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Medica changes board under pressure from Hatch
From staff reports
August 2, 2001

Allina Health System has named a new board of directors for its Medica health plan after negotiating the board's make-up with Attorney General Mike Hatch. Hatch has been investigating Allina's finances and management. Two weeks ago Allina announced it would split off Medica from the company's hospitals and clinics, in part to satisfy some of Hatch's concerns. The degree of Hatch's involvement in overhauling management of the state's largest health care organization is unusual, though not unprecedented, and has drawn both support and criticism.

Allina CEO Gordon Sprenger says he expects Hatch to be involved in reviewing the Allina board of directors.

For more information on the break-up of Allina, see our archived stories.
ALLINA OFFICIALS SAY as part of the breakup of the company, they wanted a new independent board to govern the 1-million member Medica health plan. Until now, the seven-member Medica board was a subset of the larger 28-member Allina board. The seven members have resigned from the Medica board, and have been replaced by a new slate headed by former Fingerhut CEO Ted Deikel. Deikel says the group's first tasks include getting up to speed on the Attorney General's audit, and making sure Medica's administrative costs aren't out of line.

"We will be focusing on some very basic issues having to do with travel, entertainment, consulting issues, what we have to do is make sure that the community - all our communities and constituencies - understand that we are here to do the right thing for the members of this organization," Deikel said.

Hatch alleges Allina has wasted millions of dollars on executive perks and consultants and improperly used Medica members' premiums, allegations the company has denied. Hatch praised the new board, which he helped select along with Deikel and Allina CEO Gordon Sprenger. Hatch says the members are well respected and know how to manage money. He says the oversight of the new board should ratchet down administrative costs - which may or may not translate into lower premiums for Medica members. "You've heard up until the last month or two, the industry saying, 'not only have we jacked the rates up for the last few years, but we're going to jack them up in the coming years.' I suspect that you will find that this company won't be jacking them up. They may have to adjust them, but that's a suspicion. It's not for me to be making that speculation, but I think you'll see a company that will be very prudent with regard to the dollar," Hatch said.

One of the outgoing Medica board members - Dr. Ronald Peterson - released a statement saying he believes the facts will show that administrative costs have played an insignificant role in the health care crisis. Peterson said changing the board doesn't alter a stark set of realities - that increasing health care costs stem from new drugs and new treatments.

Health care consultant Allen Baumgarten says he'll be surprised if the new board makes a major difference in health care costs, and says Hatch's deep involvement in the process should concern other nonprofits. "I think that not-for-profit organizations will be concerned, will be wondering about what this says about the role of the attorney general, and how likely it is that the attorney general might choose to get involved in the governance of their particular organization," Baumgarten said.

The executive director of the Minnesota Council of Nonprofits - John Pratt - says nonprofit organizations are closely watching Hatch's investigation, and are aware of the attorney general's authority to scrutinize their books. He says the replacement of an entire nonprofit board is unusual, and says most of the state's 4,500 nonprofit boards are very stable over time.

Pratt says the only similar case that comes to mind dates back to the 1960s. "Probably one of the most similar cases was the Bush Foundation which had a split on its board, was unable to make decisions, and ended up actually getting sued by the attorney general's office, which forced new members to be appointed to their board and several people to leave. But in this case, I think obviously they are taking the initiative to make the change in a way and not wait for it to get to the courts," according to Pratt.

In another case from the 1960s, then-attorney general Miles Lord took over the Sister Kenny Foundation in Minneapolis. Lord says the charities executives were accepting kickbacks, and giving the foundation's donor list to outside organizations. Lord says he replaced the board "and effectively ran the place from the attorney general's office. And then at a later time, when I resigned my job and Fritz Mondale took over, he issued a public report that I had written previously. And it was very generally accepted as the appropriate thing to do," Lord recalled.

Lord says Hatch is doing the right thing in investigating Allina, and says if Allina thought Hatch's allegations were unfounded, the company should be fighting it in court. Hatch says his audit is nearly completed - he's sent four of six reports to board members, and expects to see a change in the 28-member Allina board in the next week or two.

Allina CEO Gordon Sprenger says he expects Hatch to be involved in reviewing the Allina board. "All along we have agreed that we would both be discussing the makeup of these boards as we split up the company. But there's a different set of issues over in the hospitals and clinics, it's much more constituency-based from each of the hospitals that are part of the system, the physicians that practice within those hospitals, and so the makeup of the board is a little more prescriptive if you're going to have a happy family in the company. Simply because those institutions expect to be sitting at the governance table," Sprenger said.

The outgoing Medica board includes three doctors, the president of the Powderhorn/Phillips Cultural Wellness Center, a former newspaper publisher, the retired chairman of Dain Rauscher, and the president of a Minneapolis investment firm. All will continue to serve on the Allina board for now. The new Medica board includes former Supreme Court Justice Esther Tomljanovich, former Blue Cross Blue Shield board chairman John Buck and former Public Service Commissioner Kris Sanda.

Five of the nine members have contributed to Hatch's campaigns in the past. Board chair Deikel and his family gave Hatch $4,000 in 1998, and Deikel contributed $12,000 to Hatch's unsuccessful run for governor in 1990. But Sanda, a longtime Republican activist, says the board is independent. "I'm not a Mike Hatch supporter and probably would never be one. And there are other Republicans also standing behind me that have been selected, so this is truly a bipartisan board," Sanda said.

Sanda says board members are plowing through a thick stack of paperwork and are eager to get to work. Board chairman Deikel says the goal for Medica is to provide the highest quality care at the lowest cost, and said the board won't be doing much out-of-state travel as it begins its work. The board confirmed Medica president Jane Rollinson, who's been with the company for four months, as president and CEO of the new Medica organization.

Editor's Note: David Strand, chief operating officer of Allina, is the chairman of the Board of Trustees of Minnesota Public Radio. Two other MPR board members also serve on the board of Allina, and one other MPR board member was recently appointed to the board of Medica, which is being spun off from Allina. MPR maintains an editorial firewall between its board and administration, on the one hand, and its news division, which makes independent editorial decisions, on the other.