Allina should split off Medica, attorney general says
Glenn Howatt and Randy Furst
Star Tribune
Wednesday, July 18, 2001
Minnesota Attorney General Mike Hatch has called on Allina Health System to split into two companies, separating the 1 million member Medica health plan from
the 19 hospitals and 48 clinics of the health system.
In a confidential report to the Allina board of directors, Hatch said conflict of interests within Minnesota's largest health care organization were so severe that
Medica premium dollars have been diverted to shore up the cash position of Allina's hospitals or corporate office.
The report, obtained by the Star Tribune, said that decisions and financial transactions approved by top Allina officials have hurt Medica. As a result, the health
plan has not been able to hold down premiums, the report said.
Mark Mishek, Allina general counsel, denied that the nonprofit health system was mismanaged.
"The idea that Allina is stomping on the small health plan is not the way the organization is set up," Mishek said.
He said he could not comment on the specifics of the report because he had not had time to review it thoroughly.
Allina's board, which met Tuesday in a previously scheduled meeting, discussed the report but did not take action on it, according to company spokeswoman Maureen
Schriner.
But sources familiar with the situation say a deal is imminent whereby Allina will spin off Medica as a separate company and Allina's chief executive officer Gordon
Springer and the company's chief operating officer, David Strand, will depart.
After the board meeting, Hatch made only a brief comment.
"I did talk to some Allina representatives today and I was very impressed with their sincerity in trying to address issues," he said. "I look forward to working with the
board members."
Earlier in the day, before the board meeting, Hatch said that he met with Allina executives Friday to discuss his office's review of the company's finances.
Asked what issues he raised, Hatch would only say, "We talked about my concerns."
Hatch said it was the first of what he expects to be five or six reports on the financial review begun last year. He declined to say what the subjects of the other reports
will be.
The conflict-of-interest report comes as Allina already faces a federal grand jury investigation into allegations that it defrauded government health programs out of
as much as $19 million. In addition, court documents filed this year by Hatch said the company's top executives have spent millions on image consultants, public
relations experts, "climate facilitators" and golf trips. Allina has denied any improper spending.
No independence
In the report, Hatch said the Medica board, which is appointed by the larger Allina board, lacks the power to govern itself.
"Directors and officers of Medica cannot and do not exercise independent judgment as to the best interests of the statutory mission of Medica," according to the
report.
The report alleges that Strand, Allina's chief operating officer, earlier this year directed Medica to pay higher fees to Allina hospitals and clinics, even though
Medica and Allina hospitals already had agreed on fees.
According to Allina corporate memos included in the report, Medica eventually raised fees it paid to Allina hospitals by another 4.8 percent this year and is
scheduled to increase those fees by 10 percent in 2003.
Strand requested the change because of the "cash needs of the hospitals and clinics division," according to a memo he wrote earlier this year.
Hatch report's cited the incident as an example of how Allina officials have used Medica members' premiums to the benefit of the hospitals and clinics in the Allina
system.
The Medica division also transferred $30 million to Allina, calling the transfer a prepayment for corporate services that had not yet been provided to Medica, the
report said.
Allina's corporate office needed the money to help improve its financial balance sheet and maintain its bond rating, the report said. However, a Medica memo
indicated that the transfer would cost Medica more than $2 million annually in investment income.
Medica members also paid higher premiums because the health plan paid higher fees to clinics that referred patients to Allina hospitals, the report said.
Medica gave $14.7 million in financial assistance to the Aspen Medical Group, which has nine clinics in the metro area.
Under an agreement reached in 1998, Medica helped pay for capital improvements, consultants and outstanding debts of the clinic organization. At the same time,
Aspen agreed to switch its patients from Fairview Health Services hospitals to the Allina hospitals.
In addition, Medica pays Aspen an additional $1.5 million a year in "enhanced fees," according to Medica memos included in the report.
Allina chief medical officer Dr. Meredith Matthews said the fees were justified because Aspen admits many patients to Allina hospitals, according to a March 2001
memo.
The Hatch report said that the Allina hospital division is the "clear winner" in the deal, but Medica is a "clear loser," because its funds were used to induce Aspen to
use Allina hospitals.
Aspen Chief Executive Officer Tom Holets denied that Aspen receives higher than normal fees from Medica.
"We get significantly less than full fees from Medica than we do from other payors, including other payors that do not own hospitals," he said.
He said the $1.5 million payment from Medica is compensation for quality activities that the health plan requires the clinic to perform.
Furthermore, Holets said, Aspen still refers many non-Medica patients to other hospitals, including Fairview hospitals.
Medica's average premiums for HMO members have gone up 49 percent over the past five years, compared with a Minnesota industry average increase of 40 percent,
according to a report by health care industry consultant Allan Baumgarten.
The Hatch report also alleged that Allina officials helped Medica conceal $7 million in administrative costs to shield the health plan from scrutiny of overhead costs
by board members, regulators and policy holders.
Oversight
One of the issues facing Allina and Medica executives and board members is that Hatch has indicated in court documents that he has broad authority over the
companies because they fall under state laws governing charities.
Retired federal Judge Miles Lord, a former Minnesota attorney general, said Tuesday that if Hatch has found wrongdoing at Allina, "he has all the legal authority
necessary to move in and take over."
Lord said that while attorney general in 1960 he took over the Sister Elizabeth Kenney Institute in Minneapolis. At that time, he said, executives with the institute
were taking kickbacks for renting out a list of donors who had given money to Sister Kenney to fight polio.
"The attorney general is the guardian of all charitable public foundations and all non-profits," Lord said. "He makes the decision of whether or not the conduct of
the people in control of the corporation is consistent with their duties and obligations under their charters."
If they are not meeting their duties and obligations, the attorney general can act in his capacity as guardian and take over the corporation, Lord said.
-- Glenn Howatt is at
howatt@startribune.com .-- Randy Furst is at rfurst@startribune.com .
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