Threatening to soil the reputation of one of the country's most prominent not-for-profit healthcare systems, Minnesota's attorney general has accused the managed-care subsidiary of Allina Health System of misspending its money on executive perks.
Allina has denied the allegations but said it will cooperate with the state's investigation of Medica, Allina's 1 million-enrollee HMO. Minnetonka, Minn.-based Allina also operates 19 hospitals, 48 clinics and four nursing homes.
In a 49-page memorandum filed last week in Hennepin County (Minn.) District Court, Minnesota Attorney General Mike Hatch alleged the plan engaged in lavish spending on image consultants, executive salaries and perks and corporate entertaining. Hatch also claimed that Medica did not report this spending under administrative accounts. Instead, he claimed, much of it was hidden under accounts that suggested the expenses were directly related to medical care.
Hatch said in his filing that he needs more cooperation from Medica to investigate whether the insurer violated state charitable assets or not-for-profit laws.
News of Hatch's actions prompted the chairman of the Minnesota Senate Finance Committee, Democrat Doug Johnson, to call for hearings to investigate Hatch's claims. Johnson said he would seek to subpoena Allina executives if they do not agree to testify.
The scrutiny comes amid HMO premium increases of 7.4% in 1998 and 11.7% in 1999 after two years of increases less than 2%, according to the most recent figures from the Minnesota Department of Health. Hatch said his office intends to investigate the business practices of other large not-for-profit health insurers in the state.
In an interview with Modern Healthcare, Allina general counsel and Senior Vice President Mark Mishek said Senate subpoenas won't be necessary.
"We sent Sen. Johnson a letter saying that we will appear before his committee to A) tell our side of the story and B) talk about why healthcare costs are increasing, which was supposed to be the point of this (Hatch's) investigation," Mishek said.
Allina was formed by the high-profile 1994 merger of for-profit Medica Health Plan and not-for-profit HealthSpan Health Systems. The merger was closely watched as a harbinger for integrated systems, with hospitals, physicians and health plans working together under one corporate umbrella. Allina finished 31st in this year's ranking of the 100 most integrated healthcare systems compiled by SMG Marketing Group (Feb. 19, p. 18).
In 1999, it won the prestigious Foster G. McGaw Prize for Excellence in Community Service awarded annually by the American Hospital Association.
And Allina's President and Chief Executive Officer Gordon Sprenger is one of the industry's most prominent healthcare executives, serving as the AHA's board chairman in 1996. Sprenger, 63, plans to retire from his Allina posts in July.
The memorandum asks the court to mediate any disputes that may arise between Hatch's office and Allina during the investigation.
A spokeswoman for Hatch said the attorney general had no choice but to file the memorandum because Allina was "at times, downright obstructionist" when responding to document requests.
In a letter to Hatch dated March 19, Mishek described Allina's cooperation as "full and complete," including the turning over of 50,000 pages of information that cost more than $1 million in staff time.
The attorney general outlined six pages of entertaining expenses he considered excessive and, in some cases, in violation of Allina's business expense policy. Among the items was more than $67,000 paid to three executives in expense reimbursements that the Internal Revenue Service ruled improper. The reimbursements included $38,700 for ski and golf trips and other travel, $2,800 in golf fees, $3,400 in meals and entertainment, $4,000 in club membership dues and $2,100 in gifts.
The memorandum cited seven trips or banquets that included golf fees, which the attorney general said was a violation of a company policy against reimbursing for golf fees. He also cited $167,000 for a suite at the Target Center in Minneapolis, where the NBA's Minnesota Timberwolves play; a $53,000 company party in September 1999 that included a $10,000 laser light show; and reimbursements for travel by spouses of four executives, also prohibited by company policy.
Allina said that employees actually paid for the golf in many of the instances, but the rounds were booked through the company. In others, the golf fees were provided for unpaid directors.
Mishek said he can't even comprehend the calculations Hatch used to claim that Medica's administrative cost rate is 47%. Allina's rebuttal of Hatch's claims said that even if his methods were adopted, the figure would be only 26%. Allina said the reported percentages accepted by state officials in 1998 and 1999 for Medica's HMO were 12.1% and 12.6%, respectively.