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Allina audit won't end HMO spending debate
By Tom Scheck, Minnesota Public Radio
August 27, 2001

When Minnesota Attorney General Mike Hatch releases his audit of Allina Health System sometime in the next few weeks, health care experts and policy makers say it won't resolve the dispute over spending practices of the state's HMOs. In March, Hatch released some of his findings in court documents, which alleged Allina spent nearly half of its premium dollars on administrative expenses. Hatch critics say those figures are misleading and call his investigation overreaching. HMO critics say the audit will offer a look into the often private spending practices of a health plan.

HATCH BEGAN HIS INVESTIGATION OF ALLINA last year after the federal government released a separate audit of the company. He says he has found nothing illegal, but maintains his final report will show about 47 percent of insurance premiums paid to Allina's HMO, Medica, go toward administrative expenses. He also alleges that Allina executives spent millions on perks like golf outings and Waterford crystal. Hatch says he started the audit to determine why health insurance premiums were rising. He says increased care and prescription drug prices are driving up the cost of care but says Allina's administrative expenses are out of line for a non-profit engaged in health care.

"You'll also find that administrative costs are going up faster than anything, and that's got to be addressed," Hatch said. "We've got too many people in wing tipped shoes in the administrative tower and probably not enough in the operating room."

Allina has denied its administrative spending is as high as Hatch claims and questioned the way he derived his numbers.

Hatch says anything not directly linked to medical care should be considered an administrative cost. That means a head nurse who coordinates work schedules, a receptionist who processes paper at a local health clinic or a janitor who keeps the hospital clean fall into the area of administrative cost.

Bob Connor, a professor of hospital administration at the University of Minnesota, says the attorney general is rewriting the rules of health care auditing. Connor says if Hatch is going to change the normal standards for auditing when examining Allina's expenses, they should be compared to expenses tracked the same way at other HMOs.

"If you want to use a different way, a more restrictive way of calculating what is going for direct patient care or inclusive way of calculating what is going to administrative cost, then you can do so- but to figure it out if it's high or low you really need to do it for other organizations and compare it to them," Connor said.

Until that's done, Connor says health care officials can only rely on the data collected by the Minnesota Department of Health and Department of Commerce. The company's tax returns and figures by the Commerce department state that Allina's administrative costs were 12 percent in 1999. Hatch has called the Commerce findings surprising. He also says his office would like to do more compliance reviews of the state's HMOs and other non-profits but doesn't know if he has the staff to complete all the work.

Even though there will be questions on how the attorney general conducted the Allina audit, the U of M's Connor says the allegations that Allina executives spent millions on image consultants, light shows and golf trips raise serious questions. He says while non-profits need to spend a certain amount of money to attract a greater amount of business, he says Allina executives may have forgotten their mission as a non-profit.

"Because there is not supposed to be an accrual or private benefit from for profit corporations, it is important to watch both salaries and perks'" Connor said. "And also symbolically, if you have a a sector where a lot of people are working very, very hard, symbolically it is always important to lead by example. And sometimes even if a perk is justified by market forces, maybe you you should forego it by leading by example."

The audit has already had an impact, even before Hatch released his findings publicly. Allina began a complete restructuring this summer, splitting off the Medica HMO from Allina's 17 hospitals and 47 clinics. The company's two top executives will leave once the transition is complete. Allina executives said the moves were a long-contemplated business decision, but admitted that the timing was triggered by Hatch's audit.

Since Allina split up the company and negotiated the make-up of the Allina and Medica boards with the attorney general's office, Hatch says he'll no longer pursue legal action against the company. But he says he'll complete his audit and make his findings public sometime around Labor Day. Critics of the HMO industry say a detailed investigation into the state's HMOs is long overdue.

"The Hatch investigation into Allina is unique not only because it hasn't been done in Minnesota but to my knowledge hasn't been done anywhere else in the country," said Kip Sullivan, who serves on the board of directors of the Minnesota Physician Patient Alliance, a patient/doctor organization that's been a long-time critic of the HMO industry. Sullivan says he and other members of his organization discussed HMOs spending practices with Hatch after he was elected to the attorney general's office in 1998. Sullivan says his organization released a report in 1998 that claimed the state's HMOs were spending up to 40 percent of the health care dollar on administrative costs.

"There's little question that the money the do spend is used inappropriately in many cases, and in my mind there's little question that the proportion of premium dollar that goes to administrative costs is a lot higher than the 10 or 11 percent that Allina has been claiming in the last decade or so," Sullivan said.

Allina executives have denied any wrongdoing in regards to their spending practices. At a press briefing after announcing the new board of directors for Allina's hospitals and clinics, Allina's CEO Gordon Sprenger says the new boards at both Allina and Medica will consider Hatch's allegations and will address them appropriately. He says he won't comment specifically about the allegations until he and the two boards see the completed audit.

"You can take any large organization and you can find fault with decisions that may have been made at one time or another or judgments that may have been made," Sprenger said. "In general, what I would say is that we feel that we have run a very responsible organization and that the kinds of business expenses that we have needed to occur were appropriate in a competitive environment."

Sprenger says after the two boards review the audit, they'll consider making policy changes.

Even as the Hatch investigation into Allina is winding down with scaled back rhetoric on both sides, other health executives are questioning if Hatch is trying to change the health care system without any input from the business community, policymakers or health care experts.

Michael Scandrett with the Minnesota Council of Health Plans says Hatch is wreaking havoc on the state's health care system. He says the state's HMOs are abiding by state laws and audits by the Health and Commerce Departments. Scandrett says state policy makers and the attorney general need to agree on the best way to regulate and monitor HMOs.

"We're used to a system in which the laws and the rules which are used to govern health plans are stated in the law and there's something we can look at. We can find out what the rules are. With this new approach we can't look anything up to figure out what the Attorney General is telling us the way to act. So there's no way to walk the straight and narrow at least from the attorney general's perspective," Scandrett said.

While Scandrett and others in the business of health care are complaining about Hatch's audit, they should start getting used to it. Hatch has indicated he will conduct similar compliance audits of HealthPartners and Blue Cross and Blue Shield of Minnesota.

Allina chief operating officer David Strand, who will leave the company on September 5th, serves as the chair of Minnesota Public Radio's Board of Trustees. A member of Allina's board of directors also serves on MPR's board.