Minnesota Fat Cats By Kip Sullivan In These Times, July 8, 2002 Ever wondered how HMOs can ruthlessly cut medical services and still be utterly incapable of keeping down inflation in health insurance premiums? The short answer is that HMOs generate high administrative costs that swamp the savings they extract from patients. A massive, six-volume report on Minnesota's Allina Health System released by state Attorney General Mike Hatch last summer, reveals in excruciating detail just how extravagant HMO administrative expenditures can get. Allina is Minnesota's largest HMO and its second-largest health insurance company. The nonprofit insures 1 million of Minnesota's 4.7 million residents, owns 47 clinics, and owns or manages 17 hospitals. If Allina had been a for-profit company in 2000, its $2.9 billion in revenues would have ranked it about 530 on the Fortune 1000 list. But unlike most companies this size, which have worldwide markets, Allina's market is limited to Minnesota and three border states. Hatch's report received extensive coverage from the Minnesota media, but little attention elsewhere. That's unfortunate, because the report provides a detailed picture of the day-to-day operations of an HMO that no other document has revealed. The report depicts a self-centered, party-hardy culture within Allina that is quite different from the image cultivated by the HMO industry. Allina frequently brandished its nonprofit status as evidence that it was somehow compelled to be a frugal servant of the Minnesota "community," but the report shows that Allina was as capable as any other large, ruthless corporation at using money and political muscle to silence its critics. The report (available at www.ag.state.mn.us ) lists hundreds of examples of lavish expenditures, including: § Trips to Aspen and Vail, more than 30 trips to Hawaii, and more than 1,000 trips to California and Florida from 1998 to 2000; § Flights to Aruba, London, Paris, Venice, Grand Cayman, Amsterdam, Athens, Cancun, Los Cabos, Pago Pago, Puerto Vallarta and San Juan during those same three years; § $18,000 worth of season tickets to the Minnesota Timberwolves for just one executive over three years and $5,180 for season tickets to the Minnesota Twins in 1998 for another executive; § Lavish severance pay for executives who didn't qualify for it (either they hadn't worked long enough, or weren't laid off) and expensive "farewell dinners" for people who were merely transferring from one division of Allina to another; § $1 million a year for a "turn around" specialist from California who worked part-time and hired more California consultants to host parties for executives at which they watched the movie "Twelve Angry Men" to learn about group dynamics; § A hot air balloon ride for executives over vineyards in California's Napa Valley ($1,295, champagne brunch included); § A $70,000 company party, $10,000 of which was for a laser light show; § Thousands on food and drinks for eight Allina officials attending an "ethics" seminar in Monterey, California, including $1,500 for one meal at the exclusive Club XIX overlooking the 18th hole of the Pebble Beach Golf Course; § $1,679 for the cost of one executive's trip to Atlanta, including a $45 bill incurred at Atlanta's Tongue and Groove dance club; and § $1,475 for a dinner thrown for Minnesota's commissioner of health (whose job it is to regulate HMOs), former Allina vice president Jan Malcolm. The Hatch report should be useful to observers and critics of the HMO industry across the country. If a relatively small, nonprofit HMO in Minnesota -- the state where the misnomer "health maintenance organization" was invented -- can waste premium dollars this brazenly, it is certain that scarce premium dollars are being squandered in a similar fashion throughout the United States, especially by the larger, for-profit HMOs which dominate the industry. Allina's troubles began in July 1998 when the Office of Inspector General of the U.S. Department of Health and Human Services (which administers Medicare) reported that HMOs serving Medicare beneficiaries had overstated their administrative costs. According to the investigators, these excessive HMO administrative expenditures cost Medicare $1 billion a year from 1994 to 1996. This was an enormous sum, equaling 5 to 10 percent of total Medicare payments to HMOs during those years. To develop a clearer picture of where all this money went, the investigators undertook a second study which focused on nine of the more than 200 HMOs serving Medicare recipients at the time, including Allina. (HMOs insure 14 percent of all Medicare beneficiaries.) In January 2000, the Department of Health and Human Services reported that the administrative costs of these nine HMOs ranged from 17 to 44 percent of medical costs, and that five of these HMOs charged Medicare twice as much in administrative costs as they should have (the other four HMOs did not keep separate books for Medicare and non-Medicare patients). Inappropriate charges to Medicare included expenditures on gifts for HMO employees like massages and golf games, lavish parties for employees and tickets to sporting events. That February, Hatch announced his plans to audit Allina. The Minnesota Department of Health, under commissioner Malcolm, objected, claiming Hatch had no authority. But Minnesota law gives the Attorney General the authority to ensure that nonprofits are not enriching their employees or contractors or otherwise wasting money. Minnesota imposes a nonprofit requirement on all of its HMOs. According to Deputy Attorney General Lori Swanson, Allina was uncooperative from the start: "There were delays, we weren't allowed to talk to staff, we had to put questions in writing, they'd give us a partial answer, we'd have to write a clarifying question, then, eight weeks later, we might get a response. They treated our questions like litigation: If you don't use the right words in your question, you don't get any information." In March 2001, Hatch sued in state court to force Allina to stop withholding documents. This lawsuit, and the nearly simultaneous announcement by Sen. Doug Johnson that he was going to hold hearings on Allina's behavior, forced the company to back down. On March 29, the judge hearing the case signed an order approving an agreement in which Allina promised to cooperate fully with Hatch's probe. The following day, Johnson postponed the Senate hearing. But that same week, Allina, which already had more than 20 PR people on its staff, hired several media consultants and a polling firm to discredit Hatch's report. One of the PR firms was GCI Tunheim, which had just hired Hubert "Skip" Humphrey, son of the former vice president, who had preceded Hatch as attorney general. Already under fire for excessive administrative spending, Allina blew $306,000 on GCI Tunheim and the other PR consultants over the next three months. When Hatch saw mention of GCI Tunheim's new contract with Allina in a newspaper report, he demanded the documents produced by GCI Tunheim and the other consultants. These documents indicate that Allina consultants planned a media campaign of extraordinary complexity for the spring and summer of 2001. The proposed message was multifaceted, and the proposed messengers represented a cross-section of Minnesota's public- and private-sector leadership. Messages Allina sought to promulgate included: Allina does good things for battered women and people in a low-income Minneapolis neighborhood; HMO administrative costs are trivial compared to other health care costs; Hatch is setting health policy all by himself; and Hatch's investigation is scaring businesses from coming to Minnesota. (Full disclosure: One memo turned over to Hatch suggested targeting this author, who had published several reports and op-eds critical of Minnesota's HMO industry and of Allina in particular, for "opposition research.") The documents prepared by the PR consultants identified dozens of Minnesota organizations and individuals that Allina suggested could serve as "third party advocates." These messengers included health commissioner Malcolm; former U.S. senator and Allina lobbyist Dave Durenberger; Roger Feldman, Blue Cross Professor of Health Insurance at the University of Minnesota; Minneapolis Mayor Sharon Sayles Belton; former Vice President Walter Mondale; and various Chambers of Commerce. Allina's media consultants did carry out a portion of their plan. Sayles Belton and two other prominent Minneapolis Democratic-Farmer-Labor politicians jointly published an op-ed in the Minneapolis Star Tribune arguing that Hatch's investigation was a cheap political gambit that ignored Allina's good works for poor people and battered women. Durenberger made statements critical of Hatch's investigation on Minnesota Public Radio. Burt Cohen (also on Allina's list of "advocates") published an editorial in the Twin Cities Business Monthly that claimed Hatch's investigation was scaring businesses away. The Star Tribune published an op-ed ghost-written by one of the consultants and signed by Allina board chairman Bill George, which asserted that administrative costs were not to blame for high premiums and that Allina's CEO, Gordon Sprenger, was a good man. But all of Allina's influence with Minnesota politicians, reporters, editors, and professors was not enough to blunt the anger Hatch's documents provoked among Minnesotans, especially among Allina's premium-paying customers and demoralized doctors. While no independent polls were taken of the public's response to Hatch's findings, a poll taken by Allina's grossly overpaid media consultants found that only 19 percent of respondents thought Hatch was "treating Allina unfairly," and 51% thought his investigation was fair (the remainder weren't sure). Faced with Hatch's damning evidence, the drumbeat of terrible publicity, and the fact that the State Senate was on Hatch's side, Allina broke itself into two parts -- an HMO and a hospital-clinic network -- and Allina's board resigned. David Strand, Allina's chief operating officer who had been expected to succeed Allina's CEO when he retired, resigned abruptly, claiming he didn't want to run an HMO that didn't own its own hospitals and clinics. By August 2001, the battle was over. Hatch released the last chapters of his long report in September, and announced he did not intend to take any further action against Allina. Shortly thereafter, Gov. Jesse Ventura announced that he would form a task force to investigate the future of Minnesota's health care system. The breakup of Allina was the first significant reversal of the merger avalanche that struck Minnesota in the mid'90s. Such reversals are rare throughout the U.S., and Allina's has been the only one forced by government action. Furthermore, Hatch's investigation has changed the way Minnesota's media, policymakers, and regulators talk about the HMO industry. His disclosures forced Minnesota pundits to concede that the HMO experiment had been a failure. In September, the media reported a chilling epilogue to this tale of corporate arrogance. Allina, whose new board is actively cooperating with the attorney general, delivered a lengthy report summarizing the results of an internal investigation of what appeared to be an attempt by Allina executives to bribe Sen. Johnson. Strand and others allegedly discussed a plan to persuade Allina's management company, Minnesota-based United HealthCare (UHC, the nation's largest health insurance company), to build a claims-processing facility in Johnson's Iron Range district if Johnson would agree to call off the hearing. UHC was created 27 years ago by individuals who used to work for an HMO that was part of Allina. Allina also had an unusual management contract with UHC, outsourcing numerous tasks that insurance companies typically do in-house and paying more to UHC than it had to. Sen. Johnson intimated to the press that he had some inkling of Allina's plan, but he said he never was approached directly. (The U.S. Attorney ultimately declined to prosecute.) As lengthy as the Hatch report is (it stands two feet, three inches tall and weighs 51.5 pounds), it fails to measure and evaluate the full extent of HMO waste, including all of the money spent on monitoring doctors and on marketing health insurance. HMOs have failed because managed care is a zero-sum game -- HMOs cut medical costs and use the savings to police doctors, not cut premiums. Customers need to be informed about how much of their premiums go to pay for administration, including managing physicians and marketing -- both by HMOs and by less tightly-managed insurers like Blue Cross Blue Shield -- if they are to choose wisely between a private-sector health insurance system, which depends heavily on advertising and salespeople, and one, such as Medicare, that is financed by the government and spends almost nothing on marketing or managing doctors. The combined impact of HMO expenditures on policing doctors, marketing and the types of expenditures documented in the Hatch report can best be illustrated by comparing the administrative costs of a typical HMO with Medicare, the nation's program for the elderly and disabled. Unlike HMOs, Medicare does not advertise, police doctors, pay dividends to stockholders or pay for parties in Pago Pago. Consequently, the difference in the proportion of revenues spent by HMOs and Medicare on administration is immense. If you give a dollar's worth of premiums to an HMO, it will spend 20 to 30 cents on administration, and the rest on patients. But if you give a dollar's worth of taxes to Medicare, it will retain just 2 or 3 cents for overhead and spend the remaining 97 to 98 cents on patients. The strongest argument for a single-payer system is the enormous diversion of scarce health care dollars into private-sector overhead costs. But even without data on the cost of policing doctors and marketing, the Hatch report significantly contributes to America's lopsided health policy debate. The types of expenditures Hatch documented are the sort the public readily understands and condemns. Although public hostility to HMOs is widespread, the battle over the role managed care should play in the U.S. health care system is far from over. Most importantly, that hostility has not persuaded George W. Bush to back off his proposal to push Medicare beneficiaries into HMOs. In May, Bush claimed that HMOs save money and that Congress should join him in supporting "reform" that would turn Medicare beneficiaries over to the HMO industry. If and when Congressional health committees hold hearings on Bush's proposal, Mike Hatch should be their first witness.