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Medica case could test attorney general's power over nonprofits
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Attorney General Mike Hatch alleges the same people he nominated to run the Medica HMO "hijacked" the company's board of directors. (MPR file photo)
A Hennepin County judge could rule as early as this week on a case that some argue could give the attorney general newfound power over nonprofits. Judge Lloyd Zimmerman must decide whether Mike Hatch may replace Medica's board of directors for the second time in four years. Hatch contends the HMO's new board members abused their nonprofit status, held sham elections, and gave themselves lavish raises. Medica says its board took a broken company and brought it back to financial health.

Minneapolis, Minn. — The dispute between Attorney General Mike Hatch and Medica dates back to 2001, when Hatch accused Medica's parent company of wasting millions of dollars on executive perks and consultants. As a consequence, Allina agreed to reorganize, spin off Medica and overhaul management.

Medica's board resigned, and the court appointed eight new members nominated by Hatch. Those members included former state Supreme Court Justice Esther Tomljanovich, former Fingerhut CEO John Buck, and former Public Service Commissioner Kris Sanda.

Hatch alleges the same people he nominated "hijacked" the Medica board, violated public trust by giving themselves lavish raises and electing themselves to the board into permanent positions.

Hatch was unavailable for comment, but Solicitor General Lori Swanson says the appointees were temporary special administrators who were supposed to clean up the problems and get out.

"Medica is a million-member HMO. Roughly 20 percent of the state's population is insured by that organization. And we believe that among those million people, that they ought to be able to find qualified candidates who can be board members," says Swanson.

Medica Senior Vice President Robert Longendyke says the attorney general's office is taking board actions out of context. He says Medica did everything Hatch required, and then some.

"We've improved from being the most expensive health plan in Minnesota to the least expensive health plan in Minnesota. A year or so ago, because of our performance, we were able to give $80 million back to our customers and providers," says Longendyke.

Board member Esther Tomljanovich, who served eight years on the state Supreme Court, says there was never any doubt her appointment was permanent.

"This was not a temporary appointment," says Tomljanovich. "I was required under the canons of judicial ethics to give up what was then my part-time job -- sitting as a retired judge -- to do this. And I would not have done that for a temporary position."

Attorneys general are told go in and vigorously prosecute as necessary, but at the same time, don't interfere with their business judgments even if it seems wrong to you.
- Health law expert Tim Greaney

Tomljanovich also takes issue with Hatch's contention that board members were giving themselves lavish compensation.

"This isn't a bunch of directors who were there lining their pockets. It's a bunch of directors who really worked hard, who really want this organization to succeed and who believe this organization has succeeded. This was a corporation that was really in turmoil," she says.

Judge Zimmerman's ruling could come down to whether Hatch's power to oversee Medica in 2001 carries over to today, or whether that oversight ended when Hatch's appointees began running the company.

The court order appointing the latest Medica board contains no expiration date, but also contains no language that the attorney general's oversight via the court order continues indefinitely. Medica maintains Hatch no longer has oversight; Swanson says he does.

"The court file was, first of all, at all times kept open. It hasn't to this day been closed," says Swanson. "If you have a settlement and it's a 'Wham-bam, that ends it' kind of deal, usually court files are closed. And here it wasn't, in recognition that it was a continuing process that would occur."

There's no question that as attorney general, Hatch has broad authority over nonprofits, and Minnesota law requires HMOs to operate as nonprofits.

But the case points to a gray area in nonprofit health law, says professor Tim Greaney, who co-directs the Center for Health Law Studies at St. Louis University School of Law. He says big revenue nonprofits like Medica must often operate like their for-profit counterparts, but also stay true to their missions. At the same time, attorneys general must walk a tightrope in overseeing nonprofits but not running their affairs.

"They're told go in and vigorously prosecute as necessary, but at the same time, don't interfere with their business judgments even if it seems wrong to you. This may be a good case of ambiguity about what poles we're on," says Greaney.

Under Minnesota law, attorneys general must avoid second-guessing nonprofit board decisions. Minnesota's Supreme Court ruled four years ago that nonprofit boards deserve the same deference as for-profit boards.

Greaney says otherwise, attorneys general can inject politics into a nonprofit and ask directors to divide their loyalties.

"To some extent, it threatens the non-political nature of those organizations, and it sets up the directors who are appointed in a bit of a conflict-of-interest position," says Greaney. "They owe some fealty to the attorney general who selected them. But the law is very clear their ultimate loyalty is supposed to be to the corporation, its purposes and its members."

Mixing politics and attorney general power is a real concern, says nonprofit law expert James Fishman. Fishman teaches at Pace School of Law in New York and has written several law books on nonprofit law.

"Nobody approves of wrongdoing by charities. It's really a wonderful issue for AGs who are political figures. There have been several other situations where AGs have used their power excessively, and I think this may be one," Fishman says.

Solicitor General Lori Swanson didn't wish to comment on whether Hatch's political aspirations played a role in the case. He is often mentioned as a possible DFL contender for governor, but hasn't said whether he'll run next year. But last May, Hatch sent a fundraising letter to DFL contributors, asking them to help him finance a gubernatorial campaign.

Meanwhile, Fishman says Judge Zimmerman's ruling could have far-reaching effects for nonprofit boards.

"I think it will cast a very broad shadow over boards of nonprofits in Minnesota that their decisions may be second-guessed; they may be removed," says Fishman. "Most are not paid for their efforts, and I think the response may be 'Who needs this?'"

Swanson disagrees. She says if the judge rules in the attorney general's favor, it would set no great precedent because Medica's situation is unique.

"This is not a situation with a state going in and actually removing board members. To the contrary, our point is they were put in place as court custodians to serve a role, and ultimately relinquish that role in favor of the membership," says Swanson.