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SUMMARY OF HEALTHPARTNERS CONSULTING EXPENSES

                From 1997 through 2000, HealthPartners spent approximately $26 million on consulting fees and expenses. While HealthPartners adopted policies and internal audit recommendations regarding third-party contracts, it seems to have consistently ignored them. HealthPartners did not consistently utilize requests for proposals, did not enter into written contracts with its consultants and failed to require appropriate documentation for expenses and other reimbursements paid to its consultants. The State also identified millions of dollars of expenditures which do not appear to be consistent with the mission of a nonprofit organization.

RELATIONSHIP WITH AFFILIATE

                HealthPartners paid an affiliate over $2 million from 1997 through 2001 even though no written agreement outlining the services to be provided by the affiliate was ever prepared. One of the principals of the affiliate was a former officer of HealthPartners. For providing the nonspecified services, the former officer and other principals of the affiliate were paid between $8,000 and $12,000 a month in base compensation; received approximately $1,700 a month in fringe benefits; and were also entitled to incentive compensation. Interestingly, if HealthPartners failed to determine the incentive compensation that the affiliate was entitled to within 60 days of the calendar year-end, the affiliate was automatically entitled to incentive compensation equal to 15% of its base compensation.

HEALTHPARTNERS COMPENSATED CONSULTANTS AND REIMBURSED THEM FOR THEIR EXPENSES WITHOUT ADEQUATE SUPPORT

                The State found millions of dollars in consulting fees for which HealthPartners never issued a request for proposals and for which no bid was ever sought. HealthPartners often failed to enter into written agreements with its consultants. For example, HealthPartners paid Deloitte and Touche over $2.6 million in professional fees and expenses from 1997 through 2000 without a written contract. In another case, Health Partners paid Cap Gemini Earnest & Young over $900,000 to reimburse it for undocumented expenses. HealthPartners also paid consultants hundreds of thousands of dollars to reimburse them for expenses when the expenses were not itemized and were simply described in invoices as "expenses" or "out-of-pocket expenses." Without supporting documentation, there is no ability to determine whether the expenses were actually incurred or whether the amount charged was reasonable.

EXPENSES QUESTIONED WITH RESPECT TO THEIR CONSISTENCY WITH HEALTHPARTNERS' MISSION

                HealthPartners' mission is "to improve the health of [its] members, [its] patients and the community." It is questionable whether a number of HealthPartners' consulting expenses are consistent with this mission.

                For example, HealthPartners spent millions of dollars to conduct public opinion polls. The polls were conducted by consultants and included questions focusing on the rationing of health care and coverage decisions affecting life and death issues. Other polls commissioned by HealthPartners had strong political undertones. For example, participants in one poll were asked whether they agreed or disagreed that Attorney General Mike Hatch is taking the right steps to protect health care consumers and whether they agreed or disagreed that Attorney General Mike Hatch is a political person who takes public positions primarily to further his own political career. It was unclear how this type of polling fosters
HealthPartners' mission. Another survey had even stronger political undertones in that participants were required to identify themselves as Republicans, Democrats, Independents or "other". That survey focused on recent investigations of health plans by the Attorney General's Office which uncovered high administrative costs and the lack of coverage for mental health treatment.

                The State's review also indicated that HealthPartners allocated significant health care dollars for party planning, executive coaching and similar activities. In one case, HealthPartners paid a consultant to organize "institutes for clinical systems improvement" on the West Coast, even though it is only licensed in Minnesota. In another case, HealthPartners paid a party planner to plan the employee holiday party, the "physician's recognition event", a doctor's retirement party, employee recognition events, service award events, board recognition dinners, retreats and other similar activities. It is questionable how these activities further HealthPartners' mission to improve the health of its members and the community.
Other expenses questioned for their consistency with HealthPartners' mission include the payment of millions of dollars for lobbying and memberships in lobbying and trade organizations. For example, between 1997 and 2000, HealthPartners paid over $750,000 to the American Association of Health Plans ("AAHP"). The AAHP has funded projects to improve the portrayal of the health care industry in movies and television shows and hired the William Morris Talent Agency to improve the image of HMOs on the big screen.


CONCLUSION

                The State concluded that HealthPartners lacks a sufficient policy pertaining to third party contracts. Because of the large amount of money spent on consultants, HealthPartners needs to establish specific controls to be followed when evaluating consultants, contracting with consultants, paying consultants and determining whether a particular endeavor is consistent with its mission.

CONSULTING EXPENSES

    I.     INTRODUCTION

As a billion dollar company, HealthPartners must necessarily utilize consultants. HealthPartners and its related entities spent approximately $26 million on consulting fees and expenses from 1997 through 2000 (Exhibit 1). While HealthPartners adopted policies and internal audit recommendations regarding third-party contracts, it appeared to consistently ignore them. For instance, on several occasions it failed to utilize requests for proposals, failed to enter into written contracts with its consultants and failed to require appropriate documentation prior to paying its consultants. The following sets forth a number of issues relating to the management
of consultants by the HMO.


    II.     COMPLIANCE WITH INDUSTRY STANDARDS AND INTERNAL POLICIES

            A.     Consulting Contract Standards

                There are numerous periodicals and reference manuals that describe the reasonable and prudent approach to the selection and management of outside contractors by non-profit and other organizations. (Exhibit 2). Depending on the size of the contract, non-profit organizations, including health maintenance organizations ("HMOs"), should:

    1.     Determine and articulate the goal and desired outcomes of the consulting contract;

    2.     Interview contractors as to experience, credibility and knowledge;

    3.     Obtain references regarding competing contractors and issue a request for proposal ("RFP") to each   contractor;

    4.     Enter into a written contract that describes the work to be performed, the desired outcome of the work, the  time parameters in which the work will be performed, the expected total project cost, and the documentation  necessary to be submitted for payment to be made;

     5.    Require adequate documentation to support fees.     Contractors compensated on an hourly rate basis should  submit invoices that detail hours of work performed, identified by day and time bracket, the services performed each hour, and the person who performed the work; and

     6.   All expenses should be itemized on the invoice and supporting invoices for expenses should be attached.

                Because HealthPartners is a steward of health care dollars and a non-profit corporation that exists to benefit the public, it is important that HealthPartners conduct its business in a reasonable and prudent manner.

            B.     HealthPartners' Policies Regarding Consulting Contracts

                HealthPartners has only two policies that address the retention of third-party contractors. (Exhibits 3, 4). The first is a "Bids" policy that requires all transactions for equipment and services in excess of $20,000 to be bid. (Exhibit 3). The policy requires that bid requests be typed with complete information including quantity, description, bidding period, delivery requirements and any special conditions. Id. The policy also requires that a minimum of two bids be obtained with regard to any contract. Id. The policy notes that "[ e ]xamination of the financial condition of a company, its ability to perform, and its facilities should be part of the criteria for an acceptable vendor". Id. The policy also requires that if all other factors of the bid are equal, the contract should be awarded to the lowest bidder. Id.

                The second policy sets forth the conditions under which HealthPartners' employees may accept a bid other than the lowest bid. (Exhibit 4). HealthPartners' employees are allowed to award a contract to a vendor or consultant that did not submit the lowest bid if concerns arise about the product or service offered by the lowest bidder. Id. If a higher bid is accepted, however, the HMO employee must create a spreadsheet listing the objective elements of the decision and explain in writing the reasons for the decision. Id. Both the spreadsheet and written explanation are required to be reviewed and approved by management prior to the acceptance of the bid. Id.

                As discussed below, HealthPartners appeared to routinely fail to comply with these limited policies.



            C.     1997 Internal Audit

                On March 27, 1997, a Capital Purchasing Audit Report was issued as a result of an internal audit of
HealthPartners. (Exhibit 5). The Report identified six areas of weakness, 'including that "[t]he organization does not consistently utilize effective contracts for contracted services." Id. The Report stated that certain transactions were either not supported by a contract or that the contract contained insufficient language to document expectations regarding, among other things, pricing, quality, confidentiality and ownership rights. Id. The Report also emphasized that contracts are essential to establishing, monitoring, and enforcing accountability regarding the terms of the agreement. Id.

                The Report recommended that HealthPartners develop and communicate explicit guidelines related to the purpose, use, and requirements of contracts. Id. Specifically, HealthPartners was directed to establish contracting guidelines including, but not limited to, the purpose and use of contracts, minimum contract language, contract review requirements, dollar thresholds, and the person authorized to execute contracts. Id. The Report further recommended that all agreements should be negotiated, reviewed, and approved at the beginning of each project. Id.

It does not appear that the recommendations in the Report were followed. Indeed, it appears that no specific third-party contracting policy has ever been adopted by HealthPartners.


                D.  HealthPartners' Failure to Comply with Industry Standards and Internal Policies and        
                            Recommendations


                    In many cases, HealthPartners had no written contract with the consultants it retained. In other cases, HealthPartners failed to require documentation supporting the invoices it paid. In still other cases, HealthPartners approved the payment of invoices where there was little or no description of the services provided, where the consultants who worked on the project were not identified, and where the number of hours each consultant worked was not specified. In addition, HealthPartners repeatedly reimbursed consultant expenses that were not itemized and lacked supporting documentation.     Without this information, it would be difficult for HealthPartners to determine if the expenses were actually incurred, and if they were, whether they were legitimate business expenses.

                In addition, there appear to be several unusual arrangements, such as contracts with companies affiliated with former executives of HealthPartners and arrangements involving the payment of millions of dollars on activities such as lobbying, polling, and executive coaching. It is questionable whether these expenses are consistent with the purpose of a non-profit organization and the stated mission of HealthPartners.

            1.     MedTrust Management Services, Inc.

                MedTrust Management Services, Inc ("MedTrust") is a Minnesota for-profit corporation created in 1994 pursuant to an agreement between HealthPartners and Keystone Business Development, Inc. (the" 1994 Agreement"). 1 (Exhibit 6). Keystone was a Minnesota for-profit corporation that provided business development, management, and consulting services to provider organizations in the health care industry.
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1 The 1994 Agreement consists of a number of individual documents and contracts. Only those relevant to this discussion have been attached as exhibits.

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                Earl K. Beitzel, John C. Brandt, and David W. Richter were Keystone's sole shareholders and became the sole individual shareholders of MedTrust. Id.  Beitzel was also the chief executive officer, treasurer and secretary of MedTrust. (Exhibits 6, 7). Beitzel was previously employed by Group Health, Inc. ("Group Health") and served as its controller, vice president and chief financial officer. (Exhibit 8).2

                Under the 1994 Agreement creating MedTrust, HealthPartners owned 50 percent of the MedTrust stock and Beitzel, Brandt, and Richter each owned an equal interest in the remaining 50 percent. (Exhibit 6). A Management Services Agreement, dated July 1, 1994, purports to identify the services to be provided by MedTrust to HealthPartners. (Exhibit 9). The Management Services Agreement fails to describe any specific services to be provided by MedTrust, however, and simply states that MedTrust will provide business development, management and consulting services. Id. The Management Services Agreement further states:


It is anticipated that [MedTrust] will be involved in a wide range and variety of [HealthPartners] projects, which will change from time to time. The parties agreed to define the scope of each major management project and to document the methodology to measure [MedTrust's] performance in a project addendum, which shall be signed and dated by the parties and become a part of this Agreement. Id.

                In connection with the State's review, HealthPartners failed to produce even one project addendum that was completed. (Exhibit 10).

                From 1997 to the present, HealthPartners paid MedTrust over $2.6 million for consulting services. (Exhibit 11). Regardless of whether any work was performed on behalf of HealthPartners, HealthPartners paid MedTrust a retainer of $30,000 a month from July 1994 through July 1998 for the services of Brandt and Beitzel. (Exhibits 9 and 12). In August 1998, HealthPartners increased the retainer to $33,000 per month. (Exhibit 13). This increase appears
to be in response to a request from Beitzel that HealthPartners give the base compensation "some thought". (Exhibit 14).

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2 Group Health, Inc. and MedCenters, both HMOs, merged in 1992 to form HealthPartners.
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                MedTrust was also permitted to charge HealthPartners an hourly rate for services provided by employees of MedTrust other than Brandt or Beitzel. MedTrust's records indicate that MedTrust billed HealthPartners $32,000 for five projects that were not covered by the monthly retainer. (Exhibit 11).3


                In addition to the base monthly compensation and hourly compensation, MedTrust was also entitled to receive incentive compensation up to a maximum amount of 45% of its annual base compensation. (Exhibit 12). HealthPartners had complete discretion as to whether the incentive compensation would be paid. Id. The criteria for awarding the compensation was not set out in any document. HealthPartners was simply to consider the "overall performance of
[MedTrust] in improving [HealthPartners'] operating performance and satisfactorily completing the management projects assigned ... " Id. If HealthPartners failed to determine whether incentive compensation was appropriate within 60 days of the calendar year end, MedTrust was automatically entitled to an incentive compensation award equal to 15% of its annual base compensation. Id. From 1997 to the present, HealthPartners paid MedTrust $468,000 in incentive compensation. (Exhibit 19).


                The payments from HealthPartners to MedTrust inured directly to MedTrust employee- shareholders Beitzel, Brandt and Richter. Each was paid between $8,000 and $12,000 a month in base compensation. (Exhibit 35). In addition, each received between $1,655 and $1,930 a
month in fringe benefits, including a $480 per month automobile allowance. Id. All three also participated in an incentive-based 401 (k) plan, pursuant to which up to 10% of base compensation would be contributed to the plan. Id. The 401 (k) plan contribution was contingent upon MedTrust receiving the incentive compensation described above. Id.

                On June 30, 2002, during the course of the State's compliance review, HealthPartners purchased the other 50% interest in MedTrust, buying out Brandt and Beitzel's shares.4  HealthPartners' only explanation for the purchase of MedTrust was "a reduction in the need for services of MedTrust and its employees." (Exhibit 16).


                Despite the purported reduction in the need for MedTrust's services, another Services Agreement was entered into between MedTrust andĚ HealthPartners after the 2002 buy-out. (Exhibit 17). The 2002 Services Agreement is as vague as the 1994 Management Services Agreement with respect to the work MedTrust is to perform for HealthPartners. !d. According to the 2002 Services Agreement, MedTrust is to pay HealthPartners $15,000 a year for "certain administrative and other support services," including payroll, accounts payable, bookkeeping, human resources and administration, accounts receivable, general accounting and tax reporting, and financial statement preparation and tax filing. Id. MedTrust was also required to provide "certain consulting and administrative services" and the "management and consulting services of a full-time consultant." Id. In return for MedTrust services, HealthPartners was required to pay
all reasonable costs incurred in the operation of MedTrust. Id. 5

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3 While it is not clear who performed the various services for which amounts beyond the monthly retainer amount were paid to MedTrust, the Management Services Agreement states that MedTrust may be compensated for the services of employees other than Brandt or Beitzel. (Exhibit 9). Some of the billed services were identified as being provided by "Andy Brandt, Katie Brandt, and Erik Beitzel." (Exhibit 87).
4 Beitzel and Brandt bought out David Richter's shares in 1997. (Exhibit 15).

5 Since the only apparent service to be provided by MedTrust to HealthPartners is the provision of a full-time consultant, it is unclear why HealthPartners simply didn't hire the consultant rather than incurring the costs of operating MedTrust.
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                As a result of HealthPartners' purchase of MedTrust, John Brandt restructured his employment agreement with MedTrust. Pursuant to the new agreement, Brandt is paid $19,000 per month and is eligible to receive incentive compensation of up to 10% of his annual base compensation. (Exhibit 18). Although Brandt had been working for MedTrust since its inception, he received a $15,000 signing bonus from MedTrust upon signing his new employment agreement. Id.6 Because the 2002 Services Agreement requires HealthPartners to pay all operating costs of MedTrust, it appears that HealthPartners is ultimately responsible for payment of this "signing bonus."

                The circumstances and relationships among HealthPartners, MedTrust and other business ventures in which MedTrust's principals are involved raise a number of questions. For example, NaviCare Systems, Inc., ("NaviCare") is another company operated by David Richter and John Brandt, which develops software products for the health care industry. Both Richter and Brandt are listed as board members, and Richter has served as NaviCare's president since its inception. (Exhibit 20). NaviCare shared MedTrust's address on White Bear Parkway from 1998 to 2001. (Exhibit 21). NaviCare reimbursed MedTrust in 1997 and 1998 for rent, telephone, equipment, and supplies, but no such payments are recorded for 1999, 2000 or 2001. (Exhibit 22). After HealthPartners purchased the remaining shares of MedTrust, Brandt was specifically allowed to retain his position as a NaviCare board member. (Exhibit 18).

                On November 13, 200 I, NaviCare entered into an agreement with Regions Hospital, a HealthPartners affiliate, to provide a patient tracking system. (Exhibit 23). HealthPartners paid NaviCare $172,800 in license fees and $75,000 in implementation fees in 2001 and 2002. Id.

HealthPartners also agreed to pay an annual support fee of $48,960 to NaviCare. Id  At the time of this agreement, John Brandt was affiliated with both NaviCare and MedTrust. It is not clear whether, in its capacity as a management consultant to HealthPartners, MedTrust recommended the purchase of the patient tracking system from NaviCare.

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6 In addition, Beitzel received a payment of $117,300, the nature of which is unclear. HealthPartners described this payment as "in accordance with his original contractual agreement with HPI." (Exhibit 59).

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                Other concerns regarding the relationship of some of the parties identified above relate to the following:

  • Although HealthPartners has owned a 50% interest in MedTrust since 1994, MedTrust did not appear in the HealthPartners' organizational charts from 1997 to 2001. (Exhibit 24).
  • MedTrust provided services to HealthPartners in connection with its purchase of the Mork Clinic. John Brandt signed on behalf of HealthPartners a severance agreement with a Mork physician. (Exhibit 25). HealthPartners could not explain why.
  • Carl W. Brandt is John C. Brandt's brother. (Exhibit 10). Carl Brandt incorporated Brandt Medical Management Services, Inc. in 1994. (Exhibit 26). In 2000, the company changed its address to MedTrust's White Bear Parkway location. Id. Brandt Medical Management Services apparently subleased office space from MedTrust. (Exhibit 10). From March 14, 2002 to July 30, 2002, HealthPartners paid Brandt Medical Management Services over $37,000. (Exhibit 27).

                The relationship among HealthPartners, MedTrust, NaviCare and Brandt Medical Management Services is unclear. As is the case with other HealthPartners' vendors and consultants, HealthPartners did not seek proposals or bids for the work performed by these companies. Absolutely no documentation was provided which identifies what services were performed by Brandt Medical Management Service for the majority of payments it received from HealthPartners. With respect to MedTrust, the only documents which purport to contain any meaningful description of the work performed by MedTrust are after-the-fact summaries which were prepared by MedTrust in an effort to obtain incentive compensation from HealthPartners.


                2.     HealthPartners' failure to seek bids, issue requests for proposals, and enter into written agreements.

                    As noted above, HealthPartners' "Bids" policy requires that all service contracts valued at $20,000 or more be put out for bid. (Exhibit 3). HealthPartners appears to have seldom followed this policy. In reviewing a sample of consulting engagements from 1997 through 2000, the State found millions of dollars in consulting fees for which HealthPartners never issued a request for proposals and for which no bid was ever sought.  For instance, HealthPartners paid Deloitte & Touche, LLP and Deloitte Consulting, LLP (collectively, "Deloitte") over $8.7 million for consulting and audit work performed in 1997 through 2000. (Exhibit 28). One of the Deloitte projects for which HealthPartners failed to seek a bid was the "Medical Group Management Project." The first engagement letter for the project in 1997 provided for only four
months of Deloitte's services and expressed HealthPartners' desire to utilize internal staff as much as possible and to use Deloitte to simply 'jump-start" the project. (Exhibit 29). Despite this intent, the Medical Group Management Project evolved into a three year endeavor at a total cost of nearly $3.5 million. (Exhibit 30).


                Other examples where HealthPartners failed to comply with its Bids policy include the following:

  • HealthPartners paid Cap Gemini Ernst & Young US, LLC approximately $6.5 million in professional fees and expense reimbursements in 2000 and 200l. (Exhibit 31).  Cap Gemini states that it never participated in a bid process or responded to a request for proposals in connection with this work. (Exhibit 32).
  • HealthPartners paid almost $375,000 to N. Dean Myer & Associates, Inc. ("NDMA"), a Connecticut management consulting firm that charges $4,000 to $4,500 a day for its services. (Exhibits 33, 34). HealthPartners did not seek bids or issue a request for proposals for the work performed by NDMA. (Exhibit 34).
  • HealthPartners paid over $80,000 to the Minerva Leadership Institute, 22 Dellwood A venue, St. Paul, Minnesota, for creating a "practice environment" without a request for proposals. (Exhibit 36).

                Not only did HealthPartners fail to follow its bid process in awarding various consulting contracts,it often failed to enter into written agreements with its consultants. Examples include the following:

  • HealthPartners paid Deloitte over $2.6 million in professional fees and expenses from 1997 through 2000 without a written contract. (Exhibit 37,38).
  • From 1998 through 2000, HealthPartners paid Padilla Speer Beardsley, a market research firm, over $330,000. (Exhibit 39). HealthPartners failed to produce any contracts with Padilla Speer Beardsley.
  • HealthPartners paid Kotten Associates, LLC, located at 4186 Blueberry Lane, Eagan, Minnesota, $175,000 despite no written contract. (Exhibits 40, 41).

                By failing to issue requests for proposals or seek bids, HealthPartners was unable to prudently evaluate the abilities of and prices charged by its consultants. By failing to enter into written agreements with its consultants, HealthPartners was unable to establish -- from the beginning of a project -- the goals and desired outcomes of the project, the time period of completion, and the amount and nature of expenses that it would reimburse.

                3.     HealthPartners repeatedly made payments on deficient invoices.

                HealthPartners' failure to establish payment parameters in its contracts is evident in the invoices it paid from 1997 through 2000. For example, a number of invoices the State reviewed contained insufficient detail to support the hourly billing for professional fees. Many contained only a short phrase of work description that was repeated on each invoice for the project.

Examples of these deficiencies include the following:


  • From 1997 through 2001, HealthPartners paid MedTrust over $2 million 10 consulting fees without receiving a single invoice. (Exhibits 10, 11).

  • From 1998 through 2000, HealthPartners paid $175,000 to Kotten Associates even though the invoices submitted did not include any description of the services performed. (Exhibit 40,43).

  • In 2000, HealthPartners paid Project Consulting Group nearly $95,000 in professional fees for services described in the invoices simply as "project management." (Exhibits 44, 45).


                Most of the invoices submitted by consultants also failed to itemize expenses. Frequently, the only information provided to justify the expenses was a one line sentence stating  "out-of-pocket expenses" or "expenses".     (Exhibits 47, 53).     HealthPartners repeatedly reimbursed expenses for which no underlying documentation was provided to support the expenses claimed. It was thus impossible for the State -- and for HealthPartners -- to determine whether the expenses were actually incurred and, if they were, by whom, their business nature, and the reasonableness of the amount.

                For instance, Cap Gemini Ernst & Young sought reimbursement for over $900,000 in undocumented expenses. (Exhibit 46). The expenses were not itemized and were simply described as "expenses." (Exhibit 47). HealthPartners also agreed in some of its Cap Gemini Ernst & Young contracts to be billed for estimated expenses instead of actual expenses incurred. (Exhibit 48). With respect to one project performed in 2000, HealthPartners was billed for one- third of the expenses in each of the first three invoices. (Exhibit 49). In the final reconciling invoice for this project, it appears that Cap Gemini Ernst & Young sought reimbursement for $70,266 in actual expenses without taking into account the approximately $100,000 in expenses HealthPartners already reimbursed. (Exhibit 50). With respect to another Cap Gemini Ernst &
Young project, it does not appear that estimated and actual expenses were ever reconciled. (Exhibit 51).


                Cap Gemini Ernst & Young is not the only party for which HealthPartners reimbursed expenses that were inadequately itemized and insufficiently documented. Additional examples include the following:


  • Deloitte sought reimbursement for over $300,000 in expenses that were described in the invoices simply as "expenses," "out-of-pocket expenses," or "phone charges, mileage, direct support and material." (Exhibits 52, 53). HealthPartners reimbursed these expenses without any supporting documentation.
  • HealthPartners reimbursed Cashel Consulting for over $32,000 in undocumented travel expenses. (Exhibit 54). HealthPartners also agreed to pay Cashel Consulting a fixed fee for administrative expenses rather than reimbursing it for actual expenses incurred. (Exhibit 55).
  • HealthPartners reimbursed John Brandt of MedTrust $3,500 for business mileage based on an estimate of the miles driven. (Exhibit 56). This payment appears to be in addition to the $480 per month automobile allowance that Brandt received. (Exhibit 14).
  • HealthPartners reimbursed Gantz Wiley Research Consulting Group, Inc. over $1,700 in expenses without any supporting documentation. (Exhibit 57). It also appears that HealthPartners paid this consulting group $575 for "lottery tickets," although no explanation was given for the purpose of this expense. Id.

                Without supporting documentation, it does not appear that HealthPartners was able to determine whether the expenses were actually incurred or whether the amount charged was reasonable.

III.      OTHER EXPENSES QUESTIONED WITH RESPECT TO THEIR CONSISTENCY WITH THE                   MISSION OF A NON-PROFIT ORGANIZATION

                HealthPartners has spent hundreds of thousands of health care dollars for services which do not appear consistent with the mission of a non-profit health maintenance organization. HealthPartners has spent significant monies on expenses such as lobbying, trade associations, public relations and polling firms, and consultants hired to coach executives. It is unclear how these services support HealthPartners' mission to "improve the health of our members, our
patients and the community." (Exhibit 58). Some of the questioned expenses are further described below.



             A.     Coaching, "Cultural" and Similar Expenses

                The State's review indicates that HealthPartners allocated health care dollars for purposes of party planning, executive coaching and other similar activities. Some of the questioned consulting expenses include the following:

  • ChangeMaking Systems, LLC. From 1998 to 2000, HealthPartners paid more than $150,000 to ChangeMaking Systems, LLC, a management consulting firm located at 950 Pershing Circle, Burnsville, Minnesota. (Exhibit 60). Among other things, ChangeMaking Systems provided services with respect to "behavior coaching", "group process techniques", and the "facilitation of major meetings". Id. In connection with services provided to HealthPartners' "Institute for Clinical Systems Improvement ("ICSI"), ChangeMaking Systems prepared a paper on "team vision" (Exhibit 61) and facilitated the rehearsal of a "fish bowl exercise". (Exhibit 62).
  • ChangeMaking Systems also provided services to HealthPartners Ventures, Inc. ("HVI"). During 1998, ChangeMaking Systems worked with HVI to encourage medical organizations in other parts of the country to consider forming organizations like ICSI. (Exhibit 60). In this regard, ChangeMaking Systems met with physician representatives from Pudget Sound area of Washington to form such an organization and to assess their readiness to organize. Id.
  • PostScript Corporation.     In July 1999, HealthPartners retained PostScript Corporation, . located in Eden Prairie, Minnesota, to provide an interim chief information officer. (Exhibit 63). PostScript assigned its president to handle the job, who worked four days a week for twenty weeks and was paid $145,758 -- the equivalent of $379,000 per year. Id. HealthPartners reimbursed the interim officer for over $400 in gifts for HealthPartners' senior management, which included spa gift certificates, cuff links, and $85 ties. (Exhibit 64). HealthPartners ultimately hired the PostScript president to be its permanent chief information officer. After ten months on the job, this chief information officer left HealthPartners and received a full year's severance -- a severance package that is not consistent with HealthPartners' own severance guidelines. (Exhibits 84, 85).
  • Jane Schwanke.     HealthPartners paid Jane Schwanke, a "public relations specialist" in White Bear Lake, Minnesota, to act as a party planner. (Exhibit 65). Among other things, Schwanke planned the annual employee holiday party, the "physician recognition event", a doctor's retirement party, employee recognition events, service award events, board recognition dinners, retreats, and the "president's dinner". Id.

  • N. Dean Meyer and Associates, Inc. HealthPartners paid N. Dean Meyer and Associates, Inc. '("NDMA") a Connecticut management consulting firm, almost $375,000 in consulting fees. The services provided by NDMA included assistance in changing HealthPartners' "corporate culture". (Exhibit 66). The "culture in action process" which HealthPartners acquired from NDMA for $50,000 focused on teaching "behaviors that are expected of everyone in the organization." Id.
  • Coaching and Career Consulting. From 1998 through 2000, HealthPartners paid at least $250,000 in executive coaching and career transitioning services. (Exhibits 67 to 73). These services included "spouse counseling", "role playing", and "values clarification." (Exhibits 68, 72 and 73).

                It is not clear how the above activities further HealthPartners' mission. For example, it is difficult to understand how the establishment of a clinical improvement organization in Seattle, Washington improves the health of HealthPartners' Minnesota members. (Exhibit 60).

            B.     Polls and Surveys

            1.     Public Opinion Polls.

                During the review period, HealthPartners retained a number of consultants to conduct public opinion polls and spent over $3 million on polling firms. (Exhibit 74). For example, in 1999, Padilla Speer Beardsley conducted a poll on behalf of HealthPartners which included questions focusing on the rationing of health care. (Exhibit 76). The survey described a situation in which a 45-year-old person suffers from cancer. The person's physician says that the person's only chance of survival is an experimental treatment. The surveys asks at what point would it be reasonable for a health plan to deny coverage to this person. The survey respondents were asked to choose from the following:

  • Less than 75 percent success rate 
  • Less than 50 percent success rate
  • Less than 35 percent success rate
  • Less than 25 percent success rate
  • Less than 10 percent success rate
  • Less than 1 percent success rate
  • Never

Id. The fact that HealthPartners may be basing treatment and coverage decisions regarding life and death issues on public opinion polls is extremely troubling.

The same Padilla Speer Beardsley poll also had a political undertone in that persons were asked whether they agreed or disagreed with the following statements:

  • Attorney General Mike Hatch is taking the right steps to protect health care consumers; and
  • Attorney General Mike Hatch is a political person who takes public positions primarily to further his own political career.

Id. It is not clear how this type of polling furthers HealthPartners' mission of improving the health of its members and patients.

                Another survey which had an even stronger political tenor was conducted in May 200 I by Maritz Marketing Research, Inc. ("Maritz"). That survey, which required participants to identify if they were Republicans, Democrats, Independents, or "other", focused on recent investigations of health plans by the Attorney General's Office which uncovered high administrative costs and the lack of coverage for mental health treatment. (Exhibit 77). The survey asked, among other things, whether the person responding agreed or disagreed with the following statements about the Attorney General's HMO investigations:

  • I support these investigations of health plans;
  • I expect these investigations will show health plans were not in the wrong;
  • It's about time someone looked into how our health plans operate;
  • I believe health care costs will decrease as a result of these investigations;
  • Because of these investigations, I have less trust in health plans in general; and
  • Because of these investigations, I have less trust in my own health plan.


Id. It is questionable whether retaining a public relations consultant to perform this type of poll represents an appropriate use of charitable health care assets.


                    2.     Member Surveys.

                HealthPartners paid Maritz more than $1. 7 million to conduct polling, including member surveys inquiring about treatment and health care coverage. (Exhibit 78). In connection with those surveys, it was not uncommon for HealthPartners to share its members' personal medical information with Maritz.  For example, in 1998, HealthPartners forwarded to Maritz a list of members who received diabetes treatment. (Exhibit 79). Despite the fact that the private information that the members were diabetic was shared with Maritz, Maritz summarized the questioning process as follows:


The screener will ask for the contact person, then ask if that person was treated for a short list of conditions in the past 12 months. This procedure is designed to avoid the perception that the interviewer knows personal details regarding the respondent's medical history. Only those indicating treatment for diabetes will be allowed to participate. Id.


                As noted above, the names of only diabetics were given to Maritz by HealthPartners. Yet, HealthPartners and Maritz did not want to reveal to the members that their personal medical information was shared by HealthPartners. This type of surveying is deceptive and highly questionable.

                In 1999, HealthPartners paid Maritz $27,000 to survey more than 3,000 members who sought behavioral health treatment. Persons included in the survey were only those who sought mental health or chemical dependency treatment. (Exhibits 80, 81). HealthPartners supplied Maritz with the name and address of patients who sought mental health or chemical dependency treatment, and Maritz mailed a survey to each of those patients. A "generic cover letter" was
apparently sent with the survey that "instructs only those members who have experience with behavioral health services to complete the survey" to give the impression that the survey was actually being sent to a wider population than those treated for behavioral health issues. (Exhibits 82, 83). Ironically, in the survey itself, HealthPartners asked respondents who selected
an out-of-network provider if one of the reasons for that selection was "to keep my situation confidential. "
 
                It does not appear that HealthPartners appropriately protected the private medical information of its members by sharing patient medical information with a third party.

   
            C.     Lobbying Expenses

                HealthPartners has spent significant amounts of its health care dollars on lobbying and membership in lobbying and trade organizations. In 2000, HealthPartners spent approximately $1.4 million in these areas (Exhibit 74); in 1999, HealthPartners spent $1.7 million on these activities; in 1998, it spent over $900,000; and in 1997, it spent over $1.1 million. Id. It is questionable whether the payment of more than $5 million in lobbying expenses over a four-year period is consistent with the mission of a charitable organization.

                An example of this type of spending is HealthPartners' payment of over $750,000 to the American Association of Health Plans ("AAHP") between 1997 and 2000. ld. AAHP has funded projects to improve of the portrayal of the health care industry in movies and television shows. (Exhibit 75). "Tired of being cast as the villain;', AAHP hired the William Morris Talent Agency to improve the image of HMOs on the big screen. Id. It is not clear how these payments enhanced HealthPartners mission to improve the health of its members, it patients, and the community.


            D.     Use of Same Accounting Firm for Consulting and Auditing Services

                HealthPartners paid Deloitte over $8.7 million in professional fees and related expenses from 1997 through 2000. (Exhibit 28). These payments consisted of over $7 million in consulting fees and over $1.8 million in audit fees. Id. As a result, Deloitte was in the position of auditing much of its own consulting work.


                In recent years, the Securities and Exchange Commission and other regulators have expressed concerns that the independence of an auditor may be comprised if the auditing firm also performs consulting services for its clients. Because of the questionable "independence" of a firm that performs both auditing and consulting services, HealthPartners should contract with a separate accounting firm to perform auditing services so that the firm's independence is not
called into question by the existence of other, more lucrative, consulting engagements.


   
IV.     CONCLUSION AND RECOMMENDATIONS

                HealthPartners lacks a sufficient policy pertaining to third-party contracts. The company has retained consultants without issuing a request for proposal or seeking bids. It pays millions of dollars in professional fees and expenses based on deficient invoices without supporting documentation. Because of the large amount of money spent on consultants, HealthPartners should establish specific controls to be followed when evaluating consultants, contracting with consultants, and paying consultants.

                The following additional recommendations should also be considered by HealthPartners:

1. HealthPartners should adopt a specific policy for contracting with third parties, as recommended in its 1997 internal audit. This policy should be similar in substance to the sample policy attached as Exhibit 86. The policy should establish when contracts are to be used and should also contain specific contracting language.

2. HealthPartners should ensure that its new policies are enforced and fully implemented, and that consultants are not retained without seeking bids or issuing a request for proposal.

3. HealthPartners should not pay consultant professional fees unless the invoices sufficiently support the amount billed. For services billed on an hourly basis, this should include adequate descriptions of the work performed, identification of the consultant that performed the work, the applicable hourly rate, the date services were performed and the hours worked on that day.

    4.     HealthPartners should not reimburse consultant expenses without adequate itemization and
necessary supporting documentation.

                    5. HealthPartners should try to reduce its annual expenditures on certain non-medical services, and should                             obtain prior board approval on expenditures in the following areas:


A. Lobbyists,
B. Membership in organizations which retail lobbyists,
C. Contributions to or purchases from organizations which lobby,
D. Law firms for the purpose of lobbying activities,
E. The Minnesota Business Partnership,
F. The Minnesota Council of Health Plans,
G. The Minnesota Chamber of Commerce,
H.  Any affiliate of the Minnesota Chamber of Commerce,
I.    National business or health organizations or trade associations,
J.   State hospital or health organizations,
K.   Public relations firms,
L.   Crisis management firms,
M.   Polling firms,
N.   Political consultants,
O.   Image consultants,
P.   Public policy or healthcare policy organizations,
Q.  "Coaches,"
R.  "Culture" consultants; or
S.  Any organization which undertakes activities similar to the above.
   
                7.      HealthPartners should engage separate accounting firms for audit and consulting work.

                8.      HealthPartners should refrain from disclosing the illnesses and other private medical information of its                                    members and patients to third parties, including survey firms.




AG: #763772-vl

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