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Originally published September 19, 2012 at 6:50 PM | Page modified September 19, 2012 at 8:03 PM

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Group Health announces layoffs, cuts

Group Health Cooperative says it must cut $250 million over the next 16 months through better cost control, some reorganization at the top and layoffs.

Seattle Times health reporter

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Group Health Cooperative, recognized as a leader in health-care innovations and patient satisfaction, says it must cut $250 million over the next 16 months through layoffs, better cost control and some reorganization at the top.

As part of those changes, Richard Magnuson, executive vice president and chief financial and administrative officer, will soon leave the organization. CEO Scott Armstrong says he intends to create a new CFO position focused solely on financial targets.

Group Health, which insures about 600,000 people in Washington and has annual revenues of $3.5 billion, is aiming to climb back up to a 3 percent operating margin, Armstrong said in a Friday memo to staff, first reported by the Puget Sound Business Journal. The memo noted there had been three years of sharp declines in finances.

"This cannot continue," Armstrong wrote. "We are better than this, and I am not going to let us have another year like this one."

Before 2008, Armstrong said in an interview Wednesday, the HMO was solidly in the black, with 6 to 9 percent operating margins. But three years of declines have led him to believe that costs must be tackled now.

"This is about making sure that the last piece we need to position ourselves to be the model for the future of our industry gets put in place," he said. The process will eliminate some jobs and necessitate layoffs, he said. "We'll make (the number) as small as possible."

Armstrong noted the co-op's national kudos for service, quality and innovations, such as creation of a "medical home" coordinated-care model for patients that focuses attention on prevention -- in particular on keeping patients out of the hospital.

When Group Health patients need hospital care, they must seek it at hospitals owned by other medical systems. Group Health, as insurer, gets the bills, which have been steadily increasing.

In insurance-plan rate filings posted this year with the state's insurance commissioner, Group Health argued that health-care costs for its individual "options" insurance plans, which allow patients to seek care from non-Group Health providers, were rising by 18.8 percent.

The insurance commissioner's office disagreed, projecting a 15.5 percent increase for the plans. Even so, it approved a rate increase of 17.1 percent.

Across all insurers, the insurance commissioner's office estimated that health-care costs were rising about 10 to 12 percent per year.

Armstrong said over the past three years, costs had increased all across the organization. Not only are the costs of outside health-care services increasing, he said, costs inside Group Health had also gone up. "Some is compensation, some is we've gotten loose on some of our purchasing processes."

To figure out how best to get a grip, Group Health is bringing in Navigant, a national financial-management consulting firm, to compare Group Health's costs to those of the best systems in the country and identify areas for savings, Armstrong said.

The co-op's financial strength is still "very, very strong," Armstrong said. "We have so much to prove, and we have this huge opportunity as the industry reforms itself. The one place we need to improve is financial performance."

Carol M. Ostrom: 206-464-2249 or costrom@seattletimes.com. On Twitter @costrom.

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