late 1970s, I think.

As soon as it was reasonably possible to do so, Jim started the process of turning the Oregon region into a partnership arrangement, first appointing Scott Fleming, who was charged as Regional Manager to try to perform in that fashion. By this time, Dr. Lou Hughes, who succeeded Dr. Saward, had run his string as the head of the medical group. The physicians were looking for another guy as Medical Director, and that turned out to be Dr. Marv Goldberg from San Diego. Carl Berner came from Colorado and replaced Fleming as Regional Manager. Fleming went back to the central office. Unfortunately, Marv and Berner didn't get along all that well. My wife Rheacy died in 1977. The next year I planned to remarry. Jim asked me if I wanted to stay in Los Angeles or work somewhere else. My new wife, Sarah, and I agreed that it would be nice to create a home of our own somewhere. So in early 1978 Berner and I traded jobs. That turned out to be good for everybody, because Berner and Goldberg weren't getting along. The chance to work with Marv was very welcome on my part as we were old friends, and Berner got a job six times bigger than the one he left, so he won too. And that was a major step in Berner's ascendancy in the program. I suspect Berner would have ultimately become President if he hadn't regrettably contracted lung cancer and died in 1980 or so. But that's a total guess on my part.

03-00:54:08 Meeker: There's just a couple more minutes left on this tape. I want to know if there's anything else about that period in Northern California that you want to talk about, or touch upon.

03-00:54:21 Wagster: First of all, when Karl Steil went to Northern California, the Permanente Medical Group was run by three guys: Drs. Cec[il] Cutting, Monty Bertell, and Morrie Collen. Steil made it clear to them after a short period of time getting acquainted, and all that, he would work with one Medical Director, but not a committee of three. Selecting one physician leader to be Medical Director ultimately ended up in a great deal of political infighting and fomentation inside the medical group, 49

because it was an unwanted problem for them to unhorse the big three, yet there was sensibility in choosing one guy. So they went through a whole series of elections. Cec told me one time how many ballots there were before he was ultimately elected; it was 20 or 30 ballots. Finally, one guy changed his mind; I think his name was Dr. Friedman. He told Cec between ballots that when the TPMG Board went back in there and voted, he was changing to vote “yes” for Dr. Cutting And he did. Cec was elected. At any rate, that was the start of Steil working with the medical group in a way they'd never been worked with before, sincerely operating as a partnership. Steil also brought great strength and power to the Regional Manager's role, which the doctors hadn't encountered before, either. The medical group ultimately, then, settled down into an uneasy at first but for years an acceptable reign under Dr. Cutting. Dr. Monty Bertell and some diehards who hadn’t won continued to be troublesome from time to time. Finally, I think the situation resolved itself, mostly because of the success of the Region under Karl and Cec. Northern California was just going great. Steil was doing appropriate and needed things about facilities and making good management decisions. Steil was very astute, in terms of medical group politics, extremely astute, and he did a lot of the right things, I think, to make the medical group realize that he was a good partner, and they could expect to do well together.

03-00:56:50 Meeker: All right. I'm going to change the tape. Did you want to take break?

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[Begin Audio File 4 wagster_dan4_05-10-2007.mp3]

04-00:00:00 Meeker: There’s a story I particularly like which I heard from people who were members of the medical groups when Permanente physicians were denied appointments to hospital staff privileges and rejected for membership in medical societies—

04-00:00:15 Wagster: Ostracized socially.

04-00:00:16 Meeker: Ostracized socially. But I wonder—as somebody who was involved in the Health Plan, not about—did you feel ostracized from the insurance establishment, or the health group establishment, such that it existed? Or was that not nearly as important, largely because there wasn't an established social world, like there was for physicians?

04-00:00:47 Wagster: Well, the latter's true. But the Kaiser Health Plan / Hospital leaders, managers, had simply a different kind of problem—"Oh, you work for Kaiser cars, is it?" We were immediately Kaiserized into a category. Whatever they thought of Kaiser would be what we were stuck with. Also, at any given cocktail party, it would be predictable that if there were people there you hardly knew, or didn't know at all, some number of them would tell you the latest horror story about 50

Kaiser Permanente service they'd heard about or experienced. From a social standpoint, it was frightful. So, I tried to figure out my own way of trying to keep people from finding out I worked for the Kaiser Health Plan/Hospitals, Kaiser. That wasn't easy, because there was no easy way to avoid disclosure, but I had practiced at Yale. When people would say, "Where are you from?" I'd say, "Washington." They'd say, "DC?" I'd say, "No, the State." "Oh, really? Seattle? “ “No.” Then what town?" "You never heard of it." "Well, what is it?" "Kelso." "Oh." I mean, I went through that process again in the early KP days. Now it was "Kaiser Aluminum?" "No.” “Kaiser Steel?" “No.” Et cetera. Once we got to KFH/KFHP out came the horror stories. Frankly, they were very difficult to deal with at times.

04-00:02:20 Meeker: So, the medical horror stories?

04-00:02:21 Wagster: Medical horror stories.

04-00:02:22 Meeker: And how did you respond to that?

04-00:02:25 Wagster: Well, first of all, I've never done very well at being personally criticized. I heard Kissinger, one time, in an interview on the radio, saying, "Frankly, I think I was unduly criticized. But now that I stop to think about it, I think any personal criticism is undue." Anyway, I really had trouble with the "It isn't my fault" thing, and I couldn't say that. I tended to try to listen, and if it was something I could do something about, I would say, "Oh, well, I'll have so and so call you, or I'll call you back tomorrow," but that was rare. Usually these are things buried in the past—

04-00:03:20 Meeker: Second-hand stories.

04-00:03:21 Wagster: —or second-hand stories. And they were incredibly bad, and it would be impossible to convince the storyteller that there might be another side to the story. But that's not really what's going on anymore.

04-00:03:36 Meeker: You know, I mean, this isn't really part of an interview, but whenever I tell people that I'm engaged in this research project, whether they're friends, or at a cocktail party, or something like that, you would be surprised how many times I get that same response. "Oh, well, I knew someone, and this happened," or, "I knew someone and that happened." And it's interesting, because I think it's an accurate reflection of a very, very general dissatisfaction with medical care delivery in the United States—

04-00:04:12 Wagster: Always has been that. 51

04-00:04:13 Meeker: —it just so happens that Kaiser is a—if not the—identifiable provider of healthcare in the United States.

04-00:04:20 Wagster: That's part of it.

04-00:04:21 Meeker: So, it would be as if I'm doing a research project on this particular medical group of three physicians. You know, undoubtedly if somebody knew who those three physicians are—

04-00:04:33 Wagster: If they knew them, or went to them—

04-00:04:35 Meeker: —they would have a horror story about it.

04-00:04:36 Wagster: Yes. Yes. [laughter]

04-00:04:37 Meeker: It's just that I can imagine for somebody who was working with the organization, who was promoting the organization, how frustrating that could be, because now I'm doing a reasonably objective study of it, and it's frustrating to me, because I see the complexities of it, and I see, also, the legacy of that kind of critique of Kaiser, and where it comes from, such as the medical societies that didn't like this particular kind of delivery of healthcare, because it impinged upon their ability to make more money in some parts. So I feel thrown into the position of defending it, but, to me, what I end up doing, I think, in most cases, is critiquing—in general— the notion of the way in which people critique healthcare.

04-00:05:32 Wagster: Well, I was never able to be philosophical about it. All I could do—really—I tend to be somewhat loquacious, and the best I could do for myself was to stay quiet. That's about as good as I could get. But as I said, if there was really something I could do about it—we had people who could—our membership service people were wonderful. Very skilled, and very sincere. A lot of integrity and competence. So there are ways to—you know, some of these things could be dealt with. Sometimes I would come back with, "Do you think there are any community physicians that have ever had a problem of that type?" I would sometimes do that. I'd also say, "That's interesting. I guess Blue Cross doesn't have any of these problems, because, of course, they're filing claims. They're just dealing with claims, and I guess you can't get into trouble much with a claim, except denial, maybe." But I never was satisfied with my response to those kind of problems. The one about the Kaiser Companies, in Oakland, God, it was just horrible. And then slowly, the Kaiser Companies dissolved, literally, one at a time, and Kaiser Permanente got greater and greater prominence. I don't know, maybe they have 30 percent of the population in the Bay Area now? It's moving up to very large numbers. And the medical group representatives are leaders in the medical 52

societies. All that stuff was going on, and it was all going in the same direction, and so I became, toward the end of my working life, by gosh, an employee of Kaiser Permanente. I didn't have to be Kaiser Aluminum, or Kaiser Cars, or anything else. It was kind of interesting.

04-00:07:26 Meeker: I'm wondering—from the perspective of somebody who worked in Kaiser Permanente since 1963—how did the dissolution of all the other Kaiser Companies impact Kaiser Permanente?

04-00:07:39 Wagster: As far as I know, and far as I would surmise, none. Not in any way. Not in any way. There was never any "relationship.” Everybody in the medical care program did everything they could in whatever they ever said to distance themselves from the other Kaiser Companies. We had the name Kaiser, of course. We'd try to find ways to channel people in their thinking. We'd do whatever might fit the occasion to get others to understand the Kaiser Health Plan/Hospitals are non-profit, (which some people understand, some don't) are not owned by anyone; don't pay any dividends; not associated in any way with any of the Kaiser Industrial Companies. We could say these things so categorically that it really resonated pretty well, and there really wasn't any relationship with any of the other Kaiser Companies. We had some number of facilities, certainly early on, where Kaiser Engineers was involved. But that was because they were a vendor, and we were—

04-00:09:07 Meeker: Like Fontana, or something?

04-00:09:10 Wagster: Well, I don't remember what all they were involved in. But there was a long period that Kaiser Engineers was involved in our stuff.

04-00:09:17 Meeker: Well, let's talk about your move from Northern California to Southern California, to become VP, which you already were, and Regional Manager. And you were there from—I guess—late '70, until about '78?

04-00:09:32 Wagster: It actually was early '70.

04-00:09:34 Meeker: Oh, early '70. Okay.

04-00:09:37 Wagster: The proposal was, let me think for a second, Carl Berner had gone to Colorado as Regional Manager, succeeding John Boardman, because Boardman had been brought back to SCR as Assistant Regional Manager and Regional Hospital Administrator. Russ Williams had resigned as Regional Hospital Administrator and left the organization. So, it was Vohs' concept that he would have two Assistant Regional Managers reporting to him: Boardman with hospitals and possibly regional services, I can't remember the other half of what Borgmann 53

would do, and Wagster with Health Plan and facilities reporting to him. In some ways, that wasn't unlike what Steil had been doing, which was having people reporting to me who otherwise would be reporting to him. So, in some ways it was like that. But it also was a signal to both John and I that one of you will get to be Regional Manager in Southern California some day, this way. Clearly that's what Jim was doing.

04-00:11:17 Meeker: Training you for the Regional Manager position?

04-00:11:19 Wagster: Right. Giving an opportunity, if you're given to taking responsibility for everything around you anyway, to exercise more responsibility. At any rate, as it turned out, I was sent off to the Harvard Business School Advanced Management Program in the fall of '70. While I was away from home, Vohs became, in December of that year, or it was November, actually, the Executive Vice President of KFH/KFHP, and moved to the Oakland office. He called me at the Harvard Business School, and said, "This is what's happened to me, and I want you to be the Regional Manager in Southern California." What followed was one of the very strange reactions in my life: I was very angry. I said, "Jim, I mean, that's great, what you're doing, but you and I and John Boardman planned to do some things in SCR that had never been done before, and now we're not going to be able to work together in the region." And I hung up. I mean, after a few pleasantries I hung up. After I realized what I had done, I called him back in about a half an hour, and I said, "Jesus, Jim. What an idiot I am. Thank you for promoting me to Regional Manager." I felt, I bet I'm red right now, I was really embarrassed about my first reaction, but that's how strongly I felt about the organizational pattern that we were going to experiment with, and my being able to work with both Jim Vohs and John Boardman as a regional team. John was a contemporary of mine (he had gone to Dartmouth) was a good friend, a good guy to spend time with, and a good thinker. So, I was really looking forward to all that happening. It wasn't coincidental, it was obviously related that Boardman shortly thereafter left Kaiser Permanente. That was a real loss to the organization, because Boardman was really competent. He came back years later at Henry Kaiser's behest, when Henry was heading up a worldwide effort to spread the gospel of group practice prepayment. The vehicle used was a non-profit corporate shell under KFH/KFHP. I don't remember the name of it. John was a great help making sense of all that what Henry was trying to do. Regrettably, John just died one day. And the world's not better for it. He just was a fine, fine guy. Henry’s effort ultimately fell of its own weight. John gave me the solution to a problem when se were chilling one day. I asked: "What would you do if you needed to see a doctor in a strange town and you were sick?" John said, "Well, if I had a stomach ache, I'd call an ophthalmologist." Whereupon I said, "John, you're not getting there." He says, "Oh yeah. I'd ask the ophthalmologist, if he had a stomach ache, who would he go see?" [laughter]

04-00:14:28 Meeker: There you go. 54

04-00:14:30 Wagster: John was a first-rate guy. At any rate, I had come back to SC from Harvard as Regional Manager, and worked with John for a year or so. It was very enjoyable time for me but he resigned. To replace John after he left us I got Russ Williams to come back and be the Regional Hospital Administrator again. I was very pleased with that. Russ was a fine guy to work with, and a very, very, well qualified hospital guy. What else do we need to know about that?

04-00:15:06 Meeker: Well, OK, so becoming a Regional Manager was not something that you actively sought, and it seems like it was a bit of a surprise, but once you get started—say, in 19—when your—

04-00:15:19 Wagster: That was '71. The beginning of '71.

04-00:15:21 Meeker: OK, the beginning of '71. You know, come back after maybe a couple days off at Christmas or something, the New Year begins—do you an agenda of what you want to accomplish?

04-00:15:31 Wagster: No. As far as I was concerned, Vohs was an outstanding Regional Manager. Nothing was broken that needed to get fixed. He was excellent in both handling people and selecting people, in my view. I knew all the people. I knew the region well, because of my earlier time there. I was happy as a clam to be given the responsibility, and what I wanted to do was just not screw it up. I just wanted to be sure that we kept everything on track. We had plenty of things going on at that time: Medicare was starting to settle down—but not a hell of a lot—with a variety of regulations. Everybody worried about the cost inflation, and the Health Plan price going up. We also had always had facility problems to deal with in Southern California. We were behind the curve virtually all the time. It was a time when you could rightfully accuse our program, and some people did, of operating under the principle of an economy of scarcity, because of limited hospital beds and increasing membership growth. I think in essence that was a fair criticism. In fact, it was not true. Some community beds were being used. But I do think it was a thing we were very conscious of, and very concerned about: not having the adequate facilities for the pace at which the program was growing in membership. Even in '70, after having started a large facilities program in the '60s, we were still faced with the same problem—catch-up. We were doing a little bit better, and meeting other kinds of challenges with respect to facilities in the 70s but it was still a basic problem.

04-00:17:17 Meeker: Well, I wonder if—to the best of your memory—you could think about the question of facilities, particularly in your period as Regional Manager. And if there was always this crunch of facilities, it seems like when new ideas came up, the obvious answer in most cases would be yes. I'm wondering if you can think of 55

cases that you actively agitated a "no" response to a new facility proposal, and of needing more facility.

04-00:17:53 Wagster: I really never thought about this kind of thing. But the process, the planning process, was a function of medical economics, Joel Kovner, the facilities people, Russ Williams, and then the planning people. With the Regional Manager involvement, and, to whatever extent, guidance, things were not brought to the point that someone would present a proposal, a package, and say: “'Yes' or 'no,' Big Cheese." I didn't think of myself or the job that way, either. I felt that the best thing I could do was make sure we had processes in place, and then I worked with all the people in the process, as they worked their way through the problems. In fact, unquestionably, people had a lot to say behind my back about how much I got into details. But my theory was that if a person does not understand the details they may not make good informed judgments and therefore not be is a good manager. And so part of what I was doing, with working with people at the detail level, was making sure they knew the details, and they understood what the hell they were working with. Then I could rely on their judgment to do something about the problem. The process needed to be effective, we needed to be moving along as rapidly as we could. We had impediments in every direction there could be, so no matter how you pushed it, it was going to take quite a little bit of time anyway, and we had really good facilities and planning people to work with.

The medical group almost never initiated some facility requirement. They didn’t have a meeting and come forward and say, "You big time Health Plan people, please do this for us." And that, again, was all part of the combination of the process and maybe the times. We were involved in this process all the time, and we had a bunch of stuff going on in varying stages, we had a whole bunch of stuff in the planning mill in varying stages, and we had periodic meetings and/or at any time somebody was concerned about something. We did it together with physician leaders. We really believed in the partnership with doctors. We were not the ones who had the money, and had the facilities so that the doctors had to ask us if we were to do this or that. The way our system was structured, we could have behaved that way. But we didn’t. To say the same thing another way, every level of managers on the Kaiser side was literally more concerned about what doctors would say to them and about them than what their boss said. In my opinion, there was no question about deference to physician views.

04-00:20:48 Meeker: What do you mean by that?

04-00:20:50 Wagster: If a doctor was really critical about a manager’s behavior, or had some really critical things to say about their products or whatever, then that would bother our managers more than their boss saying, "You know, we've got to talk about some things. You've got to do this or do that." Because we recognized the doctors were the really important people who had to be satisfied for all of us to do good. It wasn't, "The physicians had better ask us the right way, or we're not going to give 56

it to them." That just wasn't how it worked, and it wasn't how we felt. Without well qualified satisfied physicians you can’t have a successful medical care delivery program.

04-00:21:25 Meeker: Well, with that said, there was—particularly in the early part of the '70s—some turmoil around leadership of the medical group. How did you respond to that, as a beginning Regional Manager?

04-00:21:40 Wagster: Well, I was there when Herm Weiner literally suffered a breakdown. He and I had just gotten started together. He was the Medical Director of SCPMG only a matter of months.

04-00:21:57 Meeker: When did Ray Kay retire?

04-00:22:00 Wagster: I believe that he retired at the end of '69.

04-00:22:08 Meeker: Oh, okay.

04-00:22:09 Wagster: But it could have even been a little bit earlier. There was a period of time prior to Ray’s retirement when Herm Weiner was Director-Elect. That was a year or two. During that entire time, Ray never let Herm in his office. I mean, Ray literally continued to function in exactly the same way that he had before. Dr. Kay acted as if his retirement date was nowhere in sight. Herm, at first, was a little antsy about all Ray not sharing the responsibility. Then finally, he decided, "I can't do anything about this." So he retired to his office, he worked with the people that he could work with, and he waited for the day that Ray Kay officially had to retire. Even then, Ray was a little bit reluctant about leaving his office. Herm just said, "Hello, Ray. Goodbye," and took over. That period of time must have been very wearing on Herm and very difficult for him. I wasn't there during most of that. But I was there when Herm finally took over at the end of 1970 when Ray was officially obliged to retire. I think Dr. Weiner was Medical Director less than a year. I'm a little confused about the exact times right now. I liked Herm, and I thought we were going to be able to work well together as partners. I felt like I knew the region and its situation very well, from my previous experience there, as well as during the short time I had been back from Northern California. Also, through all the years, including my time in NCR, I had always had maintained a good working relationship with Vohs. We were in regular communication. So, I really felt good about what Herm and I could do together. We were staying in San Francisco for meetings in Oakland. One morning Herm knocked on my hotel door, and said, "I can't do it. I can't do this job. I'm going to go back and resign. I may not work at all." And that's exactly what happened. He resigned, went home, and was never seen in the offices again. It was very sad. 57

[interruption]

04-00:24:31 Wagster: Okay. The skirmishing within the Medical Group began immediately. I never did indulge in any way in medical group politics. Not implicitly or explicitly. Maybe I could have. Maybe I would have been better off if I had. It didn't matter. I couldn't do it. It isn't anything I could do. But the medical group was unprepared to do it all over again. After all, Herm had recently been selected as the successor, Herm got the job. Herm was in the job. Now he was gone. And it happened literally overnight. So the doctors really weren't prepared to reinstitute a selection process. I don't remember how long it took for the physicians to replace Herm with Hart Baker. It could have been just a very short period of time. I just don't remember. But ultimately the new Medical Director was Dr. Hart Baker. Hart was not really prepared for the job. He was an astute personal politician, with a down home Southern manner. He certainly knew the medical group, and he had been on its board for a long time. When I say he was not prepared for it, I know that Hart had been the head of a department, OB gyn, but he had not had any real oversight or involvement in regional responsibilities. I've got an example. Hart Baker called me one day, after he'd been in the job six months, and he took quite a lot of time to elaborate on a terrible problem with the employees in one of the medical offices. It was a problem in a specific medical office, and the behavior of its crew of people or some individuals in it. Hart railed on about their transgressions and how unacceptable they were, et cetera. When he finished, and I had waited him out, I said, "Hart, I think I understand the problem. But, you know, those employees are in the Medical Group and work for you." Dr. Baker honest to God didn't realize that the employees in the medical offices were part of the Medical Group. He thought they were Kaiser employees working for me.

04-00:26:56 Meeker: What were they, then? Lab technicians, or something like that?

04-00:26:59 Wagster: In the medical offices. They were like receptionists or maybe nurses but they were in the medical offices, which in the Southern California region made them employees of Southern California Permanente Medical Group. The Health Plan Hospitals nurses and support people were Kaiser employees. No question Hart was certainly bright enough. He was, I think, capable enough. As I had done in the jobs I'd had, he just needed to work his way into the job, and learn as he went. It worked out all right. The medical group unrest, if it should be called that, really never entered into our relationships, mine and Hart's. From my observation and standpoint, he kept the lid on any political problems quite nicely. Whatever there was in the way of opposition he handled quietly. It was not like Northern California, where Dr. Monty Bertell had guerilla warfare going on for years after he failed to be elected Medical Director when Cec was. There wasn't anything like that kind of squabbling in Southern California. I don't remember even who Hart's opponents were in the Medical Director election. Maybe the character of the opponents determined the difference between TPMG and SPMG as to post 58

election behavior. I don't know that. But the medical group was okay in Southern California with Dr. Baker.

04-00:28:30 Meeker: Well, the successor was Frank Murray, but I don't understand that they—I think that—

04-00:28:33 Wagster: That was a long time later that Dr. Murray succeeded Dr. Baker. Neither was the successor to Ray Kay. I was gone from the region by then. Hart was still in the job when Berner came down from Oregon and took over the region in Southern California.

04-00:28:50 Meeker: I had mentioned earlier on about the—you know—various points in time in which there was a real serious movement toward national healthcare. And about 1974, thereabouts, was one of those periods of time. Do you recall this coming up as an issue?

04-00:29:12 Wagster: Oh, yeah. It was a constant matter of concern. The primary concern was, "Okay, whatever form it is, we want to be in it." So our primary concern was knowing what was going on, and then getting our kind of program somehow embedded in the process. Erickson and Fleming led our efforts.

04-00:29:35 Meeker: So, the approach was not support or don't support, it was, if this is going to happen, we have to make sure that—

04-00:29:45 Wagster: Right. I do not remember our organization ever taking a policy position in favor or against national health insurance. It was during that period of time, though, that some character came up with a wonderful phrase about National Health schemes. I was at a GHA meeting, and the guy got up to make a speech. It could even have been Ernie Saward. Anyway, it was a guy like Ernie. He gets up to make a speech to the conferees and he says, "I think I can safely say that national health insurance is an idea whose time has come and gone." Because that is what really happened There was an interest in National Health Plan, a rising amount of political pressure, concerns, and countrywide debate. Then in a very short period of time, precipitously, it evaporated into nothing! For a long time even during that period the national health issue kept flipping around on the national agenda among the politicians. It was like two or three in priority. It never got to be number one, in my opinion. Number two on the national agenda almost never gets enacted. It seems to have to be number one to get acted upon. For whatever reasons, something else comes along and takes the spotlight off of national health. In part, I suspect, due to the organized and aggressive opposition of the medical societies. The medical establishment, I suspect, was one of the main reasons that prevented the question of national health insurance tipping in favor of real congressional action. 59

04-00:31:36 Meeker: Well, certainly the medical societies were a big part of the reason that wasn't enacted during the Truman Administration. But there's some sense that the reason it wasn't enacted in 1974, thereabouts, had less to do with medical societies, with the presumption that they were less important then, and maybe even willing to go ahead with it, although I don't know if that's an accurate interpretation, but more to do with pressure on the left to get more out of national health insurance than the policymakers were willing to give, and so it seems like—

04-00:32:16 Wagster: Interesting perspective.

04-00:32:17 Meeker: Yeah. I mean, from your perspective—

04-00:32:19 Wagster: Yeah. I don't know that I know that, so, Okay I do know that it was high visibility inside our organization, and our drives were always to make sure that we were embedded, included in the language, so we could live under it and with it.

04-00:32:36 Meeker: Did you personally make any recommendations, or engage in any policy creation around that?

04-00:32:42 Wagster: No. Only in that I was a member—forever—of the Governmental Relations Committee. That's the kind of thing that we spent our time working at because it fit that committee’s mission and its agenda. It was so critical to the future of our organization that we would have discussed National Health issues virtually at every meeting. You know, depending on where the hot buttons were at any given time.

04-00:33:13 Meeker: So, this would have been an issue that you simply would have kept up on, but not necessarily taken an active—

04-00:33:18 Wagster: Absolutely, about "keep up on," but it also wouldn't have been my responsibility, actually, to keep us up on this. This would be the kind of thing that the Central Office people would be expected to present to Regional Managers in meetings, i.e., Kaiser Permanente Committee meetings, Kaiser Health Plan/Hospital board meetings. We would get all kinds of input all the time from out specialists who were following the political scene and national public health ideas in particular.

04-00:33:51 Meeker: We've talked a lot about the distrust of establishment physicians, and the medical societies, of Kaiser Permanente physicians—or, Permanente physicians. I've also heard it described as 1970s, really, as the time that that relationship begins to thaw— 60

04-00:34:10 Wagster: Yes.

04-00:34:10 Meeker: —that's when the Cold War—do you see that as—I guess, do you have any perspective on that, coming from the Health Plan side?

04-00:34:21 Wagster: Only that it was an extremely welcome sea change, and that it was a relief, rather than any kind of a different feeling inside the organization. We never spent any time at guerilla warfare, trying to get back at the enemy. It just isn't anything we had time to do, or had any inclination to do. Everything about our organization was moving in a strongly positive way. At that point we were moving towards, but hadn't yet committed ourselves to become a national organization program. We were much better able, with financial stability and the medical environment in general, to recruit physicians and to get facilities coming in online. It was a good time for us, because we were winning the game. We also were out among them more than ever, and I made it my business when I went to the Northwest in the late 70's—because I saw the need, as well as the advantages—of being very visible in the community. But, we were starting to move into activities in the community to enhance our image, to make people aware of our presence, and we were getting acceptance. In Oregon, when a new head of the medical school—the Health Sciences something or other—for Oregon, in Portland.

04-00:36:33 Meeker: Oregon Health Sciences University.

04-00:36:34 Wagster: Right. A guy named Dr.Len Laster replaced the prior Dean, head, or President, whichever he was. Dr. Laster came to see Marv and I. Well, that's, I mean, that's incredible. This is 1977 or '78, I guess. All the leadership on the Kaiser side was encouraged by Jim Vohs to get into community affairs, and community activities. We were heavily involved with all kinds of community services projects, which we were sponsoring in Los Angeles, I inherited from Jim a learning center that he had created in Watts, after the Watts riots. It was a really remarkable thing, mostly because of a guy named Bill Coggins, who ran it from the start. It was just a really remarkable effort in and for the community.

04-00:37:36 Meeker: What role did the Health Plan play in maintaining that? I'd imagine that funding it was probably a large part of it, but—in providing direction, and, I guess seeing that the Kaiser core values become part of that organization?

04-00:37:54 Wagster: That was easy because of Coggins. And Bill didn't technically report to the Regional Manager, but he really did. I don't remember how we made it look on the organizational charts, but there wasn't anything he was doing that he didn't acquaint us with, and there also was almost never any basis for criticism on our part. We all wanted to do more than we could do, and the only constraint was the 61

money. We had a minimum amount, but some amount, of resistance from the medical group with respect to the money being expended in that direction, but if you could convince the physicians that it was going to be spent anyway, it's just a question of where it's going to be spent, isn't that a pretty good place? There were lots of other community service projects, research, and health education, that of course the medical group was entirely responsible for, and did a bang-up job with. But the learning center just worked, and it was because of Coggins.

04-00:39:00 Meeker: I don't know if—maybe you could answer this question—from what I understand, in the last ten, twenty years, the federal government, in particular the IRS has looked much more strenuously at 501©3 organizations, non-profits, wanting to see a community benefit. And so I know that the community benefit element of Kaiser Permanente is much more pronounced or explicit than it once was. What sort of—I guess, what was your community benefit charge? What were you supposed to accomplish in the context of community benefit, when you were in Los Angeles?

04-00:39:45 Wagster: Well, it was—

04-00:39:47 Meeker: Or, in Southern California.

04-00:39:47 Wagster: It was with all Regional Managers, and every year, one of the things that Vohs held you accountable for was an effective and as visible as possible community program doing something. When you had salary reviews, that was an element of what you were accountable for. It also—in places like Oregon, you'd have a big assist from somebody like Mitch Greenlick in the Research Center, because not only did they always want money to do things, but they were involved with what was going on in medicine, and what was going on in the community. The problem that I always felt we had was identifying the real dollars associated with real stuff we were doing, and making the case that this is a community benefit. The fact that it fits in our program, that it does things for our members—who come from the community, for God's sake. So it was always a problem, in my view, isolating and building up—making a wall out of your solid community service efforts.

04-00:41:34 Meeker: So, an example would be the Watts Learning Center.

04-00:41:37 Wagster: A big example. I mean, although we had our name on the building, almost never did we get much publicity. I don't remember much. Maybe when we opened the building, or something, but no ongoing publicity in the Los Angeles Times about this wonderful thing we were doing in Watts. We always used the charity care element. I personally didn't like to see that highlighted, because we were writing off a lot of bills, and charging it to that account, and I'm not saying that isn't an appropriate thing to do, but I also think it's hard to make the case that out of the 62

goodness of our heart, we were writing off a bill. However, it was charity care. I mean, it really was what we were doing.

04-00:42:43 Meeker: And these were non-members who sought care at the hospitals.

04-00:42:45 Wagster: Yeah. But to me, that was never what our community service program was. I also think we were encouraged in our community service program by the reaction of the board of directors of Kaiser Health Plan/Hospitals. One of the real problems of our organization is having Directors who really understand our program. Basic elements—something associated with medical care and so forth. Yeah. But how the program worked, and really what it was all about, and what we needed in the way of a critical mass, and what kind of support we needed to have that ensured or assured. All very complicated. But a thing like community service they could get their arms around. They really understood that. And so I think it got a real fair share of attention, and I think it got support from the Directors. That never hurt a Regional Manager's feelings—to get support for doing something—so I think that was also an aspect of the combination of motivation and impetus to keep the community service programs going, and make them alive. I actually developed another dimension of that in Portland, when I put together something we called the Healing Arts Project, where we went through a complex planning process and ended up with an art consultant who commissioned artists in the community to do some special projects for us. We then hung the pieces in our facilities, and we took care of space problems with artwork solutions. It was very successful, and it led to a guy asking me to create the Artworks in America program in the Northwest region, in Portland, which I did. That year, we got a national award. Sarah and I went back to the Smithsonian for an awards dinner. At our table— they had a dignitary at each table—was Whizzer White, the Supreme Court Justice. He was called Whizzer because of his football playing during his college days at the University of Colorado. But at any rate, he was the guy who sat at our table. It was really fun, a very nice thing. But the point is, it was recognizing what we had done as an organization with respect to bringing art to the workplace. All this started with the community services activities. More visibility, more involvement in the community, was a very important part of what we were doing. It also probably had, in the background, some life of its own, because going into the new communities, we needed to get visibility. We needed to get understood. People needed to see us. And I think probably there was also another factor going on. All these things were kind of going in the same direction. Open up, expose yourself, do something about your image, get people involved, be visible in the community. I think it was all kind of a broad front to moving at the same time.

04-00:46:17 Meeker: I think that we should stop for today.

[End Audio File 4 wagster_dan4_05-10-2007.mp3]

63 64

Interview #2: May 11, 2007

[Begin Audio File 5 wagster_dan5_05-11-2007.mp3]

05-00:00:00 Wagster: There was at some level creative tension between Kaiser and Permanente, and there was some value in that. The competition for power, or whatever, at times became overt, and was really quite clear. In fact, I suppose the personification of that was the rivalry between Sams and Vohs, which was extreme, over the years.

05-00:00:45 Meeker: Can you provide some examples of that? How it worked out?

05-00:00:48 Wagster: Well, it started with—Bruce Sams was the only physician among all the physicians in the medical groups who had presented himself, nominated himself, to be considered for the presidency of Kaiser Health Plan/Hospitals.

05-00:01:06 Meeker: So, as a real rival to what Vohs eventually became.

05-00:01:10 Wagster: And he presented himself or nominated himself, or what the hell ever the right term would be, to the search committee of the Board. He was interviewed by the search committee. The other candidates, whoever they were, were ferreted out or identified by the search committee of the Health Plan/Hospital Board.

05-00:01:34 Meeker: And other candidates would have been Vohs, Steil—

05-00:01:36 Wagster: Steil would certainly have been one. There was one physician in the Northwest Permanente Medical Group who had gone to Yale, Art somebody (I can't think of his name) who nominated me. Vohs gave me the letter he wrote. I still have it. It was a one-sentence letter that Art he sent to the Central Office, I guess, nominating me to be elected President of Health Plan/Hospitals.

05-00:02:07 Meeker: You?

05-00:02:07 Wagster: But so far as I know, that was the only vote I got in the entire system, and of course I was not interviewed by the search committee. The other candidates, beyond Steil, I don't think there was any other viable candidate visualized inside the program. So then it was a question of Vohs, Steil, and please consider Sams, against all else in the outside world. They may (I wasn't on that committee) very well have considered other people inside the organization, and/or other people outside KP. I really don't know that. I remember, however, when I was interviewed by that committee as a board member or because I was Regional Manager of SCR, not as a nominee or candidate. It was Bob Glazer from Stanford 65

who chaired the committee described the search committee process and asked for my suggestions. I don't know that anybody else was with him. There might have been somebody else, but Glazer was carrying the ball. We must have been there, I don't know, an hour. A long time. Da da da da da, da da da da da. And I finally said, "Bob, I'm kind of puzzled. We've been talking a long time about candidates, and outside people, so forth,"—I don't remember any of the particulars. Then I said, "I don't understand even the process. Because it seems to me that you have to make a decision as a committee that you're not going to promote Vohs, before you even consider all the rest of these people. Or, you're only going to consider them in comparison with Vohs. And I've not even heard you say, 'Jim Vohs,' in all the time we've been sitting here." Well, it made Bob Glazer go into a big huff. It ended up with a somewhat heated exchange between us, which was very unusual for Glazer, because he always kept his cool. I don't remember my exact words, but in essence, I said, "Unless Vohs gets the consideration he's entitled to, I'm not even sure I want to continue working in this organization." Well, that made Dr. Glazer very unhappy. The meeting ended up not being all that pleasant. But honest to God I couldn't figure out what the hell the search committee thought they were doing. Now, it may have been they had already decided, "Vohs is our prime candidate. What we need to do is get all others lined up, check them out on their own merits, and then, maybe, make a decision based on who survived." That isn't what they talked about. It isn't how they presented themselves. Now, this is closed door stuff, so nobody else knows what I just told you, but it was a really unusual, process I thought. Lacking in candor, which was not inconsistent for Bob Glazer, I mean, he was a very clever, highly intelligent, a force for good, no question about that but he also was very politically astute, in the way you must be to do well as a member of medical school faculties. You have to have certain personal special skills to sustain yourself in that kind of an environment.

05-00:06:04 Meeker: The job search to me sounds not unlike something you would find at a university, for a faculty position—

05-00:06:10 Wagster: And I think it really was.

05-00:06:11 Meeker: —in which there's already an established inside candidate, perhaps somebody who's been working with the department for a number of years, but good governance requires an open search, and all candidates be equally considered, and everyone knows who will be selected, but it's verboten to mention that, because if you do say—

05-00:06:34 Wagster: I think you're right on. And the people who were doing it were from that environment. Glazer, and I don't remember who else, but they were not—my recollection is—they were not corporate organizational types. 66

05-00:06:51 Meeker: Yeah. And you broke the code by pointing out the elephant that was sitting in the room.

05-00:06:54 Wagster: Oh, yeah. It was very indiscreet. I mean, extremely indiscreet of me. And at the time, I was really quite naïve, and I think, in some ways, innocent. But what you're describing is exactly the case, and almost certainly is the process they were going through, and explains all of the kind of odd mish-mash that they were going to go through.

05-00:07:23 Meeker: Do you remember any particular conversations about Bruce Sams' candidacy, and about—?

05-00:07:28 Wagster: No. Only that I think I learned from Vohs that Bruce had presented himself as a nominee. Because it was so strange. I mean, I thought it was so strange. First that a member heading up the medical groups would feel that they were appropriate candidates for Health Plan/Hospitals, because they were always—by definition— committed to their medical groups, and to the practice of medicine, the organization of physicians, and so forth. And the medical groups were always concerned about people who might even be physicians, like Cliff Keene, pretending like they know what the doctors think, and how the medical groups work, and being on the Kaiser side is a bad thing. And in fact, Dr. Lawrence was really the only successful physician. Well, Barney Rhodes was brought into that picture by Vohs. But Lawrence really got the backing of physicians, and was identified by the board as the guy for the Kaiser side. Very unusual.

05-00:08:52 Meeker: Do you want me to pause it for a second?

05-00:08:55 Wagster: No argument here.

05-00:09:00 Meeker: We were partway into discussing your tenor in Southern California as Regional Medical Director.

05-00:09:10 Wagster: No.

05-00:09:11 Meeker: (laughter) Regional—sorry—I'm getting confused all these days. So, just Regional Manager.

05-00:09:17 Wagster: I profited by looking like a doctor, but I never pretended I was one.

05-00:09:20 Meeker: Did you wear a white coat? 67

05-00:09:23 Wagster: No, no. No, no. I never pretended I was one.

05-00:09:27 Meeker: One of the things I wanted to ask you about, of course, is the Kaiser Permanente qualification as an HMO. The HMO Act passes in 1973—

05-00:09:36 Wagster: Two. December of ‘72.

05-00:09:38 Meeker: Okay. December of two. Right. But Kaiser does not become an HMO— recognized as such—until October of 1977.

05-00:09:52 Wagster: Right.

05-00:09:52 Meeker: When you were Regional Manager in Southern California. Did you have any— play any role in the process to one, decided to go for recognition, and then two, apply for recognition?

05-00:10:07 Wagster: Oh, it was the whole ballgame during those years. Once that act passed, and we had, as an organization, the Governmental Relations Committee with both Kaiser and Permanente represented, and the KFH/HP Central Office Governmental Relations Department. Bob Erickson and his crew spent a great deal of their time trying to influence the formulation of HMO law in such a way that our program could find a fit and not be impeded. They worked very hard during the legislative dance, as it's called, or as it were, to insert definitions and language recognizing the needs of our kind of program so we would not be adversely effected. The irony, of course, was we were the model the legislators were doing all of this about, and yet there was both a lack of understanding and a great deal of resistance to acceptance of our needs and what was needed for our program to perform effectively under the law. We were not part of their healthcare experience, and the things they knew about. The things that they could envision that they wanted to have happen. Now, a guy who knows all this, I was simply part of the people not just wringing our hands, but trying to get proposals, and positions, and so forth, construct them so that we would make out, I mean, enable the program to continue to function. So we worked toward that in virtually everything we did all the time. (2) Once the law passed, the new game, and the new threat to be dealt with, was regulations. The promulgation of regulations determines really, really where you're going to live, and you have to have something that works. So, the same people went to work and the same pressure was applied to try to get the regulations to be okay for us. We had all kinds of difficulty with it. (3) Something totally different, was the public perception that was forming negatively about "managed care." "What is an HMO?" The medical establishment (unfortunately a lot of other well-meaning people early on agreed) made sure that the public knew that HMOs deprived people of care. HMOs make their money, and they compete 68

effectively because they deny people access to needed medical care. So that meant that the regulations had to protect everybody against these bad HMO people, or this potentially harmful organization that could do harm if you let it, that kind of thing. Another factor is in the marketplace. Suddenly there was every kind of "organized" type of organized program you can imagine. Six hundred identifiable, different, organizational patterns that called themselves an HMO. So what was an HMO? And how could we distinguish ourselves from this growing list and worse yet from our standpoint, in come the large for-profit organizations, insurance companies and so forth. All of a sudden, one of the key things that had sustained our program over all the years, nonprofit status and the motivations to turn money back for the good of the community or into the program for the good of the members that we were serving. That was not what motivates for-profit players moving into medical care under some HMO guise. It's not what they did. Their motive was profit. So, soon, an HMO became tantamount to somebody involved with finance rather than a physician [who] was deciding whether someone could get care, or would be reimbursed for the cost that they had incurred in getting the care. That was anointed, in a way, by the HMO Act, and we were dreadfully concerned about it. Vohs used to talk a lot about the motivation of for-profit people moving into medical care. And then, to make—

05-00:15:41 Meeker: It's what's now evoked by the phrase "managed care," right?

05-00:15:45 Wagster: "Managed care" became the phrase that was used, and everything became worse. Then "managed care" took on the specific meaning that your situation's going to be managed by a for-profit guy. All of the sudden, that's what Kaiser Permanente were in the eyes of the general public. That's how we, without anything else happening, were essentially tarred with the same brush. One of our problems was, how to differentiate ourselves from bad HMOs? It was a major road block to us becoming a qualified HMO.

05-00:16:23 Meeker: Well, that's a good question. Why would Kaiser Permanente—already had been active as an HMO since about 1945, so we're looking at thirty years already— why would they want to become recognized by the federal government as an HMO? Why not just continue as they were?

05-00:16:45 Wagster: I can't give you the list off the top of my head, but one of the driving forces was the HMO law did have a capital provision in it, and that was because we worked very hard to get that provision in there, and—

05-00:17:00 Meeker: So, tax breaks or—I mean, as a nonprofit, the taxes obviously weren't an issue, but— 69

05-00:17:08 Wagster: I don't recall any concern about, "Become an HMO so you could continue to be nonprofit." There were for-profits were all over that place. I don't think that nonprofit status was a factor. I know that the capital earnings, the capital retention provision, was a significant item. There was also the, I think I'm correct in this, the awkwardness of having helped create the HMO concept, and something of the structure of it (Scott Fleming, in particular, worked with Paul Ellwood in the initial phases of the development of the concept for legislation) and having been involved, at least behind the scenes, when the Nixon Administration took it on as one of their administration’s priorities. At any rate, having done that, it was kind of awkward not to be a qualified HMO, not to apply for qualification. There was no resistance or inertia, from the standpoint of all the work it took to become an HMO, but there was irony in that. I think someone took all six regions' applications, and stacked them, the papers, and I think it was something like six feet tall that was sent to Washington. I remember one of the comments at that time made by somebody, I don't remember who said it, “You know the worst thing about this stack of papers? It's that in Washington, somebody's going to read every page, and we're paying for people to do that." It was just ludicrous, all these things that had to be done, and responded to. I suppose a clever organization could have figured out ways to handle those pieces of paper, without there being any substance behind it at all. It was really a classic bureaucratic boondoggle, in the name of, "We need these regulations to protect our society," or whatever. At any rate, I'm sure there are basic needs and basic truth in all that. But it wasn't resistance to having to do that work so much as it was concerns about another level of regulation, another level of intervention, we don't know what all this is going to end up meaning to us, we're getting identified with a label that doesn't fit us, we're different and we're having trouble differentiating ourselves. All those things were going on at the same time that we were trying to figure out how we could qualify, justify it, and get the benefits that were actually in the HMO law available to us. And I can't enumerate those benefits to you, other than the capital issue—

05-00:20:19 Meeker: Because it sounds like the risks were quite extreme, so the benefits must also have been pretty serious to be—

05-00:20:24 Wagster: Well, another benefit was employers—now that I think about it—from a marketing standpoint, employers began to understand that there was a concept, HMO, and then when they said, "Are you guys an HMO?" We'd explain that we're a group practice prepayment, and we're not qualified. So there was a, I think minor but maybe significant situation in the marketplace, where failing to qualify left a kind of an uncertainty, or a question, that certainly we didn't need. And we never did successfully, by the way, in my opinion, articulate a position that made us a type of HMO that was readily understood and easily identified. It was at a time in our organization when we were really struggling to find a simpler way to describe ourselves. And group practice prepayment is, I mean, you stumbled over it the other day, just an awkward phrase. After you say it, most people haven't any 70

idea what you're talking about. I mean, it really isn't clarifying anything. We just couldn't find the way to say it right. And you may or may not have heard that as we became a national program, we started looking for a new logo, or a logo that would fit us from a national standpoint. The first consulting outfit that we did business with to help us with that pointed out to us that Permanente is a very, very difficult name for marketing purposes, and suggested, actually suggested to us with Permanente physicians sitting there, too, that we call ourselves the Kaiser Health Plan. That’s how we should market the program. Well, we fired that guy.

05-00:22:22 Meeker: Well, why is that?

05-00:22:24 Wagster: Because Permanente's sitting right there. The Kaiser Permanente Committee is made up of both Kaiser and Permanente executives. The Permanente representatives are sitting right there. Nobody's going to vote for "Let's kick Permanente out of our name." They're your partners. We had come to believe that Permanente should be in our name. On the other hand, it was easy to understand the assertion that Permanente is an awkward name for marketing purposes. As far as the physicians were concerned, Permanente in the program name established the partnership and their identity. They weren't about to agree to eliminating their name for marketing purposes. So we got another consultant. And guess what? The new guy came up with Kaiser Permanente as the name we should use! So that's all that happened.

05-00:23:08 Meeker: I've heard some physicians of an earlier generation suggest it should have been Kaiser Garfield Health Plan.

05-00:23:16 Wagster: That would have been interesting. And could have been. There wasn't any reason that I can think of, maybe Garfield's modesty, that the medical groups adopted Permanente. Originally the name was the Permanente Health Plan and the Permanente Hospitals. In the 50s the industrial companies were all Kaiser something. I happened to be working for First Boston in New York at that time My first job, actually, out of college, it was either in the fall of '49 or the spring of '50. One of my first assignments was counting the stock certificates pushed through our the window by Wall Street runners. The stock certificates were being submitted to First Boston because new stock had to be issued with a new corporate name. Those stock certificates were Permanente Metals Corp. and the name was being changed to Kaiser Aluminum and Chemical Corporation. So that was going on in the 50s among the Kaiser companies and it seemed natural then to change the Permanente Health Plan and hospitals names to Kaiser Foundation Health Plan and Kaiser Foundation Hospitals. It made it clearer about our nonprofit status. At that time the medical groups chose to retain the name Permanente for identification purposes, and to separate them from things Kaiser. Well, why didn’t they take Garfield's name? I think the reason is that there were some real problems inside the medical groups about Dr. Garfield, his control, 71

leadership, and possibly his personal aggrandizement. I'm making all that up, but I really think there was reason to suspect that.

05-00:25:19 Meeker: Well, there was a sense that he was too closely associated with Henry J. Kaiser, so—

05-00:25:23 Wagster: And, not necessarily always concerned about only the interests of the physicians in the medical groups.

05-00:25:32 Meeker: So, back to the HMO Act. In the conversations as best as you can remember, before Kaiser becomes qualified, and folks within Kaiser are seeking to make the adjustments to it that in fact did happen in 1976 and '77—the adjustments to the Act—do you recall what it is that Kaiser Permanente wanted changed in the act, or revised, so that it could be more palatable for Kaiser Permanente to join?

05-00:26:09 Wagster: Yeah, I actually don't remember. They were real. We had a wish list and a must list. All kinds of things were developed, discussed ad nauseam, I mean—

05-00:26:22 Meeker: Who were the key players, then?

05-00:26:23 Wagster: Always Bob Erickson, always Jim Vohs, usually Bruce Sams—from the medical group standpoint—much more so than the guys in Southern California.

05-00:26:38 Meeker: Was Fleming involved?

05-00:26:39 Wagster: Pardon me?

05-00:26:40 Meeker: Was Scott Fleming involved with that?

05-00:26:42 Wagster: Always Scott Fleming, when he was there. (There was a period of time when he was in Washington D. C. I don't remember what years that was, but it was in there somewhere. Scott was Assistant Secretary in the Department of Health, Education, and Welfare.). Always Karl Steil. From the executive management standpoint, the key leaders would have been Steil and Vohs, without question. We had this Legislative Committee made up of both Kaiser and Permanente executives. The Medical Directors from NCR, SCR, and some of the other regions. Regional Managers from several regions, too. There would be other key people from Central Office staff. Jerry Phelan was a very important thought leader and designer of policy positions at that time. He is an extremely amusing guy, witty. Walt Palmer, our CFO, in my recollection, would have been involved, but not one 72

of the designers of policy positions. Walt used to characterize himself as a numbers person, and not a word person, so he wasn't always trying to help design things

05-00:28:00 Meeker: Well, then once Kaiser Permanente does become qualified in October of 1977, and you mentioned this desire, one to both integrate as an HMO, but also, two, to differentiate from all the other organizations that are different from Kaiser Permanente, yet also HMOs. Did you play a role in the process of seeking to differentiate, which would have—

05-00:28:25 Wagster: Yeah, that was one of the major activities during that whole period of time, to establish ourselves as national organization, to identify ourselves as one organization. Expansion regions in areas of the country that we'd not been in before. We tried to get people to understand what our program (I always use the word "program," I've never called it anything else.) was, what it stood for. But we were never able to come up with a marketing zinger that stuck on the wall and that people were all satisfied with it. In my opinion, and my way of expressing it was, the best we could ever do was describe our organization and its value to someone in a paragraph. Very seldom in marketing is a potential customer, or someone interested in you ever going to stand still or even still be listening at the end of a paragraph, rather than a sound bite. We never came up with the sound bites that did the job for us. The closest we got to it was the name Kaiser Permanente. Terrible for marketing. Permanente in most people’s minds stands for nothing, and Kaiser stood for industrial companies, and for a long time for failure to make cars and sell them. It was just really unfortunate that we never got to, in my opinion, a succinct, marketable way of describing ourselves. Having said that, I think we did a very good job of promoting our service mark, Kaiser Permanente and the Community of People. I'm one of the few people who call it that. That's what it was originally called

05-00:30:36 Meeker: Sure. What is it—what do other folks call it?

05-00:30:39 Wagster: Just the service mark, or the logo.

05-00:30:42 Meeker: I've heard it described as the Kaiser Family?

05-00:30:44 Wagster: The prior logo was the Kaiser Family. And that was an outline of a man and a woman, a child holding hands with them, and the woman had a baby in her arms. It was a silhouette called the Kaiser Family. As our program developed and we began seeking a national identity, one of the things that was breaking down at that time in our lives, in society, was the nuclear family. The nuclear family was becoming less and less representative of us as a nation, as a society. There's a great deal of criticism about that. There are also— 73

05-00:31:29 Meeker: Criticism about the dissolution of the nuclear family, or—?

05-00:31:33 Wagster: No, no. Criticism about the logo as representing KP, because it, the nuclear family is not the ideal anymore. We were successfully promoting our program with customers, but the majority weren’t nuclear families anymore. They were single parents, and all kinds of relationships but nuclear families were in the minority. In fact, one of the, to me most amusing lines describing those days came from the book Megatrends. The author was Yankovitch, or—

05-00:32:06 Meeker: Was that Alvin Toffler, or no?

05-00:32:08 Wagster: No, no. I don't think so. At any rate, whoever it was [John Naisbitt]. That had a big impact, Megatrends. And one of his lines in that was, "In the '60s, the only people who wanted to get married were Catholic priests." I always thought that was an extremely amusing line, and very memorable. But the family was getting fragmented and the whole concept of family was changing, The point that people were being critical about is that why would we want to take an archaic symbol and use that for the future? I mean, that's not sensible. It was at that same time that Carl Berner, on his own with Frank Murray, created the Southern California guy with his hands up, like a guy being held up by an unseen burglar. The logo was in green. They had done that in spite of the fact that a logo existed, and that nobody had approved the creation of a new one. I'm talking about the Kaiser Permanente Committee, Vohs, or any kind of other approval process. Further, nobody approved their SCR logo after the fact despite Carl and Frank urging the Kaiser Permanente committee to adopt it as a national logo. So all of a sudden they were promoting that as what we should adopt. That was one of the reasons that we hired a consultant, and got into all of this stuff about creating a single logo as a new national identity. I don't know what got me off on this. We were talking about the—

05-00:33:35 Meeker: Well, HMO.

05-00:33:36 Wagster: HMO. At—

05-00:33:38 Meeker: Differentiating—

05-00:33:38 Wagster: But we needed to differentiate ourselves, and we needed to find a way to represent ourselves succinctly to the general public. We never succeeded in doing that with a slogan or a few words. To some degree, we did good with a new logo. At the time, I think we were developing an effective advertising program. I was personally involved, so it's hard for me to brag about the case. But I do think that 74

"Good people, Good medicine" took us to another level of both visibility and self- esteem as an organization. Because we were—

05-00:34:17 Meeker: So that was something you had done when you were—

05-00:34:21 Wagster: In '86, when I went to Central Office.

05-00:34:25 Meeker: And the national accounts and PR work.

05-00:34:26 Wagster: Yes. PR thrust at that time was principally dealing with negativism about HMOs and managed care. Trying to differentiate our program and create a positive image. We were trying to establish ourselves as a national program. All of that, in a sense, came to a head, or, in my opinion, became focused on the advertising campaign. And when J. Walter Thompson came up with this "Good people, Good medicine," it was a hard sell, but it ultimately was acceptable within the organization as okay to do. That's when we developed the rest of the advertising program. One of the, to me, appropriate and in some respects, clever and creative aspects of that ad campaign was using physicians from the different regions. In fact, in that campaign, I don't think any of them were actually identified with particular regions. They might have been. But inside the program, we knew that they were from our regions. So here we had an advertising campaign that actually physically included a representative from a region. And of course, that region—when the national ad came on—would quite proudly point out to a potential customer, or whomever, "That's our guy. That's our 6'8" pediatrician," and so forth.

I don't know whether you saw any of those ads, but that one I thought was beautiful and especially well done. I can't even remember now where he was from. He says, as he's walking in the door, "The first thing I do, when I come in the exam room to see one of my patients, is sit down." And so he's doing that, after he comes in, he sits down. Now he looks eye-to-eye with the little kid sitting on the exam table. It was very effective. Here's a guy who has a good sense to know that he's a giant to this little guy, and yet he's supposed to develop some kind of rapport. So he makes this point, softly speaking, nice voice, and making this move to sit down at the same time. Anyway, I felt the ad campaign had successfully focused attention on being good about something, and saying we're good about something. As opposed to, in the past, never tooting our own horn, really. And at the same time, we threw our arms around all the regions by including some of their physicians in the visual part of the ad campaign. The comments by the different physicians sometimes brought tears to my eyes. I thought, "Gee, that's a great thing for that person to say, and I know it's true. I know they feel that way." So, I was very pleased to represent that ad campaign. And I think it did a lot to help with the, "Who are you guys?" "Good people, Good medicine." Answer: here's a good doctor. Male, female. Black, white. We were able to represent all 75

the diversity within our program, as well as, I think, some of the very attractive physicians we have. So I liked it. I liked what we did.

05-00:38:14 Meeker: This is jumping ahead a little bit, but since we're talking about it, how was it that you moved, then, from Oregon to Central Office? What was the motivation for you? What was the motivation for the people in Central Office who wanted you down there?

05-00:38:35 Wagster: Well, it turns out to simply be a personal thing. I was very happy—Sarah and I, when we moved to the Northwest region, newly married, in '78. Working with Marv Goldberg, and the two Sarahs spending a great deal of time together, as well as a foursome. It was a really great time of life, and things were going really well. When I first went to Northwest, Marv Goldberg said to me, "Dan, you're going to be really happy here. This is a region you can your arms around." Well, he had grown up in Southern California, and I’d been the Regional Manager in Southern California, and we both knew that's an enormous operation. Maybe the world didn't know, but we sure as hell did. The Northwest was manageable. So I was very happy there. I also grew up in Kelso, Washington, just a few miles north of there. When Vohs told me about his intention to promote Barney Rhodes I told him I was very happy to be in the Northwest region, and looked forward to staying there..

05-00:40:02 Meeker: What did Barney Rhodes—what was his position?

05-00:40:05 Wagster: Some time after Vohs became President he brought Dr. Rhodes on as the Executive Vice President of KFH/HP with the Regional Managers reporting to him. It was a COO position, essentially. The same job Jim had had when he reported to Keene.

05-00:40:26 Meeker: So, this put Barney Rhodes, perhaps in a position to succeed?

05-00:40:29 Wagster: Absolutely, except no one thought that was going to happen, including Vohs. Because Rhodes was just half a step from retirement. He was maybe three or four years, five years, away from retirement. The value of Rhodes, earlier I inadvertently left him off the list of Permanente physicians who had worked on the Kaiser side. The value of Rhodes coming on the scene was first of all because he had established himself in the Northern California region by his performance as a manager of medical office in addition to his experience as an executive in the medical groups. He had also been the key manager in the administration of the Oakland hospital. He held the top administrative position at Hayward Medical Center later. So he had the hospital experience behind him, too. So, there's some real credit due Barney. He also was a quiet, pleasant personality. There was every reason to believe that Barney would be a force for good and bring things together, 76

as opposed to being on the prod for higher office, promoting himself, and the other kinds of things that can screw up young and ambitious managers. At any rate, in 1985, I guess, somewhere around there, my daughter Wendy had her son, my grandson, Michael Daniel Guastamachio. I told Vohs that I didn't know when or how, but if anything happened that would get me back to Oakland in a capacity that the program needed performed, please include me in, because I would like to be a factor in the growing up of my grandson, who's in the Bay Area. They lived in Richmond at that time. That was really the prime reason for my transferring later to the Central Office in Oakland. From Vohs' standpoint, he was really struggling to get the ad campaign organized and implemented.

05-00:43:09 Meeker: At what point was the decision made to actually pursue advertising on a—

05-00:43:13 Wagster: It was in the Kaiser Permanente Committee in 1983. There had been agitation for it for several years, in the Kaiser Permanente Committee. The primary source of the agitation was the new regions, who really were struggling with the lack of identity and marketing problems, Mid-Atlantic states being a prime candidate. Secondarily, by Hawaii, who was having real trouble marketing, and they had concluded, Ron Wyatt and Dr. Bill Dung, that they had to advertise in order to get more members. Whether that was true or not, it put pressure on the “no advertising, we grow by word of mouth” policy.

05-00:44:03 Meeker: Well, this is also a period in time that is much different than what was going on in the 1960s in Los Angeles, where you didn't want new members.

05-00:44:11 Wagster: Absolutely. By the way, we never didn't want new members—

05-00:44:15 Meeker: Well, you didn't—you weren't accepting new members.

05-00:44:18 Wagster: We were concerned about the rate of growth and our ability to perform against what was coming our way, and the term "balanced growth" grew in everybody's conversation and mind during those years. The need to "control" growth is a kind of interesting marketing idea. But at any rate, that's what it was—accepting growth consistent with our capacity and ability to grow medical services. Northern California was growing very effectively, getting new facilities in places as needed, and recruiting physicians. Really doing extremely well. Absolutely no need for a ”different thrust" in marketing. We never used the term marketing at that time. I don't think we even used the term "selling." We didn't think of the Health Plan reps as selling physicians' services. In any medical care program, the product is physicians' services. That is what you're selling. But we never thought of it that way, and we never described it that way. By now, I’m talking about the early 80s, the recession of '80, '81 was starting to change things. There were real cutbacks in employees. We were affected by that, as our members were laid off. 77

Some of them we retained, some we didn't. But it affected our growth projections. Moreover, there was a growing restlessness that turned out to almost essentially be a revolt on the part of the employers, buyers. The market in that period of time ultimately became buyer-driven, payer-driven, a situation we'd never encountered before, and the medical industry had never encountered before. So, we had these new regions—

05-00:46:30 Meeker: What was the restiveness about?

05-00:46:34 Wagster: You mean on the part of employers?

05-00:46:35 Meeker: Yeah.

05-00:46:36 Wagster: Cost. Their bottom line. Medical inflation fueled by Medicare and Medicaid, principally, and worsened by general inflation. I think it was at that period of time—wasn't it—that the double-digit interest rates were rampant?

05-00:46:50 Meeker: Well, societal inflation. In the late 70's it was stagflation, and in the early 1980's, it was inflation.

05-00:46:57 Wagster: It was inflation—

05-00:46:58 Meeker: So there was economic growth, but also inflation.

05-00:46:58 Wagster: To the square power. We had inflation and lay-offs at the same time. There were a whole bunch of conditions we'd never encountered before that we had to face at the same time. Government policies weren't working, obviously. Anyway, the employers, payers, with cost strangling them, and no hope in sight, got very aggressive, increasingly aggressive over the years, about shifting cost to employees, taking the unions on in their effort to reduce benefits and therefore company costs. The whole market incurred a structural change. Long since, people had been saying to us, "You really ought to do something about your image, your way of describing yourself," and so on, and so forth. This is also coming back to us from the marketplace, and our new regions, who were having real problems meeting their projections of growth, and so forth. All of that seemed to say, "Look, it's a different world. It's a different market. It's a different time. All these other things are changing, and we need to assure the program's future, It doesn't matter that Northern California and Southern California are doing fine. What matters is we're trying to become a national program, and we have these new regions, and communities with few people who know us. We need to make changes here and now." The Kaiser Permanente Committee was very sharply divided on whether to change the longstanding policy against advertising. 78

Principally, Northern and Southern California were standing fast, Steil was standing fast, Vohs was standing fast. It was a very powerful subgroup all saying, “No”. The younger, aggressive, fledgling regions were almost universally saying, "We need help. It's different. We're in a different situation. We should have advertising as a tool." The only established region that was strongly for it was Hawaii. Secondarily, Marv Goldberg was very strongly for it. I was not, but Marv was. And so he did his own careful way of describing what he thought we should be considering in the Kaiser Permanente Committee meetings for the good of the program.

05-00:49:50 Meeker: Being someone who was not in support of this initially, what was your reason?

05-00:49:58 Wagster: I think I was impressed with my experience in Southern California, where we did very well. We were still doing quite well in the Oregon Region, and I felt the initiatives that we were involved in at that time were paying off. We were in a very aggressive facilities expansion period. New facilities have always produced members for us. Visibility, accessibility, availability. When we open up in a new location, the people around there see us. They see the facilities growing up out of the ground. I mean, it really has always been a very important factor

Vohs and I talked a lot, and had done so forever. He was very helpful to me during my wife Rheacy’s illness and death (1976-77). He was very supportive during a period of time when I was trying to find myself. He was also very sensitive to, and very helpful when he allowed me to swap jobs with Berner, so Sarah and I could start life in another region together in our own house, and so forth. As far as I was concerned Vohs by this time was my best friend in life. We talked a great deal. He also didn't have a lot of people he confided I He had some really, really difficult problems that were going on at that period of time, that had to do with Edgar Kaiser, and finding a place for Henry Kaiser. But I don't need to get into that. The fact is, Vohs had had relationship problems there and was at odds with Edgar. Incidentally, in my opinion Vohs was right. He was getting pressure put on him to do things that I really feel he should have resisted. And he did. I wouldn't have had the courage and the ability to resist in the way that he did.

05-00:52:01 Meeker: You don't want to talk about those?

05-00:52:02 Wagster: No, I don't. But the point is, they were really very important. So we were confidants. Vohs' negative position on advertising was clear to all. There isn't any question I would be influenced by that. Frankly, I usually agreed with things that Jim wanted to do, did do, or resisted, or whatever inside our program, because not only had I learned about our program from him and reported to him all those years, I really felt he was right. Those things, intellectually, and from a standpoint of my own sensitivities and feelings, were right on. Jim, I think, personified the value-laden morality of the program, and the idea that we were a program who 79

did things right, and did the right thing. So, changing to advertising maybe was a crutch on the part of the people who were more needing of help than a real organizational policy-change to advertise. They needed help to perform better. Secondly, and I think probably importantly, I was uninvolved in all those activities. Well, I was at Georgetown when we Kaiserized the place, but not from the standpoint of getting a marketing program going there. So I probably didn't have as much information about the real scene as I should have. It was very easy for me to resist going to an advertising policy. The only thing all of us not in favor of advertising were clear about was that it was going to have to be covered by the dues. Either something else was not going to be done as much, or we were going to affect our bottom line, or we were going to have to push the cost on to the customer. All of the above was unacceptable, as far as I was concerned, if you didn’t need it. If you don't really, really need it—is it worth the cost? Is the value really there? And I guess I hadn't by that time—I'm talking about prior to '83, I hadn't accepted the importance of a unifying and uniform image and presentation of ourselves. I was not for it. I was not a strong opponent, but I didn't need to be. Vohs, Steil, Sams: they were plenty strong in their view. It was a very interesting time in the Kaiser Permanente Committee in terms of the dynamics, because the younger people in the new regions, and so forth, were trying to get something changed while the dinosaurs or whoever in the room were resisting. It was really kind of an interesting period. Anyway, when the committee ultimately said yes to the policy change, I had no problem with the change because I perceived it by that time to be a greater good to unify the program. There were reasons why we ultimately said yes, the things I've been talking about, and also, the issue it had become a divisive thing. It was very important to me that we get the hell out of a divided Committee—we had enough issues—and needed to get on with them. If we could get on with it together, and visibly show we were together, and be represented by one logo, and so forth—so be it. Let's get going. So it was easy to be behind the policy change ultimately.

At any rate, Vohs had that advertising problem. But there was another problem of consequence. We had learned in 1985 from Ford and IBM that they were not going to offer us in the new regions unless we could represent ourselves as a single organization. Our ultimate response was what became called a national accounts program. Vohs was convinced that we had to respond to the problem posed by such big customers. It was going to be a very difficult thing to get the total program involved and moving in the same direction. The issue went right to the fabric that we were struggling with in moving forward to become a national program, i. e., regional autonomy and policies, procedures, and systems that were created in the region for the region. The regions were totally resistant to any outside intervention or any requirement that they conform to some uniform standard. Autonomy had gone from semi-autonomous—as Keene used to describe it—to regional autonomy to the square power in capital letters. It contributed to our problems in expansion as well. The "not invented here" thing was in its heyday. 80

05-00:58:03 Meeker: What do you mean, "not invented here"?

05-00:58:06 Wagster: Any region that was being threatened with a best practice from another region. One of the things that was very difficult about getting best practices accepted inter-regionally, transferred over regional lines, was the resistance of the medical group, as well as, to some extent, regional management. Mostly it was a medical group resistance: "Wait a minute. We didn't invent that here. That’s not what we do here. We're regionally autonomous, and we have these kinds of procedures, and this is what we do." It was as much implicit as it was explicit. But the informal organization was very resistant to any region saying, "This is what you should do." Or someone in the Central Office saying, "They do this in that region. You really should do this, or you must do this." It was never said that way. Regional autonomy really got in our way during the expansion period. The problem was never resolved. Here were medical groups who were totally dependent on capital from the program, because the region was not making any earnings, yet the medical groups were trumpeting their independence, and fiercely defending their right to decide this, that, and the other thing.

05-00:59:38 Meeker: For the sake of independence, not necessarily for the sake of good—

05-00:59:41 Wagster: Yeah. It was a time in our program where it was absolutely contrary to the needs, but it was consistent with the program "concepts." Concepts that had stood us so well through all those years. It was really ironic that regional autonomy was starting to get wrapped around our necks. We never really resolved these issues while I was still working.

05-01:00:04 Meeker: From your perspective, as somebody who worked directly in at least four regions—and I'm counting the DC region as part of that—how is it that it moved from what Keene talked about as semi-autonomous to your experience of fierce autonomy?

05-01:00:30 Wagster: First of all, I think it's a natural evolution. If you have a group of people, and you're saying, "These two guys are partners," and you're saying that money doesn't transfer over lines, so they've got to be self-sustaining, that naturally leads, I think, to more and more—as you accept the responsibility to more and more feeling of empowerment and the desire to at least control what's yours. I think that's inevitable. That is in fact what happened. Another aspect of it is as the organization grew in prominence, and so on, and so forth, I really think there was a kind of a circling of the wagons in the regions against, or making sure that you protect what you earned, and what your plans were, and so forth—against some Central Office, or somebody else putting requirements on you. The Health Plan/Hospitals Board putting requirements on you that you shouldn't have to endure. You've got problems enough. You've got your own plan, so on and so 81

forth. I just think that's a natural development, unless there was some limits, or clear lines—policy positions—that said, "You can't do that. It's okay to be semi- autonomous, but this is what you can't do, and this is what you can do." Then hold you to it. No one had the power to do that, and no one did it. When the Kaiser Permanente Committee came into being, it grew and grew in influence, and one of the things that came out of the committee, which was part of why we had the committee.

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[Begin Audio File 6 wagster_dan6_05-11-2007.mp3]

06-00:00:07 Meeker: [material deleted]

You know, there were a few things I wanted to follow up on. Maybe we should do that now, and so then we can sort of get back on the historical track, if you will. This period of the early 1980s and the changing economic situation, which is also right upon the heels of the expansion of the HMO act, and thus the expansion of competition amongst organizations that describe themselves as an HMO, seems to me a critical turning point. It's also the period in which the organization is expanding, and it's also the period in which there is an acknowledgment of a need, for instance, of public relations and advertising, maybe also the beginning of a generational divide, like you said, and this question about regional autonomy. So, one of the key points is this period of change. So, the economic base of this—and I know that we've tried to get at this question before, but particularly in this period of time—and we talk about medical inflation—I'm wondering how it was that the prepaid group practice model was designed in part—or it was presumed that it could—to insulate Kaiser Permanente medical costs from overall medical inflation? Because it seems like it wasn't necessarily capable of doing that.

06-00:02:02 Wagster: I think that's right.

06-00:02:04 Meeker: Is it maybe a deficiency in the model? Is the model simply not capable of doing that, or is there something perhaps in the organization that didn't allow that model to act as a bulwark against inflation?

06-00:02:30 Wagster: Well, of course I don't think I can shed much meaningful light on the real answer to that. I can only respond with some impressions. One is the economic advantages we had because of in less hospital days was a major component and it eroded over time. Nothing of that power—that kind of leverage—replaced it. Nothing came along that was as important, and went as certainly to the bottom line. The second thing I would say, in trying to understand what happened to us is the market structurally changed. At the same time competition was entering into the market with all the various forms of things, some of which are very seductive, 82

many of which were loss leader type approaches for organizations to get into the industry. It was also at a time, and I'm talking about the market, when there was a surplus of hospital beds, and a surplus of physicians. It was also at a time when the government with the Medicare program had really fueled medical inflation and was now trying to take actions that would force people to provide less care that Medicare had to pay for. I can't even think of the term now that they invented, having to do with hospital episodes. Whatever the term was, with a certain disease, or a certain medical condition, you had a maximum number of days Medicare would pay for. Longer stays meant cost to the hospital but no revenue. That was a device to lessen hospital day usage by anybody and everybody and less total days paid for by Medicare. All those things were forcing, inexorably, the community providers to conform to providing less, and it often meant matching whatever we were doing. At first very few of them could match us. On the other hand, community hospitals were getting closer and closer. Probably another factor, although I don't have the information to back this up, but probably we were spending a great deal of money in capital requirements, facilities and equipment needs as we perceived them to serve out members that had to be paid for back to lenders and therefore had to be included in our dues. At a time when certificates of need for facilities and equipment and all those things were going on, the community really had a surplus of beds. The community really was retrenching. So we were going on with our facilities program while community hospitals were not spending capital. Now, I may not be right about that. This is an impression, not anything I have facts and figures on. But I think it was a contributor.

06-00:06:24 Meeker: What about new medical technologies?

06-00:06:28 Wagster: Well, they were coming on like gangbusters. Our program has always been resistant to leading-edge stuff On the other hand, everyone at all times was sensitive to not depriving people, including the physicians' capabilities, of needed and appropriate medical service. Some of these things were so powerful and so right, I mean, they gave physicians stuff they'd never had before. MRI, and CAT scan, or, CAT scan first, I guess, then MRI. Very hard to argue that you don't really need that. The real issue for us was, okay, what types of reasons, procedures, and diseases would we do that for, as opposed to: "Oh, you've got a cold? Well, let's see if you've got anything else going on, and give you a CAT scan to check out your body." We had to accept a level of increase in our expenditures for things that had to do with medical technology. We didn't do that reluctantly. We just tried to do that under control. But that was an added element. I don't know what the value of this would be—that is, the magnitude of this would be—but it also was at a time when the physicians were starting to take control over diagnostic equipment, away from hospitals. Doctors were buying their own CAT scans and MRI's. Revenue from diagnostic procedures, especially the more exotic and the more costly, were being lost to the hospitals. Those revenues were being used to pay for equipment or provide profit to physicians in the outpatient setting. So there was a change in the— 83

06-00:08:48 Meeker: And that's outside of the Permanente system.

06-00:08:51 Wagster: Yeah. In the community at large. There was a change in who got paid for what. Hospitals lost the revenue. However, hospitals also weren't buying that equipment, so they weren't putting out capital for it. The whole dynamic of cost and capital in the community was really changing. I really don’t have enough information, and I don't have a good recollection of how important that is to our subject, but it's a factor. It all played into the same complex scene.

06-00:09:30 Meeker: Well, subsequent interviews will be with people who were more directly involved in this sort of stuff, but this helps me to begin to craft some questions for those folks. You know, the thing about—it sounds like the fee-for-service practice, or the new HMOs being forced to be more cost-aware around, for instance, the number of days one spends in the hospital for a regular procedure, or something like that—being limited vis-à-vis Medicare regulations—that seems to me an argument during this period of time not for medical inflation, but for some cost control of medical expenses.

06-00:10:12 Wagster: Yes. Well, that was what the government was trying to do, absolutely.

06-00:10:14 Meeker: But that didn't happen. I mean, medicine continues to be a larger part of the GNP, and even during that period of time, when these controls were first implemented. Do you have a sense about how it was that that happened?

06-00:10:31 Wagster: Well, I guess—first of all, that's a bigger question than I have a mind for. But our national health policy has always been schizophrenic. Policy makers have never had any problem with the importance of trying rein in this rampant increase in the use of new technology, the use of services, and et cetera, et cetera. As individuals, any one of those policymakers, virtually without exception, if it was their loved one who needed something, would not only authorize it but demand more services for the person they cared about. This, to me, has always been the way to represent this schizophrenia in the medical non system, i. e., the inability to think clearly about health policy in the United States when the situation is personal and/or involves a loved one. It's almost like the flip side of: "We really need a whole bunch of those things, but not in my backyard." It's the same kind of thing, but it's, "Here's a policy, and it's a sound one. Oh, but by the way, I don't want it to apply to me, and to the people whom I care for." So there's an underlying feeling about the right to get medical care. There is pressure to do more because medicine has always been represented in our country as curing things. I was part of the Southern California team that Vohs sent to London to learn about hospice, and I learned about it from Dr. Cecily Saunders, the founder of the hospice movement. In my interview with her, I asked her, "How would you define 'hospice' in a few words?" She said, "We like to say, when curing ends, caring begins." Well, that's 84

a very powerful idea. But our whole medical profession is dedicated 100 percent to curing. If caring goes along with it, that's great. It isn't as if it's curing without caring. That isn't what I mean. But curing is what they are obliged to do. Someone was just telling me the other day about one of their, I think their father, he was in his 90's, had some real problems, ended up with a lung being taken out. Extremely difficult operation. He died within six weeks. It was just recently my friend was talking about this. I was faced with a similar problem with the Mohrs, the couple I lived with to finish up high school in Kelso. They broke their hips within three weeks of each other. Mom Mohr was a frail little person. My buddy Bob Blackstone's brother was the orthopedic surgeon, and he said, "She will not be able to walk again if we don't pin the hip, but her bones are fragile. I'm not sure it will work." What did I do? I said, "Let's try it." She never did walk again. In spite of the pin, a short time later while struggling to her feet, everything came apart, and she spent the rest of her days, which was about a year, laying in the bed. Well, what a terrible decision for me to have made. On the other hand, I couldn't make any other decision about this lovely person. So—

06-00:14:32 Meeker: Because cost has been removed from the equation?

06-00:14:35 Wagster: Absolutely. Love takes place of any rational decision about cost. In fact I was not going to be paying the dollars for her situation at all. I don't think that there's any question that cost does not enter into decision makers’ thinking about their loved ones. There is no direct connection between decisions, emotional packed situations, and cost. The irony of fee-for-service and indemnity still being the major financing mechanism in the United States is that that more service means more money to the physician and hospital. When we took our program to Kelso- Longview, one of the reasons we did that, I wanted to do that, was because of a visit out of the blue by an executive of the Longview Fibre Company. His essential message was, "We really need you guys to come to town. We've got a doctor in town who charges our insurance plan $25,000 for a person to die," which is a really interesting way to phrase the problem. That was his business point of view, that as soon as a really seriously ill person got into the hands of this physician, the patients were going to get medical procedures, hospitalizations, and other kinds of things done which on average was costing the company’s insurance plan $25,000 before they died. Maybe the patient lived a little bit longer, but they died despite the costly heroics. The Fibre executive felt our presence would make that very difficult for community physicians to continue to behave that way, even if it didn't cure that problem. If the members were on our plan, it wouldn't happen unless it was medically necessary. The quality of life would be factored in and revenue enhancement taken out. Everybody who got into our plan, that would be one less $25,000 candidate for the community physician.

06-00:16:33 Meeker: But is it not also possible that it will still cost $25,000 for someone to die in the plan? It's just the cost will be displaced to the Kaiser Permanente program away from the healthcare provider—or, away from the employer? 85

06-00:16:58 Wagster: Yeah, it's possible. Some amount of that cost, without question. And, obviously, if they're Medicare, the government has to pick it up. Could our physicians perform in some way that the community physicians wouldn't? I think there would be less pressure from a physician who felt—in our system—that some procedures would be affecting the quality of life in the last days of people who had whatever the conditions were. My father was given a heart valve, inserted in him, when he was in his 80's. I called the physician when I learned of this, because I knew him. I was no longer in the Northwest region when that happened. I said, "Why—my dad's 80-some years old? How can you make the decision to operate on him?" Because this hadn't happened yet. He said, "Well, one of the things we do is test the strength of the heart. And your dad—despite his chronological age—has the heart power—pumping ability—of a 40-year-old. So, from our standpoint, it's a very appropriate thing to get this new valve, for his heart to keep functioning. Well, I don't know what criteria would have been for a community physician. I have no idea. But I accepted that as a very sensible way to go about an open-heart surgery—but anyway, a surgery as serious as inserting a pig valve. So I'm not trying to make the case that our physicians would say, "Okay This person's going to die, and that the end of it. Don’t worry about it." I don't mean that at all. I just think the pressures to do the right thing for the patient do not include an economic factor, and/or other physicians are going to be asking the guy, "Why are you doing this?' And I'm not sure that ever happens—I don't think anybody asked Dr. Blackstone why he did that. But in our program, I would feel that there would be some level of certainty that somebody would be questioning hip pinning for a ninety-year-old woman, very frail, who has already broken her hip, probably because the bone broke and then she fell, as opposed to falling and breaking the hip. Because I understand some high percentage of broken hips are of that nature for frail people. Anyway, I'm not answering your question very well, because I think I probably am exceeding my knowledge here, with my mouth.

06-00:20:04 Meeker: Well, I don't know if that's the case or not, but it's a useful observation, and it's an observation that I've heard from many people who are probably very qualified to make that observation.

06-00:20:17 Wagster: That's reassuring.

06-00:20:21 Meeker: Back to this question about autonomy—this is, I believe, what we were talking about when the tape stopped. It was interesting. The way in which you were telling this story, which is the new regions, as well as some of the established regions—particularly based on the Clifford Keene observation that it had moved from a semi-autonomous to a vigorously autonomous sensibility—

06-00:20:52 Wagster: Keene never said it's now vigorously autonomous. 86

06-00:20:54 Meeker: Well, Okay. What did he say?

06-00:20:57 Wagster: He just stopped using the word "semi." By this time, Vohs was really running the organization, and Vohs didn't argue about autonomy. However, Vohs was a real threat, particularly to the Medical Directors, because he was a competent, strong, and well-organized executive, and all of their partners reported to him. Virtually without exception, he lined up on the right side of issues, and became a formidable, I'm going to use the word opponent, from the medical groups’ point of view. Especially concerning things the physicians might be interested in controlling. So all of a sudden, there was somebody in the Central Office, never Keene. who knew what our program was all about, believed strongly in partnership, and had excellent leadership ability. It gave rise to concern among Medical Directors: "Here comes the Central Office, telling us what to do. Vohs, he's going to develop a staff. He's going to get managers in there, and we might end up fighting to avoid being subordinate to the Central Office." Whether that was true or not, and whether there was evidence or not, that's what they in my view the physician leaders thought they were facing, I think it created more and more resistance on their part to intervention, as opposed to guidance and support and so forth, from the Central Office. Stronger, clearer, more absolute regional autonomy would maintain the status quo.

06-00:23:13 Meeker: Well, you may have just answered this question, but—if we're looking at this late 70s, early 80s, mid 80s period of time in which you're describing some sort of change that happens of a relationship between the regions and the Health Plan Central Office—

06-00:23:32 Wagster: I'm describing a change that I think the regions feared that something Vohs never did and he didn't represent.

06-00:23:41 Meeker: Okay, the question I was going to ask, then, had been, if there was some sort of change, was the change powered by increasing independence of the medical groups and the regions, or maybe also an increasing desire manifest through regulations and so forth of the Central Office to maintain more control over the medical groups and the regions—of both.

06-00:241:4 Wagster: Yeah. Everything except "control over," I would agree with.

06-00:24:20 Meeker: What would you say, then?

06-00:24:23 Wagster: The outside requirements, market, government, were all better served, and our needs and our program were better served by responding to them in some 87

centralized, uniform fashion rather than regional adaptations or responses. As a generalization, I really believe that to be true.

06-00:24:53 Meeker: But I imagine a lot of the Medical Directors would disagree with that.

06-00:24:57 Wagster: They would not only disagree with it, they wouldn't do it. At the simplest level, I guess I can say "at the simplest level," certainly at a basic level, in order to have a national accounts program and effectively present ourselves as one organization with one person in KP dealing with a single person in the customer's organization. Hopefully the company rep higher up in the ranks, so they could actually talk about what's going to go on in the future in the customer’s organization and suggest ways KFHP could be more responsive. That kind of stuff. At the mundane level, for instance, that might require one bill from us for all of the locations a national company had employees, which could involve several regions. Creating a single bill turned out to be almost impossible for us to put together.

06-00:26:04 Meeker: This is the national accounts work, yes?

06-00:26:08 Wagster: The membership accounting people had enormously difficult problems, practical problems, in accepting a centralized billing system. You have all kinds of operational function s tied to each region’s billing system. Over the years regional functions, and procedures, and activities, had been built into the region’s billing system. They're integrated. The billing systems understandably were not the same in any two regions. When you change something, or if you impose a change because one region such as Southern California's system does it well, then other regions would have to change a whole bunch of things in order to get the detail information they need for their operations. So, the Medical Directors, and to some extent the Regional Managers, would say, "We don't want to spend our money that way. We don’t have the money to spend for that," or, "That's not going to make it better for us to deliver medical care." They would be very resistant to a change even if it seemed invisible and should have been something they would be indifferent to. Then there would be the bugaboo of regional autonomy. The Central Office requiring something, and raising the specter of the marketplace, when really the region’s leaders fight feel they can resolve the situation with a different adjustment or response. So, again, the problem of getting the physicians closer to the marketplace was part of this difficulty. Regional autonomy was part of the difficulty, and the specter of control and who decides, governance, was a very important part of the problem.

06-00:28:18 Meeker: You just brought up the question of getting the physicians close to the marketplace, and I know that we had a conversation about that— 88

06-00:28:25 Wagster: That phrase, by the way, was introduced to my thinking by Alain Enthoven. We were in a meeting, and he was in the Northwest. Alain was a very fine consultant and a very great thinker—I mean, a really sound guy.

06-00:28:41 Meeker: He's still around, right?

06-00:28:43 Wagster: Could be. I haven't seen him in years. At any rate, we were in Portland, and I was talking about some kind of problem, and that's when he first used that phrase. I think he might have even put it in a note to me, but it was the first time that anybody had ever used the phrase, and I thought, "He's right on."

06-00:29:01 Meeker: You explained what you meant before we actually started recording today. So I'm wondering if you wouldn't mind actually going over that again, because I think it's a really important point.

06-00:29:10 Wagster: Well, in a group practice prepayment plan, the patients come from the Health Plan's success in contracting contract with employers and union groups' trust funds and individuals. The physicians have nothing to do to attract new patients into the offices—with the physician. The patients, also, are not referrals from another community physician. There is absolutely no linkage with the physician's behavior and activities and a person when he/she joins the program as a Health Plan member. Secondly, the cost of the Health Plan dues for groups and individuals is determined by a very complex set of procedures, budgeting process, and input from a variety of places. It's not only hard to visualize, it's totally unseen by the individual physicians in the medical groups. Physicians in the program like that, because it’s all part of the combination of group practice and the advantages of the power of the Program concepts. The physician is where he wants to be in the medical delivery system, making decisions about appropriate, necessary medical care. He's not trying to be a businessman. He's not diverting his attention, and better yet, he's not indulging in things he's really never been trained to do, and all the attendant problems. So the individual physician's relationship to and involvement in the process of rate making is zero. None. The individual physician's relationship to the process of getting new patients is none.

Kind of a worst case—for example, is when a region is growing 10 percent a year despite not being open to new groups. A mentality develops among physicians which is very, very hard to deal with. I'm not accusing anybody of it, but you can see what a natural consequence of a situation like that would be: "More members than I can handle. More work than I should be having to do and be safe with my medical practice." That would become the concern of individual physicians. That being so, why wouldn’t a caring doctor think: "If this member has a problem with that, and doesn't like what I do, they can leave the Health Plan. There are going to 89 be plenty of other people ready to stand in their place." So the medical group physicians are not only insulated from the market in terms of getting patients, they have no role in the process at all. Worse yet in our group practices keeping the patients wasn't linked directly to physicians’ income. No way. I mean, fee-for- service, my God, what could be more obvious? If you refer a patient in the community, as a community physician, to someone else, there's always the risk you'll never get the patient back. There's a whole complex process that has to go on to make sure that the doctor you're referring people to will, in fact, not send your patient to their buddy for follow-on care or whatever. I mean, that's an invisible part, but a very important part, of what goes on in the referral business, consulting business, so forth, in the community. Moreover, physicians in our program don’t feel it directly in their pocketbooks if they alienate a patient. If they don’t get that patient coming back to them again, another Health Plan member comes in the office door. Now, I don't want to be unfair to the physicians. I don't really believe that a physician changes his professional attitudes because he joins our program. I really don't think he loses his professional integrity, any of those things. He really wants to do well by the patient. He really wants the patient to thrive under his care, and so forth. But the fact is, there's no linkage one-on-one, a fee, a patient, a service, et cetera.

Then the final point, or at least an added point and very important, is what difference does it make for a physician as a member of a group if his time is spent doing the right thing for patients instead of seeing a whole bunch of patients in what he feels is not really the best medicine he can practice. So what if he sees ten people instead of thirty in a given period. Well, without making a judgment about whether the ten are going to get better health outcomes, or the thirty are at risk in a way they shouldn't be, without getting into that at all, the real issue is what should a group practice prepayment plan do about individual physician productivity? The Medical Groups may have done a lot of things. And it may have been a lot more effective than I ever perceived it to be. But the most important thing is, it isn't necessarily going to cause anything to change if they do nothing. I'm not saying they didn't do anything. That is not my point. But the point is none of these things I've been talking about link the physician to the market, link a member to his pay, or ultimately, his retirement pay. None of those things. So the problem, then, is how do you get the physicians to do the best thing they can do professionally because they want to, and be mindful of their critical role in keeping the money flowing into the organization? It becomes a way of life, and it works. When you have market changes, in my opinion, the medical group mentality, and/or their culture, moves very slowly in reacting to those changes because individual physicians are insulated from them. The market may be moving quite rapidly. However, it's very hard to find ways, again, I come back to the same phrase, because it's useful to me, to find ways to link the physician to the marketplace meaningfully and avoid physician behavior change which would be at the expense of the member patient needs. Is that helpful? 90

06-00:36:11 Meeker: Um, yes. I'm not sure that I personally got every element of it, but I'll be able to reflect upon it when I see the transcript of it. I know that one of the things we did talk about a little bit before had put it in terms that I understood intuitively—or intellectually, perhaps—was the question about physician compensation, and how that did and did not relate to the marketplace in which other physicians work, and I'm wondering if you can explain that in those terms.

06-00:36:52 Wagster: Yeah. The program had a structural, I think it's proper to say, incongruence with the community. I won't say it was a flaw, but it was a costly difference in two respects: (1) the medical group decides what the physician is going to get paid. The medical group is a political organization, and it also has a history. So the distribution of income to the different specialties over time in any of the medical groups did not necessarily parallel the distribution of income, or the average income, so forth, of physicians in the community. Now, obviously you can't recruit physicians without compensating them on average at least as well as they can do on the outside, in the community. But having said that, wrong with paying them more? There was a time when some outside influence required a justification, somehow, in the distribution of community physicians’ income, relationship between invasive physicians (it seems to me it was a government initiative) and noninvasive specialties. As a result, in comparison, our medical groups were out of whack with what was going on in the community at that time. A second thing, and more important, probably, in terms of long-term program competitive viability: there was a, probably commercial-related, not community medicine related, factor, policy, position that grew in the medical groups. It grew first in the established regions, and was applied in the expansion regions as they occurred. It was this: over time, physicians were paid more income.. Longevity was a factor in your compensation. I've already talked a little bit about productivity. I was never really clear how productivity factored into physician compensation decisions. It was worrisome to me. This longevity increase, though, was a matter of fact. If a physician stayed with the plan, you got increases regularly over time. As you aged as a person and as a physician, your income increased, despite the fact that with our competitors, the physicians in the communities, every report essentially said the same thing: their annual income goes up until they get somewhere in their fifties, and somewhere after fifty-five, it starts down, because they spend less time in the office. They get less fees, because they provide less services. By the time they retire from practice, their incomes are significantly less than they were at their peak earning power. All the while, within our program, the medical groups' earning power, or, I should say, compensation to individual physicians, continued on an upward plane each year. The net effect is as the medical groups age, literally age, the physicians get more compensation, or at least the same annual compensation, if they aren't getting more. This despite a community pattern which is a very different and lower number for other doctors as they near retirement. The final point is at the time they retire, probably the community physician does not have any annual income from his practice. He may have income from his investments, savings, or the sale of his practice. The 91

Permanente physician has income, peak earning of his career, right before he retires. He has a retirement salary based on that paid to him every month forever. That has to be provided for in KFH/HP reserves, and the amount of the reserves actuarially justified so that KFH/HP has the total sum of money needed in order to meet the Health Plan's commitment to pas the physicians’ retirement. The fact is that the pattern of physicians’ earning and the payment of retirement on peak salaries makes the program over time simply less competitive in comparison with community physicians.. Period. No question about that, and in my opinion it’s something that can't be changed, and won't be fixed.

06-00:42:47 Meeker: So, also, as we're thinking about this early 1980s period, when the cost/provision of care ratio begins to become much more similar to what's happening outside of the Permanente program. That might have something to do with the fact that the first generation of Permanente physicians from the 50s and 60s are beginning to retire at about that point in time, or get to the older age where the earnings in conventional practice will begin to decline, but their earnings are reaching their peak at the time that their contributions to seeing patients is beginning to decline.

06-00:43:33 Wagster: Yeah, my feeling is that's true. I have no facts to support that, and I've got to say I don't know how big of a factor it is. There are, however, at the same time, things going on, economies of scale, because the program is getting larger. For example, pharmaceuticals: the program is getting larger, and we're able to buy things and negotiate prices with outside vendors. The economies of scale are very meaningful, versus the outside community. There are a whole bunch of things that the program can do and does do from the standpoint of economies of scale. There are things going on internally that are helpful and positive. At the same time that there are structural elements that may very well have been significant. But I have no information, and no study that I can remember, that says, "Here. Let me count the ways. Here's the amount of money that I think we're talking about."

06-00:44:38 Meeker: Well, these are the kind of ideas that maybe quantitative-based scholars will be able to pick up on at some point and test. You did mention pharmaceuticals just in passing, and there was an article, I believe published in 1970, written by Phelan and Fleming, and another name I can't recall.

06-00:44:59 Wagster: Well, it could have been Julian Weis. He was the pharmacy head in Northern California. I don't know what the article was.

06-00:45:03 Meeker: It was just an overview on prepaid group practice. One of the things that was mentioned in there that I hadn't previously known—one of the points was about comprehensiveness of care in the context of Kaiser Permanente, particularly prepaid group practice. And I had known that the coverage—except in Northwest, 92

there was no dental coverage, and the coverage of psychiatric services was very minimal.

06-00:45:36 Wagster: In Southern California, it was okay.

06-00:45:37 Meeker: It was okay in Southern California because of some negotiation, right? With a union?

06-00:45:43 Wagster: Joe De Silva, the head of the Retail Clerks' union. Interestingly enough, his concern came about because his daughter had real problems, emotional, mental problems. That was his personal motivation to get into prepaid mental health as a benefit for his union members. He negotiated to get employers' money into the picture making it available for us to provide psychiatric care for the employees who were our members.

06-00:46:10 Meeker: Interesting. Well, the third point was that apparently, circa 1970, there wasn't coverage for outpatient pharmaceuticals. Obviously, that's something that has come online since then.

06-00:46:24 Wagster: At some time, and I don't remember the year, although I had made some notes about things at one point in time that had to do with “firsts” in the Kaiser program, and I don't think I have a year associated with them. But at some point, prior to 1963, Northern California, almost certainly in response to a union request, developed a prepaid drug program. Art Weissman would have been the key to that happening, because he was the medical economist who dealt with the questions like, "Wait a minute. If you're going to give away these drugs, what the hell should we be charging for that?" Art was the architect of prepaid. Northern California had several years of experience with their prepaid drug program before the Southern California region was willing to adopt it. I don't remember at what point Portland came online but the Northwest was next and finally Hawaii. As expansion regions came along, prepaid drug benefits were offered as a matter of course.

06-00:47:24 Meeker: But the general financial model for this, then, would have been an additional cost to the employer to provide this new—

06-00:47:34 Wagster: Yes. There was a prepaid monthly rate charged. You can have these benefits. If you want prepaid drug, it's X, and it goes into the total Health Plan package.

06-00:47:44 Meeker: But this is also something, then, that contributes to the inflation of medical costs in the Kaiser system, to the members and employees? 93

06-00:47:56 Wagster: I guess you could say yes to that. But, here again, I don't know how you know what you know. With a prepaid drug program, there is greater likelihood of patient compliance. With patient compliance to what's prescribed, there's greater likelihood of less intense or acute episodes of ill health. So somewhere in there, it may be that the prepaid drug program not only paid for itself but saved cost inside the medical care delivery system. Don't know the answer to that.

06-00:48:35 Meeker: That question—in essence, about the health efficacy of prepaid group practice has of course been a big concern of medical researchers, particularly in the division of research in Oakland. But it seems like it's an immensely difficult—and perhaps impossible—question to ultimately answer.

06-00:49:04 Wagster: I think it is. Some of it you would take on faith—

06-00:49:08 Meeker: Well, you have to. But in the era—particularly now, in which we're moving toward evidence-based medicine, and a critique of the art of medicine, and a critique of—certainly—the role of faith in medicine, or faith in business models, for that matter. That presumption—which is one of the founding presumptions of the logic of prepaid group practice—comes under greater scrutiny. And it's something we like to believe, but is it in fact something that is worth believing in? It reminds me of when I was looking at—I interviewed Morris Collen, and other people who were involved in the multiphasic exam, and the idea is that the more exams you give people on a regular basis, you're going to get earlier detection, which will mean greater health, but studies have proven that with very few exceptions—around diabetes, sigmoidoscopy exam, and a couple other things— most of the stuff that they were doing had no impact whatsoever on prevention— and again, this was the question about prevention vs. early detection. But logically, those exams should have had a big effect, but research has not been able to prove that. I don't think research has really authoritatively been able to prove it doesn't have an effect, either. But medical research in this way is a notoriously difficult thing to do.

06-00:50:53 Wagster: I'm reminded of personal experience, which I won't try to put on the scales as if it has a lot of weight, but I did learn to my surprise there's a marketing aspect to multiphasic. In my own home, at least. When I was transferred from Southern California to Northern California, in whatever year that was, '68, I think, our family had been having a very successful time in La Cañada, California. One evening I came home and said, "Rheacy, they want me to go to Northern California. I'm really concerned about it. I want to know whether it's going to be all right for you and for our family." And she said, "Well, I liked living in the Bay Area. At least now, I can get a physical." What she meant was a multiphasic physical exam. Our personal physician in SCR was a guy named Dr. Chuck Stein, who was a brilliant internist, He had given us a routine physical exam every year. 94

It was very interesting to me that that a multiphasic exam was the first thing that popped into my wife’s mind. She equated that multiphasic, obviously, with better medicine. And I never had any evidence of the marketing value of multiphasics, and so on, and so forth. But I really would suggest that there is a marketing value. There is a personal confidence issue associated with multiphasic exams, that, if you are kind of into modern times, you might feel more comfortable about the organization and/or the care you're getting, vs. going to the doctor and he thumps you and puts the stethoscope on you.

06-00:52:55 Meeker: Well, one of the things about the multiphasic as well was that it became—it was certainly an expense, but it appeared to be cost effective, particularly because physicians were not necessarily the ones conducting the exams.

06-00:53:11 Wagster: Right.

06-00:53:12 Meeker: Physician extenders, nurse practitioners, and so forth.

06-00:53:12 Wagster: Right. Yeah, it was a way to harness economies of scale, and specialization of function, and technical advances, to organize them in a more efficient manner, and not only saved the time of the physician, and so on, and so forth, but very possibly produced an accurate result, more uniformity, because you were having specially trained people doing these various things. All of it thought through in advance, as to how you could do it best. Some people really worked at that. I don't know that any doctor has a lot of training in how to best give a physical. I mean, maybe they do, but I think that's very informal, at best.

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[Begin Audio File 7 wagster_dan7_05-11-2007.mp3]

07-00:00:43 Meeker: So, we did talk about some of your personal reasons for wanted to leave Los Angeles and move to Oregon in 1978?

07-00:00:58 Wagster: And from Oregon going to the Central Office.

07-00:01:02 Meeker: Yeah, in 1986. Were you ever concerned by moving from Los Angeles—which is one of the two largest regions—to move to a smaller region. Were there any career concerns about that?

07-00:01:18 Wagster: Yeah. The most important of which at the time was the question of whether I should resign as a Director. Which I asked Vohs. And he said, "Of course not." That made me feel very good. But I felt that was not necessarily a good objective 95

decision. I also didn't feel like as a board member I was ever an important thought leader, or policymaker at that level and in that setting. I really evolved into a role that I was very comfortable with, which was making sure that I did everything I could to interpret issues and situations for the board's understanding of what was good for our program. In other words, what was expected and needed as far as the operation of the program was concerned. So I really felt I performed a function of serving almost as an interface between the operations of the program and the people who had the responsibility for policymaking. Having said that, I think our top management team, Vohs and other people in Central Office, had much more to do with policymaking at the board level than some members of the board. I don't know how that evolved later under Dave Lawrence. I haven't any idea. Under Jim Vohs' leadership, I really felt the executive management input was critical and more important to the outcomes of policies and strategic positions than input or dialogue that came from the members of the board. I probably shouldn't be saying that, but I think that, anyway.

07-00:03:46 Meeker: Well, you were in a good position to observe that, yes?

07-00:03:50 Wagster: Oh, yeah. But I just don't think it's a politically correct thing to be saying.

07-00:04:00 Meeker: Well, like I mentioned before, if you feel, after reading this, that you need to seal certain portions of it, by all means—You know, in between this period and Oregon, you were sent to Washington, DC as a transition manager.

07-00:04:18 Wagster: Right. With Marv, by the way, Dr. Marv Goldberg—

07-00:04:20 Meeker: Oh, he went as well.

07-00:04:21 Wagster: —went as well. Yeah.

07-00:04:23 Meeker: You know, it's interesting. We talked about early on, when Northern California sort of adopted Ohio, and Southern California, Colorado. Was there a sense that Northwest was going to oversee DC, and what became Mid-Atlantic?

07-00:04:40 Wagster: No, not really. Interesting question, though. But it wasn't part of what Vohs was thinking. There was no sense that Marv and I would have an ongoing strong tie to the Mid-Atlantic states. On the other hand, now that I think about it, a number of people—Donna Showbridge for sure. I think there were others. I know she was one—

07-00:05:13 Meeker: Who was she? 96

07-00:5:13 Wagster: —came from the Northwest. She went to the Mid-Atlantic States region as an administrative manager type person, or medical office administrator type person, which is what she had done in the Northwest. So we provided some people, as I recall, and some physicians, I think. I'm now fuzzy on who went there. But I’m clear there was never any suggestion that the Northwest Region would be "sponsors" of the Mid-Atlantic states region. The seeding of the regional management and physician executives there involved Southern California and Northern California quite heavily, actually.

07-00:06:02 Meeker: What was the extent of your work there?

07-00:06:06 Wagster: As a matter of fact, I'll tell you a story that I'm not sure is all that well known. The guy who ran GUCHP, as it was called—Georgetown University Community Health Plan. I can't think of his name; it wasn't McNulty. Anyway, he came to Vohs' office one fine day. Vohs knew him. Paul Lairson from the Northwest Permanente Medical Group had been at GUCHP for a while, trying to help them out on the physician side, so we had some connections with those guys. He, the CEO of GUCHP on his own initiative came to see Vohs for a meeting. He came across the country, went into Vohs' office, and spent, Jim told me, probably the better part of an hour, maybe more, talking about things. Then, at some point, he got up to leave. Jim said, "He was most of the way out the door, when I said, 'By the way, how are you doing financially?' He stopped, turned around, and said, 'Well, I think we're about to become bankrupt.'" Jim said, "Well, why don’t you sit down and we'll talk about that." [laughter] So it was that question and the guy's answer that actually got the conversation going about what he really had come there to do, but for some reason seemed to have changed his mind, I guess, and was reluctant to reveal to Jim that he wanted us to rescue them financially. [laughter] Which is really an incredible story.

07-00:07:44 Meeker: So, had the discussions about taking it over already happened?

07-00:07:48 Wagster: There had been discussion of it, and concern about it. There was knowledge about some financial problems, because of Paul Lairson’s involvement—I think he was the source of our information at the time. But I'm not sure where all that came from. Certainly we knew all was not well at GUCHP. I think Jim just assumed that's why the guy was there in his office. There was no other reason for the guy to travel to California to meet with Jim. But he never mentioned anything about their financial crisis until Jim raised the subject. Thereafter, as soon as the subject was out on the table, there was one hell of a lot of discussion about, "Well, wait a minute. What's this going to cost? And da da da da da." At any rate, my role and Marv's role was to try to calm a very anxious bunch of people, who thought the program was in trouble and may not survive, to reassure them at the outset that we were not hatchet men, that we were not, well, all the "nots" you need to go 97

through to make people feel like they're now going to be part of a bigger thing, and it's going to be better. Then to start introducing, with other people that we had brought in to help with various activities, things that we needed to change to in order to keep track of what was going on in the way our regions kept track of things. We had to arrange for and coordinate a whole bunch of people who came in for different reasons, and so forth. But, my first order of business, which took more than a month, was to initiate being a part of and supervise the payment of vendors who had been not paid for weeks. To make sure they didn't stop providing goods and services, whatever it was they were peddling, and also, more importantly, ensure they didn't sue us for non-payment or give us any problems related to delivery of needed stuff.

We spent a great deal of money provided by our Central Office time writing checks and keeping track of what the hell we were doing, and getting a better fix on what GUCHP’s real financial situation was as we went. So KP accounting people and a Kaiser accounting system was one of the first things that we needed to install and in order to get control. On the physician side of it: Marv was trying to reassure the doctors, trying to get them to think in different terms; what our program represented; what we were successful in doing, et cetera. Trying to convince the physicians they would be too. Making them clear that we are going to solve the financial problems, and fully intended to be supportive of a program that would be, not totally different from what they'd been doing, but certainly would be influenced by our own experience. That we were not going to just send money and suggest that they spend it wisely. We were intending to move in the direction of a Kaiser Permanente program (group practice plan vs. a staff model). Ideas like regional accountability, ideas like independent medical groups. Those were things we talked about with the management people, as well as the physicians.

07-00:11:26 Meeker: In essence, the core values.

07-00:11:28 Wagster: Core values. I used to characterize it as Kaiserizing for shorthand. We worked at getting the people in GUCHP to believe that we operated on the basis of a mission, principles, and concepts that we really believed in, and which ultimately would dictate and control our actions as their new friend, helping them become someone they hadn't been able to become so far.

07-00:12:13 Meeker: Was Georgetown Community Health Plan a prepaid group practice?

07-00:12:18 Wagster: Well, you know, I was just sitting here trying to remember the—I think it was a staff model. I should remember that, but I really—But I think it was a staff model. It wasn't an independent medical group, and that was one of the major things that we wanted to segue into. 98

07-00:12:40 Meeker: Well, it's an interesting point when thinking about that organization taking over something that already existed, and then having to introduce not only new management, but a whole new set of ideas in an organization where ideas about that organization were very important.

07-00:13:10 Wagster: We were a different colored horse, not a cow, or a bull, or something. In other words, they really were trying to do what we did. They just were doing it with the physicians not in an independent medical group. I'm reasonably certain they were a staff model. Paul Lairson had been there for some period of time, and unquestionably had either reinforced or familiarized them with whatever differences we represented in their philosophy and concept. But they were our kind of people. They really were. It wasn't a categorical difference. At that time we weren't trying to somehow get them to understand the kinds of economies and behaviors that we felt were critical to make a success of this thing.

07-00:14:30 Meeker: Were there any examples of a culture clash? Any places where the different color of the horse was significant?

07-00:14:46 Wagster: First of all, they were not feeling their oats, to continue with that simile. Because they were on the brink, and anybody who was inside the organization who was knowledgeable and thoughtful at all knew it. I mean, you can't not pay bills to vendors and have keep that a secret within the organization. For weeks they had no cash to pay any bills. They had stopped writing checks. So we were dealing with a bunch of people who were concerned, if not frightened to death, who needed jobs, and who recognized that somebody else had to pay a lot of delinquent bills. I think they really accepted the obvious, that if someone else is willing to provide a lot of money to pay bills that GUCHP owed, and I'm going to keep my job, then I guess I better try to conform, shape up, or do something that's appropriate in the eyes of the new guys. The physicians, I think, had the most changing to do, not necessarily for the worse, but I wasn't involved with any of the physician meetings, other than some meetings to describe our program, and to talk about the plans and things that we expected to do, and what we saw to be our objectives, and issues, and philosophies. I met with a number of the doctors individually and talked with doctors in small groups. But the whole idea of getting a bunch of doctors to feel like they were suddenly going to be a medical group after years as employees in a staff model organization was beyond a mere challenge to us. I didn’t initially remember that today, but that is what it was all about. It had been a long time in coming, and turned out to be a really difficult concept for the doctors to grasp. If you keep telling physicians they're an independent medical group, you've got to be careful about what you wish for, because that might very well happen. And it did. There were some real problems with that medical group in the long run, or after a while, as the physicians enjoyed exercising their new-found independence without necessarily embracing accountability. 99

07-00:17:25 Meeker: For example?

07-00:17:27 Wagster: Just deciding what they would do, and what they would decide, and what they would agree to, and what they would not agree to—

07-00:17:33 Meeker: So, the autonomy——

07-00:17:34 Wagster: —and even before they were actually making money, my recollection is, they enjoyed their independence very much. Independence brings with it responsibility. I think they were clearer on the independence than they were on the responsibility, at times. That may not be entirely fair to them. The program in that region was eminently successful. I mean, it was just a great job by all that certainly includes the physicians. Dave Pockell as Regional Manager gets a great deal of credit, but he had a whole crew of people who really worked at it the problem as did well. Dr. Wayne Alberts was a complex combination of a charismatic guy and a loose cannon. It was very hard to get a fix—

07-00:18:15 Meeker: What role did he play?

07-00:18:16 Wagster: Wayne was appointed Medical Director for the physicians even before they officially became a Permanente Medical Group. He came from the Northern California region. He was a brilliant guy, I mean, a very, very bright guy. Unfortunately, it was a little bit hard to predict what he might do in a given situation. Pockell was the stabilizing influence in that whole thing, and he did a great job. The whole crowd did just did swell.

07-00:18:52 Meeker: From your perspective of being there for—it was about a year, is that correct?

07-00:18:56 Wagster: No, it was less than six months.

07-00:18:58 Meeker: Okay, less than six months.

07-00:18:58 Wagster: It was maybe five months. Marv left after about three months. He just kind of got tired of going to Washington. By that time both Pockell and Dr. Alberts were on the scene. The rest of the management team, the controller, I think, was there by the end of our stay. No, I think Barnaby was there. Marv and I brought Dick Barnaby from the Northwest region to get control over their financial stuff. I think Barnaby may have been still there when Marv and I went back home. I think he stayed on even after I left. I'm not sure. But he was our controller in Oregon, and 100

we brought him in to install our financial systems and controls. Barnaby was very effective. He did a great job.

07-00:19:40 Meeker: So, from your perspective, then—being there for about six months, or a bit less, and then from then, in 1992 and 1993 working on this report about the expansion regions: it does seem clear that among the post-1980 expansion regions, the Mid- Atlantic states is one of the bright spots.

07-00:20:00 Wagster: Right.

07-00:20:01 Meeker: What do you attribute that to? What factor or factors?

07-00:20:07 Wagster: From a positive standpoint, we did catch a program before it soured. I mean, they may have had problems. They may really well have gone under, but they were not grousing and turning in on each other. To whatever extent the leadership was not appropriate, the leadership was gone. The guys we brought in there, which is always what you hope for, turned out to be very suitable for the situation. We also were able to bring to bear from other regions, principally the Northwest region because of Marv and I being involved, critical people that did critical things, and did them right. So we had this early liaison, but not sponsorship responsibility. It worked out. We had a reservoir of people in the total organization that was drawn on. Later that pool got diluted and wasn't as high quality a group of people to draw upon for later expansion regions staffing. It was easier to get good people to agree to move to Washington, DC, than it was to get them to move to Cleveland and some of the other places like Kansas City. So that was a factor, getting people to move. It mattered where it was, and what it was. Washington, DC was a plus— favorable location. We were able to get better quality people to go there. Some of the better experienced and quality people with good potential, of which Dave Pockell is the best example. He became a much more important figure later in the running of our organization. So we had a high potential person who did well, and because of his performance was given bigger responsibilities later. We had a right person in there. Also, Washington, DC is an unusual, I won't call it unstable, but it is certainly a transitory population. Not everybody, but there are a hell of a lot of people who are in and out of Washington, DC for a whole bunch of reasons. The staff of congressmen, a whole bunch of things are constantly in flux..

07-00:22:58 Meeker: Every two years a big change.

07-00:22:58 Wagster: A whole bunch of things happen all the time causing people to come to a town. If you and your family are new and don't know what the hell to do, a group practice prepayment plan, if you've had any exposure to one at all, is not a bad solution to the question, "How do I get medical care here, and what do I do about doctors?" I think: Washington, DC itself is acceptable to people considering a transfer. In 101

Washington, DC the characteristics of the population predisposes them to see our program as an appropriate aid in their getting settled, if they are new. We also didn't encounter entrenched concerns among potential members about the care delivered by GUCHP. There were not a lot of horror stories going around about GUCHP physicians. I don't know that it was the highest quality bunch of physicians in the country, but I think they did have some really, really fine guys in there who had stuck with the Plan and with each other. They also stayed with us when Kaiser Permanente took over. We didn't inherit a bad situation. We had a plan that was not properly managed. We introduced conceptual changes that were positive from the standpoint of virtually everybody, the employees, the managers, and the physicians alike. The thing we wanted them to do was to be like us, to become us. Things that were not onerous to them. It was not anything employees and physicians had to overcome somehow in their thinking. You talked about conflict earlier. I don't really remember conflict when we took over from GUCHP. The Washington economy is sustained by us taxpayers pretty nicely, and so KP had the benefit of an economy that was never really a problem to the plan. Good decisions were made on facilities and on hospital arrangements by the regional management team, too.

07-00:25:33 Meeker: Were new facilities constructed, or were there—

07-00:25:36 Wagster: Over time, there were a lot of facilities constructed. But, you know, that takes time to figure out where they should be, why you want to have them there, and so forth. But good decisions were made, and the capital was available, because the program wasn’t stretched at that point. The demand for capital for other reasons and in other places was manageable. The new region got a lot of good attention from the organization, because we were concerned about an HMO failure in the nation’s capital. We also didn't have a lot of things distracting us. We had capital available. We had people available. We had a situation that was okay. We made it better. It was perceived to be better by people inside and outside our program in the region. We had a positive marketing opportunity. I think virtually everything you can think of that might have been helpful was probably at play there and mostly on the positive side.

07-00:26:40 Meeker: Well, we're almost—let's see—well, we've got about another twenty minutes with this tape. Twenty, twenty-five minutes.

07-00:26:57 Wagster: In fact, because of all that, I think we developed an organizational arrogance, i.e., we knew how to do it, and we couldn't fail. Colorado and Ohio had been very difficult, for different reasons. In Colorado, there was a huge problem with our making hospital arrangements. No one would give us beds. It was overcome ultimately, but really a hell of a problem. In Cleveland it was the medical group. There were difficulties with the medical group always. Cleveland was very difficult for us to staff, because who wanted to go to Cleveland from California? 102

At that point in time, Cleveland had kind of replaced Detroit as the bottom city of the United States. The dregs—

07-00:27:58 Meeker: It was the city where the river caught on fire, right?

07-00:28:00 Wagster: Right. And everybody laughed about that all the time. Who wants to go there? They also had a very serious undertone of racial turmoil in Cleveland. Not riots, like Detroit, but a heavy Black population and some real reasons to be concerned about security and the social environment in Cleveland. Very difficult to get people to go there.

07-00:28:39 Meeker: You know, there was an interesting article that came out a couple years ago, looking in depth at the Carolinas, and why that didn’t succeed. One of the key points that came out in this—and I've seen it elsewhere—but it seemed to be quite clear in this case, was the physical geography of the landscape, and the link between a successful Kaiser Permanente expansion area and a critical mass of an urban area, and how important that is. But what you said also about the transitoriness of not just Washington, DC, but large urban areas also are very transitory.

07-00:29:31 Wagster: You're right. You're right.

07-00:29:32 Meeker: And the relationship of new people coming in—

07-00:29:35 Wagster: Unless the city is decaying.

07-00:29:36 Meeker: Unless they're decaying. Well, there's another kind of—

07-00:29:39 Wagster: If the urban environment is decaying, they really tend to keep the poor and sick.

07-00:29:48 Meeker: Like Cleveland.

07-00:29:49 Wagster: You don't have the influx of the vigorous and high potential producers.

07-00:29:54 Meeker: But it's also the influx of people who are coming to a new place, who have no particular prejudice about the kind of healthcare options that exist there—

07-00:30:09 Wagster: In combination with no relationship, no— 103

07-00:30:10 Meeker: Yes. So, you go to a place like Research Triangle, and while there's certainly— being an academic-oriented community, there's certainly some transitoriness—

07-00:30:20 Wagster: Which we always appeal to, by the way.

07-00:30:23 Meeker: So that, maybe, may have been a core population, but for an area in which it wasn't as transitory as a large urban area, it might have been difficult to market yourselves to a well-established population.

07-00:30:39 Wagster: And there were. It would be nice to get access to big chunks of potential members. It was very hard to find big chunks in the Carolinas.

07-00:30:48 Meeker: And so, I assume that there was some success in public employees in DC, as well?

07-00:30:54 Wagster: Oh, enormous.

07-00:30:57 Meeker: Okay.

07-00:30:58 Wagster: We had very favorable relationships, because of Bob Erickson, principally, with the federal group, as we called it, forever. This was at a time when all this talk about and the reality of inflation—medical cost inflation, But all this talk about HMOs and managed care (that wasn't the term used popularly at that time) but organized medical care of some kind. That was the talk going on in Washington. I mean, the papers had to be full of it, because Congress is talking about it all the time, so on, and so forth. Were they as busy talking about the lack of organization in community care at that time in North Carolina? I don't think so. I mean, sure, it would have been kind of in the news, but it wasn't the same kind of intensity. I don't know what your experience has been, but I was astonished when I went to Washington, DC, and heard taxi drivers telling me about what the latest news was that day about goings on in the government of the United States. It was just incredible. Everybody in Washington knows what the hell's going on there. It's a very interesting community. Nothing like that happens anywhere else in the United States. Well, Sacramento is all taken up with the state, but—

07-00:32:24 Meeker: Well, Los Angeles and the film industry is very much like that.

07-00:32:27 Wagster: Same kind of a thing. That's what they do there, and that's what they talk about there. And so, I think our Washington experience was colored by all of that incredible amount of unintended but actual promotion that was going on. 104

07-00:32:44 Meeker: So, back to Northwest. There's one thing that I wanted to follow up on about that particular period of time, and I don't know if you have any particular thoughts about this or not, being on the Health Plan side, but one of the most interesting conversations I had—and it was a sustained conversation—was with Al Weiland about the medical records.

07-00:33:06 Wagster: Good guy. Very interesting guy.

07-00:33:09 Meeker: Yeah, yeah. I really enjoyed his interview. And about some of the problems of the medical records, because of the decentralized medical centers, and the centralized location of the medical records, and how it meant for a very low delivery of medical records to appointments.

07-00:33:29 Wagster: Always a problem. The physical record. Always a problem.

07-00:33:30 Meeker: Always a problem. The physical record. That wasn't—

07-00:33:33 Wagster: And the damn things getting misplaced—

07-00:33:38 Meeker: Or sequestered—

07-00:33:39 Wagster: —or sequestered by the physicians, because they knew they were going to have a hard time getting it again, so now they've got it, and they hide it. It was really a problem, always.

07-00:33:49 Meeker: Was this something, as Regional Manager, that you tried to deal with?

07-00:33:53 Wagster: Oh, yeah. And never successfully. First of all, it was ironic that the Northwest region, because of the leadership and modeling of the Research Center, was ahead of the rest of all things Kaiser Permanente in the use of computers, use for management information and emailing. They had it in the Research Center and we implanted it in the region. When I went to the Central Office, I got Jim to agree that we could put computers in various people's offices, including his, so we could start emailing each other. That whole system would be supported by Tom Fisher, who had done the information technology work outside the Research Center for the Northwest region. I was the first person to put voicemail in the Central Office for all things Kaiser. Voicemail enabled me to communicate with each and all of the Health Plan Managers in discharging my responsibility for the national accounts. At any rate, my point is that the introduction of computer-based technology had a troubled history in our program. In Northern California, the 105

thing I talked about during our interviews back a bit, was in terrible shape with their initial effort to improve and upgrade their computer system. In Southern California, we likewise had trouble getting good leadership in the computer area, and we seemed to always be behind the curve. We didn't seem to be anything like as effective in implementing business decisions or business practices with computer support. Along with that, the medical group was extremely resistant to spending money for computers, because everybody knew then you were better off with a written file, provided of course you could find it. Underlying all that, and the same thing with the business side of the computers, if someone asks you, as a manager, to articulate how you manage, so they can write it down in a program, that’s a problem for the best of managers. One, it's hard to explain; two, you may not even know how you manage; three, the computer can't say maybe, just yes or no. The answer has to be a yes or no to be programmed. Most people don't think about their jobs and function in yes or no terms. They do now, in some ways, but they didn't then think that way. Underlying the problem with the medical charts is agreement about what we want to have the medical chart comprised of. There is great difficulty in getting physicians to agree. Almost, in fact, I think we all concluded over time, it was impossible. You could not get agreement from physicians on the form and content of a medical record in the computer that they wanted the computer to spit out or to display.

07-00:37:45 Meeker: What was the disagreement about, precisely?

07-00:37:47 Wagster: What it would be? What would go in? How it would be displayed? How it would be accessed? The criteria, and the extent to which the data in the computer was expected to influence your performance as a physician delivering the art of medicine. It was—

07-00:38:13 Meeker: So you're talking about clinical guidelines, as part of the medical record.

07-00:38:19 Wagster: Specifications and criteria. At any rate, it was very, very, clear, I think probably to everybody in the world, but it certainly was to me, that we really, really, really needed a medical record in the computer, and that our program was uniquely positioned to both benefit from that and to provide better medical care because of it.

07-00:38:46 Meeker: Your program, meaning Northwest, or Kaiser Permanente overall?

07-00:38:50 Wagster: Overall. And certainly in the Northwest region, where we had a running start with the Research Center, where we had a management information system coming on, and where Marv and I had done a bunch of things that had, in a way, in my opinion, revitalized the region and energized the place. We were having a hell of a lot of fun, and it was really going very well. And Marv and I were both very 106

active in the community, too. It just was the right thing to do. But designing the medical record, not its support system, would cost so much money, and it would be difficult to get agreement on how to go about it. Who would decide what the medical record would have in it. Ultimately it fell of its own weight. A medical record project never got even visualized, much less off the ground.

07-00:39:41 Meeker: So, there were no real attempts made during your time period to contract with a software company to develop something?

07-00:39:51 Wagster: None. We were also advised there was an experiment going on in Colorado, as I remember, and an experiment going on in, I don't know, maybe in both Southern and Northern California, I don’t remember now. Maybe even in Hawaii. I'm not sure. My memory fails me. So why would we spend money in the Northwest, when we can ultimately get the benefit of the experimentation and investment by other regions. That was seductive reasoning, I think.

07-00:40:25 Meeker: So it must be—

07-00:40:25 Wagster: Probably an error on our part in retrospect.

07-00:40:26 Meeker: —somewhat of a shock to you to learn that it was the Northwest region that, in effect, developed what has become the dominant model.

07-00:40:35 Wagster: Well, first of all, I didn't actually know that.

07-00:40:37 Meeker: Oh, yeah.

07-00:40:38 Wagster: But secondly, not a shock, because I really felt that we had a corporate culture, a program culture that could accommodate to such a project We couldn't get that one going at the time because no one felt the urgency. We couldn't get agreement on it as a top priority. The competition for money, expense and capital, was huge, because of our facilities program. We had a gigantic facilities program going on in our region. In fact we could never have afforded to do what we did in the region without the backing of Northern California and Southern California, that is, without the surplus capital they were generating. We were investing a great deal more money than we could have ever borrowed to implement our facilities program at that time, based on our earnings capacity and the projections of membership growth over the next several years.

07-00:41:26 Meeker: You said that, however, there was—as far as corporate management—the introduction of computers at this time. And you also said that the Center for 107

Health Research had some impact on that? Can you describe that? Or did I hear you wrong?

07-00:41:40 Wagster: Well, Mitch Greenlick was with the Research Center. First of all, he was an outstanding manager. You really almost shouldn't ever accuse a social scientist of being a manager, [laughter] but by gosh he was one. Secondly, he was a charismatic, very effective, and a creative leader. And by the way, I'm very pleased that on my watch, Mitch was elected a Vice President of Kaiser Foundation Hospitals, which I was very pleased happened, because he was deserving of that recognition. Oh, I'll tell you a fun story. Can I tell you a fun story?

07-00:42:12 Meeker: Please do.

07-00:42:13 Wagster: Okay. It was a Board meeting. It was wintertime, and I don't remember what year. Doesn't matter. The Board meeting agenda included a presentation by Mitch as a part of what was going on in research in our organization. During the morning coffee break I saw, Mitch Greenlick standing in a corner talking with Edgar Kaiser. Cliff Keene was always very aware of Edgar Kaiser's presence, and extremely concerned about anybody having a conversation with Edgar, because Cliff felt he might hear about it later from Mr. Kaiser. It was just one of Cliff's things. Any way, Dr. Keene sees this. To Cliff, Mitch just might be the worst person in the world to be chatting with Edgar Kaiser. that anybody could imagine getting Edgar's ear would be Mitch Greenlick, Mitch was feisty. He was clever. And he was apt to say damn near anything. I mean, really, in an organizational sense, he was a loose cannon. So Cliff sidles over to the two guys talking. I can't make out what they're talking about until Cliff gets there and they turn toward him. He insinuates himself in the conversation with a socially appropriate remark of some kind and then says, "Dr. Greenlick," who is standing there with a sports coat and his trademark turtleneck on, "Don't you ever wear a necktie?" And Mitch says, "With a turtleneck?" It was incredibly funny. Cliff just swallowed his teeth. It turned out, by the way, I learned something from him years later, when I was recalling this story to Mitch for our mutual enjoyment. I was telling him how much fun I had had at the time, as well as telling of the story over the years. Mitch said, "Do you know what Edgar and I were talking about?" And I said, "I have no idea, because I just heard the exchange when Cliff accosted you." Mitch said, "I was talking to Edgar about how to stop smoking." Mr. Kaiser was a terrible chain smoker. Isn't that interesting? Because Mitch, among the other things he'd done, had a very successful research project on how to stop smoking. In fact, the Research Center helped my wife Sarah stop smoking. It was a very important intervention in her life. She's never smoked since, but she had a lot of trouble quitting, and got the help of the research people to do that. That's what the two of them, Greenlick and Kaiser, were talking about. It was just wonderful. And wonderful to learn that Mitch was really interested in Edgar's welfare. But poor Cliff. It was not a fair fight. Cliff was not a repartee guy. 108

07-00:45:41 Meeker: Maybe he got what he deserved. [laughter]

07-00:45:43 Wagster: Well, in some respects. But he just wasn't a repartee guy. He did have a social sense to say the right thing at the right time, but it was not barbs and repartee.

07-00:45:56 Meeker: Yeah. That is a great story. Having interviewed Mitch, I can see that response very much.

07-00:46:04 Wagster: Oh, Mitch was great fun to work with, and always stimulating, and required you to stay focused. He kept your attention, because he could get you off track in a hurry, and might get you committed to things you really didn't want to do. They were probably always right things to do, but maybe off in timing, or maybe costly, and possibly overreaching. I mean, he thought anything was possible. In that way, he was, I thought, inspiring. I loved the guy. I really enjoyed working with him.

07-00:46:45 Meeker: Let's see here. You know, I feel like we didn't quite do justice to the national accounts work that you did, because I think that brings up a lot of large issues in relation to this concept of core values. Some of the challenges to it, perhaps.

07-00:47:02 Wagster: Yeah, it became—the advertising program was kind of swallowed but the digestion problem was its own difficulty, because it was Central Office controlled. It was a bunch of other things, but regions did get something for it. There may well be other opinions that are different—but in my opinion the ad campaign worked. At the time, it was close enough, and it worked. The national accounts program was a goddamn problem. Any way you looked at it, it was a problem. Starting with, "Regions do the marketing. We all know that. Dan, what are you doing here?" I mean, all of a sudden, everything about national accounts was inconsistent with what we had done in the Central Office and in the regions. People wanted to keep doing what they had been doing. National accounts involved all of the wrong things. "Central Office leadership? Who needs that? Not invented here," As far as the region's concerned, it was a shadowy, maybe real threat, with regards to control and responsibility for membership and marketing.

07-00:48:22 Meeker: What do you mean by that?

07-00:48:24 Wagster: Well, okay. So two outfits said this to somebody, and they won't let their employees enroll in the new regions. They're not dropping us in the established regions. I mean, we've got 10,000 IBM employees who are members here.

07-00:48:36 Meeker: So they won't go into the new regions unless they can get a single bill from a Central Office, as opposed to— 109

07-00:48:40 Wagster: And a single person to talk to. Uniform benefits. A whole bunch of other things probably would follow later after the program made those changes. The companies would have less administrative concerns. They would have a better integrated program, consistent with their own desires and needs. All kinds of things as far as our big national customers were concerned.

07-00:48:56 Meeker: Was there ever a sense that greater centralization was not incompatible with the core values of the organization?

07-00:49:09 Wagster: I think not. I think it was so wrapped up with personalities, and with the specter of central leadership and who decides. Who decided that? And the categorical, unflinching, or unchanging, requirement that whatever is earned here stays here. Our dollars are not going out of the region for any reason. We earned it. It's our money. And the fact that that region had been supported by the Central Office, the program numbers, were the basis of lenders lending us money. The new regions weren't really that important in the earning of the program’s capital, but that was lost in all the rhetoric. Northern California probably never did need anybody else. They had the most members. They did a better job of their facilities planning. There are a whole bunch of reasons whereby Northern California could rightly say, "We earned the money. We made the program strong. It's our financial stability that you guys are enjoying." I mean, I really think that they probably could say that.

07-00:50:34 Meeker: Well, when you say "Northern California," are you talking about the leaders of Health Plan, the leaders of the medical group, or both? Together and separately?

07-00:50:44 Wagster: I'm talking about the region, and its performance.

07-00:50:46 Meeker: Okay.

07-00:50:47 Wagster: And whoever gets—

07-00:50:48 Meeker: When it comes to this issue of regional autonomy and a negative reaction to an idea of greater centralization, such as the national accounts, this is an area that you think the leaders of the Health Plan, and the leaders of the medical group are unanimous within their own regions? Do you see what I'm getting at?

07-00:51:15 Wagster: No. Say that again in another way, maybe. 110

07-00:51:17 Meeker: Well, you know—so this question about the creation of national accounts, and would—

07-00:51:24 Wagster: Right. The threat of national accounts. [laughter]

07-00:51:24 Meeker: The threat. The threat of national accounts, and how this would have created a greater centralization around some really important things. It seems to me that the people who would respond most negatively to that would be medical group leaders in the different regions. But it sounds to me like what you're saying is that not only were medical group leaders thinking that this was anathema to the core values of the organization, but also regional Health Plan leaders were in agreement with their compatriots in their region—their medical compatriots in the regions.

07-00:52:08 Wagster: Okay. A couple things, and this is a personal observation. You can never underestimate the personal experience of at least three people in this drama. Vohs, who started working for Steil, was promoted from Industrial Relations Manager to Health Plan Manager to Acting Regional Manager to SRC Regional Manager, all the while reporting to Steil. Ultimately Vohs and Steil became super-equals, Executive Vice Presidents, including each having a new expansion region. Then Vohs became Steal’s boss. Next Steil's title was changed from Executive VP to Senior VP, which by any objective view was a demotion. You were this kind of a corporate officer, Executive VP; now you're a Senior VP. Vohs and Steil had this strong bond and relationship over all the prior years. However, from my personal knowledge, Steil never lost fully his resentment for being passed over for the top KFH/KFHP position. He also was suspicious of whatever Vohs' role had been in raising a question in Keene’s mind about the organizational sense of one VP reporting to another VP. But whatever it was that Steil knew, there was a resentment on Steil’s part because he was near the top then demoted. All the while, there was the Kaiser Permanente Committee setting, where different people were assuming varied roles of leadership, on different issues. Stepping out forward, or hanging back, giving counsel or being silent. There was a lot of power stuff going on—at all times—in the Kaiser Permanente Committee setting. The other player in this act is Dr. Sams, who sought to be the top executive for all things Kaiser Foundation. Okay. What would be logically the result when Vohs, as the head of the Health Plan/Hospitals made a run at uniformity? "All regions get in line and do the same thing for marketing purposes. We need a national accounts program.” for instance. There may be no problem at all making sure you support the policy, but there might be a very difficult problem in the implementation, because, "Vohs doesn't tell us what to do." The final piece of this is a practical problem. As a Regional Manager with a Medical Director partner, you really have to choose your battles and your issues to do battle over, and you're very guarded about getting into policy positions that are not congruent with your partner in the Region. If you know where the other guy is, and you know 111

why he's there, you really seek ways to be supportive of that kind of position. Particularly if you feel like the Medical Director doesn’t really have any alternative, or he's got himself painted into a corner politically, or whatever, you as Regional Manager are aware of the need to work together with your partner. So if the Medical Director doesn't want to support something, it's hard for the Regional Manger to say, "Well, my partner doesn't want to do it, but I want to do it." By showing the flag and your support for Vohs, you may have to oppose your regional partner’s views or needs. In Northern California, what would be the incentive for Sams and Steil to agree to a National Accounts Program being pushed by Vohs given their experience and concern about “Who's in charge here?”—I mean, there's a personality issue here that I think is of great consequence, in terms of what actually happened.

07-00:56:48 Meeker: So, from what I'm hearing, it sounds more like in this particular case, a program in national accounts—and the massive innovation that would have required—was untenable largely because of personality issues, less so because of ideological issues around core values.

07-00:57:12 Wagster: You didn't have to choose. I mean, you really didn't have to choose.

07-00:57:18 Meeker: What do you mean, "You didn't have to choose.?”

07-00:57:19 Wagster: The one thing is core values, and by God, it doesn't fit that. The other is personalities, and by God, I don't know whether I would like to do that. You didn’t have to choose.

07-00:57:27 Meeker: Okay. What about leaders of the other important regions, in particular Northwest and Southern California?

07-00:57:36 Wagster: Southern California was so much more important than the Northwest and Hawaii.

07-00:57:29 Meeker: Oh, okay.

07-00:57:39 Wagster: Size, history, a whole bunch of things.

07-00:57:41 Meeker: Proximity

07-00:57:42 Wagster: Always. 112

07-00:57:42 Meeker: So, what about Southern California? Did they get a chance to weigh in and think about national accounts?

07-00:57:48 Wagster: Oh, yeah. And Berner was very effective in his leadership and partnership with—

07-00:57:56 Meeker: Vohs. No.

07-00:57:57 Wagster: No. I'm blanking on the doctor.

07-00:58:00 Meeker: Oh, Murray.

07-00:58:01 Wagster: Murray. But he was also cognizant of the importance of his partnership with Murray. There was always an underlying rivalry between the two California regions, Medical Group vs. Medical Group. I mean, in the Northern California region, look what the medical group calls itself. “The Permanente Medical Group.” Does that give you some kind of clue? And I don't think there's any question that there was always that competition, rivalry, if not some resentment: "Wait a minute. Not here. You can't make me do that." And I'm overdrawing this, as if it's individuals were sitting down saying "I'm going to do these things." I think these things were embedded in people, and they happened. Just as so much of the time they did the right thing because it was the right thing to do. It just so happened, as I said a moment ago, you didn't have to choose between the program core values and individuals. You have to superimpose something quite different to get a change like National Accounts, and we never really figured out what that should be.

07-00:59:20 Meeker: Did Vohs ever have any inkling that national accounts would be possible, or did he—

07-00:59:25 Wagster: Oh, he was absolutely convinced we had to do it. No question about it. I mean, he created it. He gave me that job. We talked about the position first, but it was his decision to give me that job because he thought I could do it. He thought our program had to do it, and more. But we couldn't go without the medical groups. It needed to be a consensus judgment. Ironically, there was a consensus judgment! The Kaiser Permanente Committee absolutely endorsed national accounts. You go into the region and try to get the Accounting Managers to change the system so we can present one bill for the total program to a customer, and you find that it's embedded in this aspect of the medical offices, and da da da da da, and you can't get that damn change made. So it was a—it was not a failure, it was a slow process, really difficult to get, with everybody agreeing conceptually, and virtually nobody wanting to change something to accommodate to it. Very, very complex worst case for a how a good organization with good, well-meaning 113

people that could get together on a bunch of things and show the strength, and wave the flag, and all these things—it just somehow stuck in their throat, and/or wasn't worth the effort to put it in, because of their own medical group, or whatever their sticking points were for them. It was different with different people. But you don't do anything in a medical care delivery system without cost. Hugh Jones, when I went down to talk to him about the advertising program, pointed out to me that I was asking him (I found this to be kind of offensive) but he pointed out to me that I was asking him to agree to an increase in the advertising budget that was not provided for. Southern California's portion of that was a significant amount of money, for this national advertising program, and it would go right to the bottom line and the divisible the physicians were expecting. "Well, Hugh, I ran this region for a number of years. I know very well what I'm asking, and what this is all about." But Hugh considered that to be something that was my problem and not his problem, which is kind of interesting.

07-01:02:20 Meeker: I need to stop this. It's about to quit.

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[Begin Audio File 8 wagster_dan7_05-11-2007.mp3]

08-00:00:00 Wagster: There’s a cartoon I like in which this small boy is being examined by a pediatrician, and the kid had grabbed the pediatrician's stethoscope. The doctor's hair is standing up on end, as this kid's shouting into the stethoscope. The caption is, "Am I all right, doc?" And the poor doctor's head's about to come off.

08-00:00:31 Meeker: Sounds like something from The New Yorker, huh?

08-00:00:32 Wagster: Yeah, like.

08-00:00:35 Meeker: All right, so you were talking about your sense that you'd done what you could have done in Central Office around national accounts and PR, and that you were looking for another opportunity.

08-00:00:49 Wagster: No. It was different than that. I went to Vohs' office, and said, "Jim, I really have enjoyed working with you in this capacity. National Accounts and the ad campaign are as far as I think I can take them. There's more work to be done. I would be happy to do it, but I would be happier running a region. I know you have some problems with Regional Managers in different places. I’m a few years from retirement. Sarah and I do not have any encumbrances with kids. So, I'm willing to go to any region you want me to go to that would improve the strength of the program by my being just one added checker you could play in the Regional Manager game." And Jim said to me, "Well, Dan, have you ever thought 114

of doing something for yourself, as opposed to doing something for the program?" And I said, "Jim, I really don't know what you mean." And he said, "How would you like to go to Hawaii to live and be the Regional Manager there?" And I said, "We've got Ron Wyatt there." And he says, "Yes, but Ron's ready for early retirement." I said, "Okay: I've got to talk to Sarah before I commit." So I came back and I said, "Okay, Jim. I'm your guy." And before I left Oakland, I made it my business to look up Cora Tellez, who was with the program in NCR. She had actually started with us, I think as an outside trainee of some kind in some kind of sponsored special program. She caught Vohs' attention and he brought her into our program to do some special projects in his office. I think she was probably the Patient Accounting Manager in Northern California when I contacted her. I wanted Cora to come up out to Hawaii at some future date and succeed me as Regional Manager, because I didn't have that many working years to go. I knew in advance that we didn't have a stockpile of potential managers in Hawaii, and I thought she was uniquely equipped to serve that region, and would fit the job nicely.

08-00:03:20 Meeker: Where was she from?

08-00:03:22 Wagster: Her background? She actually is Filipino, and she was selected for a year’s award by some kind of a foundation, I think the Coral Foundation, or something like that [Coro Foundation]. She was a kind of an intern, I think that was the term. I don't remember the mission of that foundation, but it took young people and sent them as interns into various organizations, possibly only non-profits.

08-00:03:49 Meeker: Did she reside in Hawaii there, or she was in California?

08-00:03:51 Wagster: Well, it turned out she was in Oakland with NCR. I talked to her before I left for the Islands. It wasn't a condition of my taking the Regional Manager's job, but I really wanted her as a successor. She said fine. When I ultimately got to the point where I could make her the Assistant Regional Manager, she accepted the job, but to my dismay she never moved to Hawaii. And that turned out to be a real thorn in a whole bunch of people's sides. But she was on the job when it was time for me to come back to the mainland to participate with Sams in the expansion study. So what she was doing was commuting from Oakland, kind of like on a twice a month basis. She did become the Regional Manager and did that for a while, and then I kind of lost track of her, because I was doing the expansion study, and I retired thereafter.

08-00:04:54 Meeker: What sort of work did you do in Hawaii? Did you enjoy it there?

08-00:04:57 Wagster: Enjoyed it very much. I did not enjoy being a part of Ron Wyatt retiring early. I felt badly about that, because Ron is a very fine guy. In fact, he married Sarah and 115

I. I got him to do that. He was a Mormon bishop. I'm not Mormon, or I wasn't before the wedding ceremony, but he may have made Mormons out of us, I'm not sure. [laughter] At any rate, a good guy, and a very close friend. The region wasn't broken, but it had a need for, again, almost like Oregon, some revitalization, some added thrust. The visibility in the community, again like Oregon, Northwest, was not impressive. So I made it my business, having had success doing it in Portland, to become very visible and very active in the community, doing everything I could get my hands on or get into. I was elected to the board of the Chamber of Commerce, on the board of the Hawaii Business Roundtable. I did everything I could do to represent our organization as one of the top companies employing lots of people and providing valuable services in Hawaii. I felt like I was very successful at that in my community service efforts, and on balance did the program a great deal of good. One of the things that we always have to struggle with is the concern, explicit or implicit, on the part of people as to whether Kaiser Permanente is really full of good people, really providing proper medicine, and so on, and so forth. Hawaii had had a sort of a storied history of concern about the quality of medical care delivered by the region. In fact, a related thing that I had known about: when Hawaii first started to advertise, in '81, probably, they had a—what's it called, a group that gets together, and you test something?—a test group—I can't think of the term.

08-00:07:25 Meeker: Focus group.

08-00:07:26 Wagster: A focus group. They had a focus group made up of members, and people from the community, on which they tried out an ad campaign they had created. The theme of the ad campaign included, if not centered on, the quality of the care delivered by the Hawaii region. When that particular set of words and the idea of quality care came across in the screening of the ad, some people in the focus group actually snickered. Don Duffy, who told me this story, came back to Oakland, and said to Jim Vohs, "They've got a campaign out there. It's wrong headed, and should not be approved, and here's the story." Well, Jim didn't need any more evidence. He wasn't pleased with the advertising decision anyway. He was accepting of it. He immediately got Ron to take another shot at the ads and avoid focusing on something we, in the perception of our members and the community, were not, in fact, delivering. It meant to me that there was a long-standing residual concern about quality in the program there.

One of the things that I felt could be done, with the right kind of leadership and representation, is to present yourself in the community as one of the most active, supportive and valuable people in the community; it would be very hard for people to think you work for a lousy organization. The view should carry over from a top level in the community. It also was at a time when as an organization, all of the Regional Managers were being encouraged to participate in the community. As a nonprofit, community service oriented organization, we were trying to find ways to align ourselves with the basic interests and needs of the 116

community, because that would reflect well on our organization, and it was consistent with our values and our intent as an organization, our mission.

Anyway, when I got to Hawaii, we were ahead of the curve in some ways, and behind the curve in others. We had a hospital built to replace the one at Waikiki and the rest of the facilities needed were pretty much in place. However, we had some real facility pressures that needed to be attended to. Everybody had been so concerned about getting the new hospital up and running and the cost of it, as well as the problem of the repayment of the capital, understandably a lot of the other things were neglected. We also needed a better long range plan. We needed to make some decisions about what we were going to do about outlying islands and how to provide care there. There were some fundamental strategic plans that needed to be worked out, anyway. I had a great deal of fun there. The nicest people in the world, with the possible exception of the great people in the Northwest, must live in Hawaii. They are friendly, warm. It was a great place to be. I felt the same way I had felt about the people in Oregon. I felt very welcome, and I really enjoyed being part of all that. Dr. Bill Dung was a very fine guy to work with.

08-00:11:32 Meeker: He was the Medical Director?

08-00:11:33 Wagster: Medical Director, and had been for years. He had a retiring, humble way of presenting himself. It was surprising to me because that isn't usually a prominent characteristic of Medical Directors, in my experience. But at the same time, he really was politically astute. But he was a good partner. It was a very fine period of time for me.

08-00:12:06 Meeker: Well, I think that we should wrap up, but I do want to give you an opportunity to offer any final words or thoughts if you have any.

08-00:12:18 Wagster: I just needed to make the comment Sarah was alluding to, but I think that would be better off the record than on.

08-00:12:26 Meeker: Are you sure?

08-00:12:28 Wagster: Well, okay I left the Hawaii region, went back to the mainland to team up with Bruce Sams for an expansion study. It took us a couple years. We worked very diligently at it, we worked very hard at a report. I was personally not satisfied with that effort, and the outcome. I really felt a better job should have been done. It doesn't matter what all reasons went into it. So I left, first, regional management circles, which I had enjoyed virtually all of my career. First. I missed that. Then I participated in this—and immersed myself in—this expansion study, and didn't really feel good about our product, and it was never really used in any way. It was 117

buried, after we presented it. I continued on the board until I reached the policy age of seventy. You're supposed to—at the end of that calendar year—resign, and I did that. So it was almost like running out of steam, with a very enjoyable experience in the Northwest, and a very enjoyable experience in Hawaii, a kind of an interesting, if not exhilarating, period of time in between, of national accounts and public relations. But I left the organization with kind of a feeling that my time had come and gone. And I was stuck with that for some time. And I just want to thank you for this opportunity, because—as I told Sarah, my wife, a day or so ago—in preparing for these interviews, I read—I skimmed through—the annual reports, and took a bunch of notes about dates and changes, and subjects, and so forth. I then read speeches that I had made at the time of National Accounts and advertising program was coming on, and I made notes from that. Then I read my concluding remarks in the expansion study. As a net result of all that, I realized I remembered a lot of things about a lot of people, and very good feelings, and my role and participation in a bunch of things. I felt, frankly, better about all that. And I was surprised to read that the guy who wrote that expansion study—me— wrote it pretty well. I was, frankly, pleasantly surprised. I hadn't anticipated that I would feel that way about it. The value to me is that as I sit here in the Northwest—it's not only "Dan who?" from the inside of the organization, but I'm not sure I remember having done all these things, whatever the hell they all were. The review to get prepared for today helped me. By going through this review process, I relived a lot of things, from a very positive standpoint. I enjoyed it. So, thank you.

08-00:16:11 Meeker: Thank you.

[End Audio File 8 wagster_dan8_05-11-2007.mp3]

[End of Interview]