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United He Stands

When Matt Entenza stood outside his St. Paul home on the morning of October 26 and declared that he meant to be the next attorney general of Minnesota, no one should have been surprised. As far back as 2001, Entenza, the current minority leader in the Minnesota House of Representatives, had formed his own campaign committee as a means of stamping himself as the DFL's heir apparent to Attorney General Mike Hatch, should Hatch have opted to run for governor in 2002. That fledgling committee was disbanded shortly after Hatch chose to stay put and run for a second term as AG, but four years later—and just two days after Hatch had announced that he would challenge Gov. Tim Pawlenty in 2006—Entenza strode to the microphones as his party's presumptive nominee to succeed Hatch.

The announcement Entenza had waited years to make was, predictably, a smorgasbord of autobiography, career highlights, and political positioning. He introduced the people around him, including his wife, his three sons, his in-laws, and one of his former teachers. He said he'd be a consumer watchdog, citing "big oil companies" as a particular object of scrutiny. He noted that he'd shut down nefarious telemarketers as an assistant attorney general under Skip Humphrey, put white-collar criminals in jail as a Hennepin County prosecutor (thereby warning "the Enrons of the world" to watch out, he boasted), and was the chief author of the Legislature's "do not call" bill limiting the reach of telemarketers in the state. He cited crystal meth and sexual predators as two of the criminal problems statewide that would receive special attention under Attorney General Entenza.

But what he chose to downplay in his campaign kickoff announcement may have been as revealing as what he emphasized. Specifically, Entenza's five-minute statement refrained from mentioning the matter of health care until the next-to-last sentence, and then only in a laundry list of hot-button issues he'd watch closely as AG. This was striking for a couple of reasons: first, because it virtually ignored the keynote issue of his predecessor's two terms in office, a period that earned Minnesota a reputation as one of the most aggressive states in the country in its oversight of HMO medicine; and 
second, because the wife of 22 years who stood at Entenza's side that day, Lois Quam, also happens to be one of the more 
powerful health care business executives in the country.

Election Day 1998 in Minnesota will forever be known as the time when Jesse Ventura "shocked the world." But it was Hatch, the other insurgent winner from that night, who made a more lasting impact on the balance of political power in the state. And he did it by making good on his campaign pledge to take on the health care bureaucracy, at a time when HMO enrollment made up a whopping 98 percent of the state's health insurance market.

Minnesota, along with California, stood on the cutting edge of the "managed health care" revolution that sprung up during the 1970s and '80s with the formation of health maintenance organizations, or HMOs, to compete with traditional fee-for-service health insurers. But as the HMO model pioneered here has become increasingly pervasive across the U.S., Minnesota has remained a unique legal environment for health care, owing largely to its status as the only state that requires HMOs to operate as nonprofits. That law, coupled with the attorney general's legal authority over charitable trusts and consumer protection issues, has enabled Mike Hatch to wield tremendous influence over the practice of health care in Minnesota during the past eight years.

"Let me be blunt," says Kip Sullivan, a steering committee member of Minnesota Universal Health Care Coalition. "Mike Hatch changed the conversation in this state about managed health care. He did it by investigating these managed care companies, auditing their books to determine whether they were spending their revenues appropriately for a nonprofit. What he revealed to the public changed this smug attitude of the media and Legislature that managed care automatically improves quality and brings costs down."

Hatch, who previously worked in Rudy Perpich's administration as a commerce commissioner from 1983-1989, had spent much of the '90s in private practice, frequently representing clients whose lives were jeopardized, and sometimes lost, because their health insurers balked at providing full coverage or ruled they were ineligible for recommended procedures. The experience radicalized Hatch in some ways, and he came to the attorney general's office seething over the various ways these companies minimized their costs by cherry-picking whom they would agree to cover, stonewalling sick people, and denying access to potentially life-saving treatments ("See You in Court," CP, 3/3/99).

Three cases from Hatch's tenure stand out above the rest. In October 2000, he filed suit against Blue Cross and Blue Shield of Minnesota, accusing the company of denying its subscribers medically necessary, physician-recommended treatment for mental health, eating disorders, and chemical dependency. At first, BCBS vigorously denied the charges. But 10 months later, in a press conference announcing a settlement of the lawsuit, a Blue Cross executive acknowledged that the firm "failed these families in some important ways." Under the terms of the settlement, BCBS agreed to speed up its claim reviews, broaden its coverage, submit denied claims to a three-member review committee appointed in part by Hatch and a Hennepin County judge, and reimburse the state more than $8 million for taxpayer-paid health coverage the company should have borne. The state's other two major HMOs also subsequently agreed to submit their denied claims to the three-member panel.

 

In May and June 2005, Hatch hammered out a remarkable agreement with more than 50 of the state's biggest hospitals, which collectively admit about 75 percent of Minnesota's inpatients each year. The agreement enables uninsured patients earning less than $125,000 per year to receive the same substantial discount for services that's granted to large blocs of patients in government plans and HMOs. (This bulk-rate discount, for example, reduced one $4,200 radiology procedure to $729.) The two-year agreement was the first of its kind in the nation, and further stipulated that the hospitals would adopt a zero-tolerance policy on abusive debt collection procedures and give patients more chances to pay their bills before garnishing their wages.

Hatch's most expansive investigation produced spectacular headlines in March 2001, when it was reported that the AG estimated Allina Health System spent as much as 47 percent of its customer premiums on administrative expenses. Auditors from the AG's office uncovered everything from golf lessons to basketball tickets to highly inflated consulting contracts, some of it improperly allocated as patient treatment costs. By August 2001, Hatch had negotiated the breakup of Allina into two distinct companies, separating the Allina hospitals and clinics from Medica's insurance administrators. The state also intervened in the composition of the two companies' boards of directors. "There's no doubt in my mind that Mike Hatch saved Allina," says one Allina director, Brian Short. "If he had not stepped in, the way it was being run, it would be bankrupt right now."

Hatch's aggressive watchdogging of the health care business has been, on balance, a political plus for him. His 2002 reelection campaign garnered him more votes than any other statewide candidate, and bettered his 1998 showing by more than six percentage points (from 47.8 to 54.4). He remains the favorite to capture the DFL endorsement for governor, and, for what it's worth so early in the campaign season, led Pawlenty by a 49 to 45 margin in a statewide Zogby poll last October.

All this begs the question of why Entenza doesn't want to associate himself with Hatch's principal legacy. It isn't style: Entenza's kickoff speech leaned hard from start to finish on the kind of consumer protection advocacy Hatch made an indelible part of the office's public image, summing it all up with the not-exactly-robust declaration that "I want to be your watchdog." And it isn't relevance: Health care consumes 15 percent of the gross national product and 27 percent of the Minnesota state budget, and regularly appears at or near the top of the list of voter concerns. So why would Entenza mention those dastardly telemarketers three times, call out Enron and big oil companies twice in a state devoid of gushers, and hurry past the phrase "affordable health care" at the close of his remarks?

The answer may have been standing beside him on his right, cheering him on as he announced his willingness to abide by the DFL endorsement and pledged that he would "work tirelessly" to "make sure we have a majority in the Minnesota House of Representatives." Entenza's wife, Lois Quam, is the CEO of Ovations, a firm that, to quote Quam's own congressional testimony last February, "is the largest provider of health care services to seniors in America." Ovations is a division of United Health Group, which Quam characterized to Congress as "the largest health and well-being company in the United States," providing services to roughly 55 million Americans and "over half of the nation's 100 largest companies."

Quam, who was rated the 36th most powerful woman in American business by Fortune magazine in 2005, has exercised more than $4 million worth of stock options in the past three years and says she has more than that in yet-untapped stock options. During the 2004 election season, she and Entenza contributed a combined $600,000 to Democratic causes, most of it in Minnesota. While Entenza has never sat on a health care-related committee during his 11 years in the House, Quam has been an important figure in health care policy. She helped lay the groundwork for the state's MnCare health insurance program, and advised former first lady and current Senator Hillary Rodham Clinton on Clinton's ill-fated national health plan during the early '90s. Financially and (according to those who know the couple) intellectually, Quam is an enormously valuable asset to Entenza. But politically, her prominence as a for-profit health care executive and political donor represents a variety of potential conflicts of interest for the candidate.

 

Their relationship has already generated heat for Entenza on the issue of campaign finance. In the past, Entenza has authored bills calling for public funding of campaigns. Barring that, he says he advocates "sharp limits" on the amount that can be contributed. But in 2004, in the face of Republican resistance to these reforms, Entenza was able to reverse field and fight fire with fire, dropping three $100,000 contributions on a party-oriented PAC known as 21st Century Democrats. Delivered near enough to the November election to avoid easy scrutiny, the donations enraged Republicans, who believe the money contributed to their net loss of 13 seats in the Minnesota House.

Although 21st Century Democrats was eventually fined a record $317,500 by the Minnesota Campaign Finance and Public Disclosure Board for failing to register with the state as a PAC (as any group that receives more than $100 in contributions must do), Entenza himself was not implicated. No one could disprove his contention that all of his $300,000 went toward 21st Century Democrats' get-out-the-vote program, which is legal in Minnesota; and that none of the money went toward the 21st Century Democrats' underwriting of 20 field workers for DFL candidates, which would have violated state laws.

Entenza's contributions to the 21st Century Democrats may have generated most of the controversy, but it was the other $300,000, given by Entenza and Quam to the DFL's state party apparatus and House caucus in 2004, that at least some proponents of campaign finance reform regard as a more dubious gesture. "In Minnesota, when donors contribute to a party or a caucus, it is illegal for them to earmark where they want that money to go," says Hamline University professor David Schultz, the former head of Minnesota Common Cause. "But when Matt Entenza, contributor, gives the money to the DFL caucus where Matt Entenza is the minority leader, people could say he already has a pretty good idea of where that money is going to go. He's not going to be stupid enough to break the law and write down that he wants it to go to XYZ, so there is no smoking gun. But he probably knows.

"The same appearance of a problem exists if it is Lois Quam giving the money," Schultz continues. "One could imagine a conversation between Matt and his wife where he says, 'If only we had another $50,000, we could put it into that House race down in that district.' And his wife says, 'Fine. Here it is.' Now because she doesn't directly say it needs to be earmarked for that district, it is permitted. It is a legal laundering of political contributions. It is a huge hole in the law."

Entenza responds: "The House caucus has a steering committee that sits down and makes decisions as a group. I am certainly involved in the decisions, but it is not as if I do the decisions myself. Look, I oppose caucuses even having to raise and spend a lot of money in the first place. It didn't used to be that way, and then in 1998 or 1999 the Republicans went to court and got all the restrictions removed. And they don't want public funding of campaigns, which I have consistently supported."

But Entenza's embrace of other elements of campaign finance reform has not been so steadfast. At the onset of the 2005 legislative session, when he and Quam were under fire for their $600,000 in donations, Entenza asked Schultz to draft what Schultz would later refer to as "my dream bill." The professor responded with eight suggested changes to Minnesota campaign finance law, such as placing a $1,000 cap on contributions and creating a more rapid and transparent process for disclosing donations.

Then the gamesmanship began at the Capitol, but it was not Entenza leading the dealing. Staunch Republican Rep. Tom Emmer carried Schultz's dream bill and got it passed through the House Civil Law and Elections Committee—"the first time campaign finance reform has passed a [Minnesota] House or Senate committee in 10 years," Schultz claims. It so happens that the chair of that committee is Rep. Jeff Johnson (R-Plymouth), who is almost certain to be Entenza's opponent in the race for attorney general this November. But a campaign of opposition from the anti-abortion group Minnesota Citizens Concerned for Life effectively killed it in the House. Nor was the DFL majority inclined to take it up in the Senate.

 

Schultz says that after the bill passed Johnson's committee, he went to Entenza and asked the minority leader if he could rally his caucus to support the legislation. "I said, 'This is essentially the bill you asked me to draft,'" Schultz recalls. "'It needs help. Could you get your caucus together and get the votes for it?' It was a quick, 10-minute conversation. He said he'd think about it and then he never got back to me. I thought there would be enough Republicans to pass the bill if the Democrats signed on and Matt put the pressure on to support it. [But] it seems to be the case that he ceased interest.

"I still think that, once you get beyond the leadership, there's a majority of legislators to support the bill. But because of the way soft money goes into the caucuses, it goes to the leadership, and they can spread it around. That gives them a tremendous amount of power. If you take away that soft money, you take away a lot of [Legislative leaders'] control. I think that is one of the reasons Matt didn't want to get back to me. I think the Republican leadership felt the same way."

"I am the minority leader, which means I am not in the majority," Entenza replies, with a hint of exasperation. "I never got a chance to vote on it in the House because the MCCL killed it. I have a zero percent voting record with the MCCL. My opponent, Jeff Johnson, is in the majority and is supported by the MCCL, so maybe he should be asked why the bill wasn't brought up for a vote." Regarding Schultz, Entenza added, "I am a supporter of what David does. I'm sure David and other advocates are frustrated by our inability to pass a good campaign reform bill. They should be frustrated."

But Entenza himself seems galvanized by the opportunity to beat the Republicans at their own big-money game. "I don't like the way the Republicans have changed the system," he says. "But given that it is the system we have, I am lucky to be able to contribute money to help Democrats."

Entenza comes from fairly modest middle-class roots in Worthington. For the past decade, his law practice has taken a back seat to his slow, steady climb through the Legislative hierarchy. Put bluntly, the primary source of wealth in the family is Lois Quam. It is her largesse that has enabled Entenza to spread hundreds of thousands of dollars into House races where frazzled candidates are coping with individual spending limits of less than $40,000. Who is naive enough to believe that those infusions of dollars weren't a factor in the DFL picking up 13 seats in 2004, or that political debts to Entenza were not incurred in the process? As Entenza himself concedes, he's lucky: Under the current system, there is a connection between Quam's financial well-being and his political power.

As it happens, the source of Quam's financial well-being—the $38-billion conglomerate known as the United Health Group (UHG)—has chafed for the past two decades at this state's tradition of nonprofit health care, which Entenza himself describes as "the Minnesota way we do things." The founder of United Health, Richard Burke, never disguised his annoyance with the nonprofit restrictions and regulations placed upon HMOs in this state, telling Mpls/St. Paul magazine in 1986, "A root cause of this stifling regulatory environment is the distrust of the competitive system, which says that you have got to protect an unwitting, uninformed buyer from these vultures who are going to take advantage of them. That's garbage." When doctors from the Hennepin County Medical Center founded an HMO known as Physicians Health Plan, or PHP, in the late '70s, Burke had a simple but profound epiphany: M.D.s and MBAs are very different people, and it isn't the M.D.s you want running the business end of things.

"Burke figured out that he couldn't run a for-profit HMO but he could develop a for-profit HMO management company," says Allan Baumgarten, an independent analyst on health care policy and finance, and author of the annual Minnesota Managed Care Review. "Within two years, he had created this arrangement where PHP contracted all its management services from what became United Health. PHP had no staff of its own; it was basically a shell corporation."

Thus began a familiar pattern of UHG charging higher-than-average fees and administrative costs to the nonprofit HMO it managed—first PHP, then Allina/Medica, and now Medica. Way back in 1987, when he served as commissioner of commerce under Gov. Rudy Perpich, Mike Hatch was called upon to mediate a dispute between United Health and a group of angry doctors who called themselves the PHP Oversight Committee and objected to the way UHG had taken over operations. Hatch responded by booting Burke off the PHP board of directors and installing a few of the insurgent physicians, including Dr. James Ehlen, who became chair of the board.

 

Fourteen years later, during his 2001 audit of Allina and Medica, Hatch once again overhauled the board of directors in an effort to force competitive bidding and lower the management fees UHG was receiving. In a remarkable July 2001 correspondence that he sent to members of the Allina board, Hatch enclosed a series of documents, including a 1996 Ernst & Young survey that noted the administrative expenses paid to UHG by Medica were so high they did not lend themselves to direct comparison with other HMOs. There were also some pointed notes from Anderson Consulting, composed in the late '90s, claiming that:

• UHG's processing fees were 26 to 40 percent greater than the very highest charges in the industry on a per-claim basis;

• Ross Perot's company, EDS, would have charged Medica just 40 percent of the cost levied by UHG, while providing additional services;

• UHG's 35-percent profit margin was well above the industry average; and

• UHG's "substandard" service cost Medica about $10 million in losses.

Much to Hatch's chagrin, the new board of directors selected to run Medica still did not solicit competitive bids for UHG's management contract—one reason he took them back to court yet again last August, he says, in an unsuccessful effort to reestablish his control over the board. "I have said, and I still believe, that Medica is a front for UHG," Hatch declares. "United literally runs it—they are the guts of the company."

According to the latest statistics available from the Minnesota Department of Health, Medica in 2004 incurred the highest general administrative expenses among the state's three large HMOs yet again, spending more than $45 million more than Health Partners, their next closest rival. Administrative costs compose 12 percent of Medica's budget, versus 10.3 for Health Partners and 10.1 for Blue Plus, which is Blue Cross's HMO. "Hatch is right," says Baumgarten. "That management contract [at Medica] is the kind that should periodically go up for bids. There are companies that can do it for less money."

Ah, but what kind of bang do they deliver for their buck? As a Medica executive told the Strib last September, "We determined that the best value comes with United. They bring backroom expertise and economies of scale."

It's a brave new world of modern health care management, and the stodgy nonprofits just can't keep up.

"The purpose of requiring HMOs to be nonprofit is so they will focus on the quality of health care delivery and not on a return to their shareholders," Baumgarten says. "Theoretically, nonprofits won't compromise care to maximize profits. But the reality is that people do business in a variety of ways, mostly to respond to what their customers are asking for. And customers are coming to Medica and Health Partners and saying they want to design their plans in a different way, which is why you are seeing so much business outside the HMO."

What this means, for practical purposes, is that although the for-profit UHG is technically not part of the Minnesota HMO establishment, it is still a major player in the state—not only for its arguable control of Medica, but also owing to the increasing number of ancillary products it sells here. For example, Medica clients who move outside the state can transfer their coverage to a UHG policy through United's "Passport" program. Those Minnesotans who would rather insure themselves through a health savings account will soon be able to take advantage of UHG's newly acquired Definity division. To aggregate health care data as a means of cutting costs or identifying "best practices," UHG offers their Ingenix program on a business-to-business basis. And this month, United began selling Medicare Plan D drug coverage through Quam's company, Ovations.

On that last count, David Schultz wonders aloud about the possibility that Attorney General Entenza might one day be called upon to bring a class action suit against his wife's company. "Lois Quam is a major United Health Care executive who is probably going to be selling a product that is very popular," he notes. "But Medicare Plan D is also probably going to be a hotbed for all kinds of litigation, because it is a new law, it is very complicated, and it is unclear what your obligations are [and] what is paid for under Plan D. You are going to have patients suing health care companies, alleging XYZ. But if enough of those complaints are filed by consumers, this is where the attorney general comes in and says, 'We will file a class action on the part of the state.' That is one of the most important steps he can take—we expect him to be an advocate for Minnesota.

 

"So, yeah, I think there are all kinds of interesting conflicts for Matt to navigate."

When I mention Schultz's scenario to Entenza, he first dismisses it. "All that stuff is federally regulated," he says, referring to Medicare. "But I suppose it could be a consumer issue." He pauses, then starts again in a tight voice. "I'd have to recuse myself, the same way Jeff Johnson would have to recuse himself if anything had to do with Cargill, where he used to work, or all the business clients he's had as a corporate lawyer. Anyway, I would make the call to the professional prosecutors in my office and let them do whatever needed to be done.

"I don't have a hypothetical opponent. I have a real one," he continues, the heat rising in his voice. "I suppose you could ask him how he is going to deal with all these potential conflicts he has from the companies he represents. Again, I have a history as a watchdog. The business lobbies never supported me in my races. I'm not the candidate of the Chamber of Commerce." Calming down, he concludes, "But without question, if there was an issue with United Health Care, it would go to the professional prosecutors in my office, and I would not be involved."

But who would decide if there was "an issue" with UHG in the attorney general's office? For practical purposes, wouldn't important calls such as whether to pursue a class action as a result of multiple complaints, or to launch an audit or broad investigation, necessarily originate with the man in the big chair? "No, not at all," Entenza replies. "I used to be there, and I know that the office gets hundreds of complaints every year. Some go up to the attorney general and some don't. But if there are any complaints or issues of any sort that arise, the professional prosecutors would have full rein to do whatever they need to do."

But it stands to reason that the tone of the office is set at the top. "Some of the state law is vague as to what constitutes appropriate use of monies by a nonprofit, what constitutes an HMO, what constitutes fraud," says Kip Sullivan of the Minnesota Universal Health Care Coalition. "There is a lot of room for creative use of those laws by an attorney general that knows HMOs can constitute bad policy, and that company officials can engage in bad practices. But if you assume as an AG that managed care is wonderful, then you are going to take an entirely different attitude toward using the scarce resources of the attorney general's office." 


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