Attorney General of Minnesota Report on Kaiser Permanentes George Halvorson

Cover page for travel and entertainment exhibits 1-171 Minn AG into george halvorson and healthpartners

Vol. I - Exhibits 1 - 83
Vol. II - Exhibits 84 - 171

Chapter I: TRAVEL AND ENTERTAINMENT

Section 1.1     Introduction

                HealthPartners, Inc. ("HealthPartners") is a Minnesota nonprofit corporation licensed as a health maintenance organization ("HMO"). The HealthPartners system consists of nineteen entities, thirteen of which are organized under Chapter 317 A and are tax exempt pursuant to either Section 501(c)(3) or 501 (c)(4) of the Internal Revenue Code. (Exhibit 1.)

                To qualify for these tax exemptions, an organization must operate so that "no part of [its] net earnings ... inures to the benefit of any private shareholder or individual," I.R.C. § 501(c)(3), and that the assets are "devoted exclusively to charitable ... purposes." I.R.C. § 501 (c)(4). The "private inurement" doctrine prohibits a charitable organization from benefiting private individuals for non-charitable purposes. If a charitable organization's assets are used for personal enjoyment, the organization can lose its tax exempt status. See IRS Gen. Couns. Mem. 38459 and 39862; John Marshall Law School v. United States, 1981 WL 11168 (Ct. CI. Trial Div. 1981) (school's tax exempt status revoked based upon private inurement, which included travel expenses for school dean and his family members, club memberships and tickets to professional basketball and hockey events).

                As an HMO, HealthPartners must also comply with the Minnesota Health Maintenance Act, which requires an HMO's board of directors and officers to make sure that the HMO's assets are expended in a manner that furthers the HMO's mission as a nonprofit health maintenance organization and achieves greater efficiency and economy in providing health care services to Minnesotans. Minn. Stat. § 62D.01, subd. 2 (2000).

                The directors and officers of a charitable organization owe a fiduciary duty to the entity to discharge their duties in good faith. They should do so in a manner they reasonably believe is in the best interests of the corporation, and with the care that a prudent person in a like position would ordinarily exercise under similar circumstances. Minn. Stat. § 317A.251, subd. 1; § 317 A.361, subd. 1 (2000). They have a duty to safeguard the entity's charitable assets and ensure that assets are used to fulfill the charitable mission. Minnesota courts have described the fiduciary duty of a nonprofit corporation's officers and directors as requiring "the highest standards of integrity." Shepherd of the Valley Lutheran Church of Hastings v. Hope Lutheran Church of Hastings, 626 N.W.2d 436, 442 (Minn. Ct. App. 2001).

                HealthPartners has made public commitments consistent with these obligations. For instance, HealthPartners pledges to use "as little money as possible for plan administrative costs and profits -- maximizing the percentage of your premium dollars available for your benefits and care." (Exhibit 2.)

                In July of 2002, nine months after this compliance audit began, HealthPartners adopted travel and entertainment policies similar to those adopted by Allina Health System and Medica Health Plan as part of their Memoranda of Understanding ("MOU") with the Minnesota Attorney General's Office. While HealthPartners did have some policies in effect prior to the Allina and Medica MOUs, these policies were substantially modified to be more consistent with the mission of a nonprofit health care corporation.

                As described in more detail below, it appears that HealthPartners, while having adopted some travel and entertainment policies prior to 2002, had difficulty in complying with these policies. Deloitte & Touche, LLP, which annually reviews various travel and entertainment expenses of HealthPartners, noted over 400 "exceptions" to HealthPartners' policies between 1997 and 2000. These exceptions generally related to the failure to attach receipts, to specify a business purpose, to identify participants on expenditures for meals, lodging and flights, and to identify recipients of dues, gifts, gas and parking. (Exhibit 3.) There is no evidence that HealthPartners attempted to correct these deficiencies, which raises the issue of whether the company has in place a process to implement or enforce the policies it has adopted.

Section 1.2     Travel Policy: General

                    Since 1997, HealthPartners' travel policy required employees:

1. To fly coach fare, not "business" or first class;

2. To stay at hotel "chains" with which it has negotiated a discount;

3. To rent cars only if other transportation is not practical;

4. To incur only "reasonable and necessary" travel expenses; and

5. To substantiate all travel-related expenses by providing the original receipt and including "detailed information" setting forth the business purpose for the expenditure. (Exhibit 4.)

HealthPartners has not developed a daily maximum on what can be spent when its employees travel (i.e. per diems), but instead has relied on its managers to ensure that travel expenses are "reasonable and necessary." Id. The travel policy prohibits payments on behalf of spouses or family members to be reimbursed. Id.

In July of 2002, after the Allina and Medica MOUs became public, HealthPartners revised its travel policy. (Exhibit 5.) The new travel policy noted the importance of ensuring that adequate cost controls are in place and that the company's employees should exercise .discretion and good business judgment with respect to travel expenses. Id. The new travel policy requires employees to adhere to the following standards, which were added to the previous travel policy:

1. Air travel expenses must be approved in advance by the employee's supervisor, who must first evaluate the cost of the travel;

2. Personal expenses such as in-room movies, spa and exercise charges are not reimbursable; and

3. Itemized receipts must be filed which show the actual services provided.

As discussed below, a sample of HealthPartners' travel records suggests that employees have ignored its travel policies. It also appears that the policies are not routinely enforced.

Section 1.3 International Travel

                Both the 1997 and 2002 travel policies require employees to substantiate travel expenditures with original receipts and to demonstrate the reasonableness and necessity of the travel. (Exhibits 4,5.)

                For a number of reasons, the need for compliance with such policies is perhaps most important in the area of international travel. First, healthcare costs are skyrocketing, and there is a need for management to demonstrate prudence to the health providers it employs. Second, because HealthPartners is licensed only in Minnesota (and has some affiliates in Wisconsin), the necessity of an international trip is likely to have remote value to the patients served by the HMO. Third, seminars, conferences and meetings in the United States, and indeed the Midwest, likely offer more relevant services to a Minnesota-based HMO.

                It does not appear that HealthPartners exercised restraint in this area.

                From 1997 to 2001, HealthPartners paid for over 100 flights to over 30 different international destinations, with employees traveling to six continents - Europe, Australia, Asia, South America, Africa, and North America. (Exhibit 6.) A sample of the expense reimbursements indicate that the executives often failed to submit documentation to justify the business purpose for such trips, and in some cases even failed to submit the invoices.

                For instance, HealthPartners paid approximately $5,000 for its Chief Executive Officer ("CEO") to take a week-long trip to Sao Paulo, Brazil in 1999. (Exhibit 7.) No business purpose was indicated, other than a reference to "an international trade mission." The trip was arranged by a private "networking organization" that sets up international "trade mission retreats." It can be questioned as to what trade could be conducted on behalf of an HMO that is licensed to provide health care only in Minnesota and Wisconsin. While the travel policy requires coach fares, the CEO flew in the best available classes (first and business class) during the trip. Id. While the travel policy requires the submission of itemized receipts, HealthPartners reimbursed the CEO for his hotel expenses even though he never submitted a receipt. Id.

                In 2000, HealthPartners paid approximately $9,000 for its CEO to go to Australia to find out: "Are we pricing consumers out of healthcare?" (Exhibit 8.) Given the high cost of health coverage, it can be questioned whether a trip to Australia is necessary to discover the answer. The brochure describing the event states that HMO executives would discuss the maintenance of "high ethical and professional standards" and take part in "lively social programs" and "networking opportunities." Id. Once again, HealthPartners paid for the CEO's expenses without receiving a single vendor receipt. Id. And again, the CEO flew business class, and not coach class, as required by the travel policy. Id.

In 2001, HealthPartners paid approximately $6,000 for its CEO to attend another retreat, this time in Santiago, Chile. (Exhibit 9.) The only business purpose appears to be that the trip was another "trade mission." Given the fact that HealthPartners is only licensed in Minnesota and Wisconsin, the question is raised as to what trade can be conducted on behalf of the HMO in Chile. Once again, the CEO flew the highest available class, business class.

                In 2001, the CEO also traveled to Dublin, Ireland, at a cost of over $6,000, with no business purpose ascribed to the trip other than "it was for a conference." (Exhibit 10.) Subsequent research indicates that the purpose of the trip was to study "issues affecting the Irish and British health sectors." This raises the question as to how such a visit to "the most distinguished address in Ireland," Id., relates to the business of a Minnesota HMO.

Section 1.4 Travel: Board of Directors

                The board of directors is the governing body of a nonprofit corporation. The board establishes the strategic and budgeting direction of a company, hires the executive team, and reviews the tactical decisions of the executive team. Another responsibility of the board, as important as the above formal duties, is to set the "tone" of the organization as it relates to fiscal responsibility. The board must lead by example, exercising prudence in its expenditures and restraint in its decorum.

                Some of the expenditures for the benefit of HealthPartners' Board of Directors raise questions as to whether such leadership was exercised as it relates to fiscal prudence.

                For instance, in the winter of 1998, HealthPartners paid over $35,000 for its CEO, ten board members and another employee to travel to the Hotel Del Coronado in California, a four-star island resort that claims to cater to Hollywood celebrities. (Exhibit 11.) They were accompanied by nine of their spouses and family members. Id. The group took a $2,200 cruise on an oceangoing yacht. (Exhibit 12.) The company paid for the airline ticket of the CEO's wife (Exhibit 13), and for the CEO and his family to watch movies, have breakfast on the ocean terrace, play volleyball and ride bicycles. (Exhibit 14.) HealthPartners paid for another employee to watch movies and shop at two stores, including one that sells toys for children. (Exhibit 15.) It is questionable whether such a trip was in the interest of the company and whether any business purpose of the trip could have been more prudently met in Minnesota.

                In the winter of 2001, ten board members and three employees of HealthPartners returned to the Hotel Del Coronado at a cost of over $32,000. (Exhibit 16.) They were joined by five of their spouses and family members. Id. Unidentified board or family members spent over $1,700 for dinner and drinks at three of San Diego's most exclusive restaurants. (Exhibit 17.) One employee stayed in San Diego ten nights before diverting to Phoenix for an additional four nights. (Exhibit 18.) She identified no business justification for incurring such expenses. Once again, it is questionable whether such a trip served a business purpose.

                In the winter of 1999, HealthPartners spent over $35,000 to send its CEO, nine board members, and another employee to the four-star Westin La Paloma Resort and Spa in Tucson, Arizona, which promotes itself as one of the nation's best golf resorts. (Exhibit 19.) They were accompanied by nine of their spouses and family members. Id. Three board members ignored the travel policy and flew business class. (Exhibit 20.) One employee, who is responsible for compliance with the corporate travel policy, was reimbursed for driving a car from Tucson to Phoenix, where she departed several days later. (Exhibit 21.) No business purpose was identified for her side-trip to Phoenix. Once again, the necessity of such a retreat is questionable in an era of high healthcare costs.

                In the winter of 2000, HealthPartners paid over $30,000 for its CEO, another employee, and 11 board members to travel to the oceanside Four Season's Resort in Santa Barbara, California. (Exhibit 22.) They were accompanied by three of their spouses and family members. Id. HealthPartners paid $1,200 for an employee to fly to Phoenix one week before the "meeting" started. ld. No business justification was given for this diversion. (Exhibit 23.) Similar trips have continued this year, where board members and executives traveled to a seaside four-star resort in Hilton Head, South Carolina accompanied by spouses and family members. (Exhibit 24.) Once again, the business necessity of such a trip is to be questioned.

                HealthPartners has also paid for board members to travel in small groups. For example, HealthPartners paid over $19,000 for two board members to take two trips on separate coasts in one year: first to Carmel, California and then to Captiva Island, Florida. (Exhibit 25.) The "business purpose" was for the board members to attend seminars to "examine your core values, better understand yourself and others and learn how to build trust - all in a non-threatening atmosphere." Id. One board member rented a convertible for her five-day stay on Captiva Island. Id. Such trips appear to undermine the mission of the board to demonstrate prudence to the HMO staff and its members.

Section 1.5 Other Executive Travel.

                HealthPartners does not provide healthcare in any state outside of Minnesota and Wisconsin. Notwithstanding this geographic limitation, HealthPartners acknowledges that it pays for a "significant amount of out-of-town travel." (Exhibit 26.) For example, from 1997 to 2001, HealthPartners paid for over 500 trips to California and Florida. (Exhibit 27.) In addition, HealthPartners regularly paid for airport valets to park the cars of traveling executives at the Minneapolis airport, even though its headquarters is approximately two miles away. (Exhibit 28.)

                The following are a few examples of trips by HealthPartners' executives that raise questions about the company's implementation of its travel policies:

HealthPartners paid at least $5,000 for its CEO to attend conferences with other CEOs at The Fairmont Scottsdale Princess in Arizona, which included unidentified purchases at the "Princess Shop," valet parking, a cruise, movies, and for a "no show" charge when he missed a day of the conference. (Exhibit 29.)

HealthPartners paid more than $2,200 for its CEO to travel to the Arizona Biltmore Resort, including nearly $200 for a Mustang convertible he drove 13 miles. (Exhibit 30.) Once again, the CEO identified no business purpose for the trip.

HealthPartners paid more than $4,500 for its CEO and his wife, who flew first class, to travel to the oceanfront Fontainebleau Resort in Miami, where they spent almost $300 at a beach-front restaurant, the business purpose of which was simply listed as "hotel". (Exhibit 31.) No hotel or restaurant receipts were submitted for the "international conference," and no description of the sponsor, the attendees or the purpose of the trip was provided.

HealthPartners paid over $1,600 for an executive to attend a three-night retreat with other healthcare executives at the four-star Inn of the Anasazi in New Mexico, where he rented a sport utility vehicle. (Exhibit 32.) Once again, no business purpose was identified.

HealthPartners paid almost $2,000 for an executive to travel to New York's exclusive Waldorf Astoria, even though he identified no business purpose. (Exhibit 33.)

HealthPartners paid over $2,000 for an executive to attend a February retreat at a Snowbird (Utah) ski and summer resort. (Exhibit 34.) The executive identified no business purpose for the trip.

HealthPartners paid for its CEO, and a guest, to stay at Caesar's Palace in Las Vegas, including use of a spa. (Exhibit 35.)

HealthPartners paid about $5,500 for its CEO to take two trips in one year to the Bal Harbour Beach Resort in Miami. In 1999, HealthPartners paid more than $2,400 for his trip. (Exhibit 36.) In 2000, HealthPartners paid more than $3,000 to fly the executive back to Miami, where he attended an unidentified "international summit." (Exhibit 37.)

HealthPartners paid more than $1,100 for its CEO to stay at the Plaza Hotel in New York in 1998, with no identified business purpose or receipt attached. (Exhibit 38.)

HealthPartners paid over $2,700 for its CEO to spend three nights with other HMO executives at the oceanside L' Auberge Del Mar in California. (Exhibit 39.)

HealthPartners paid almost $8,000 for an overnight trip to San Francisco by four executives, where they rented a limousine for $500. (Exhibit 40.)

                HealthPartners' travel policy allows employees to stay at a location additional nights to take advantage of weekend airfare if the added expense of the longer stay does not exceed the amount saved by the weekend fare. (Exhibit 4.) In March of 1999, a vice president of HealthPartners claimed to take advantage of the weekend airfare rule by flying from Scottsdale, Arizona (where he registered to golf two days of a two-day conference) to Las Vegas to spend the weekend, where HealthPartners paid all his expenses, including his multiple night stays at a casino hotel and rental car. (Exhibit 41.) Three weeks later the executive claimed to take advantage of the "weekend airfare" rule by once again flying from Scottsdale to Las Vegas. The executive did the same thing in 2001. Id. These excursions, however, resulted in no "weekend rule" savings to HealthPartners.

    Section 1.6     Physician Travel

                HealthPartners permits physicians to use an allocation of $3,200 per year for educational purposes. This "use it or lose it" allocation is forfeited if not spent during the year. (Exhibit 42.) Allina Health System previously offered a similar "use it or lose it" educational policy. During the Allina rehabilitation period, concern was raised as to whether the "use it or lose it" rule encouraged physicians to select seminars not ·on the basis of quality, but rather on the basis of location. Recognizing the need to restore a nonprofit mission to all staff of Allina, the chairman of its Board placed restrictions on the destination of seminar travel. This appears to also be an issue with HealthPartners.

                Given the need for HMOs to establish prudence in their spending policies, it makes sense that a uniform policy on seminars be established by all nonprofit health companies.

    Section 1.7     Executive Club Memberships

                Memberships in recreational, business and social clubs, such as country and golf clubs, athletic clubs, and airline clubs, are not tax deductible. (Exhibit 43.) This policy was promulgated by Congress because such memberships have little business value in proportion to the personal enrichment they provide. As a matter of national policy, such memberships are not considered under any circumstances to be a legitimate business expense. In spite of this national policy, since 1995 HealthPartners allowed for the purchase of club memberships for its executives. (Exhibit 44.) From 1997 to 2001 HealthPartners paid nearly $250,000 for its executives' memberships at and use of various clubs. (Exhibit 45.)

                For instance, HealthPartners paid more than $100,000 between 1997 and 2000 for memberships for several executives at the Decathlon Athletic Club. Id. It also paid for its CEO's membership in the Minnesota Horse and Hunt Club at a cost of over $2,500 for two years. (Exhibits 45, 46.)

                HealthPartners paid over $35,000 in three years for an executive to belong to and use the Town & Country Club, including dues and incidentals such as locker room charges. (Exhibits 45, 47.) For two of the three years, the executive failed to indicate the percent of his personal use of the club as required by HealthPartners' policy. Id. HealthPartners paid more than $6,000 for an executive vice president's membership at the Edina Country Club, including nearly $500 in one year for a contribution to the club's Christmas fund and for food and drinks he never consumed. (Exhibits 45, 48.) Id.

                HealthPartners also paid nearly $30,000 for the CEO's membership at the Minneapolis Club, as well as parties and dinners at the club. (Exhibit 45.)

                IRS regulations similarly prohibit deduction of airline club memberships. (Exhibit 43.) In spite of this national policy, HealthPartners paid for some executives to join multiple travel clubs at the same time. (Exhibit 49.) Indeed, the Minnesota HMO paid for other executives to join international travel clubs. (Exhibit 50.)

                In some cases, where executives allocated a portion of their club use as personal, it appears that HealthPartners included a portion of the expenses on the executive's W-2 statement. Executives did not always allocate a portion of their club use as "personal," however, even when they appeared to use the club for purely personal reasons. For instance, the CEO booked the Minneapolis Club for a fundraiser for a political candidate, which he described as a personal function unrelated to HMO business. (Exhibit 51.) The CEO, however, billed the cost of the $1,000 political fund-raiser to the HMO, which paid it. Id. The CEO apparently claimed that the membership was never used for personal reasons because none of the dues were included on his W -2 statement. Id.

                In July, 2002 HealthPartners, after the Allina and Medica MOUs, adopted a new policy which prohibits the HMO from paying for membership dues at any country club, private club, athletic club, tennis club, or similar recreational organization, unless approved by the board. (Exhibit 4.) The question arises, however, as to whether any membership in any club is a justifiable expense for a nonprofit HMO.

Section 1.8 Sports, Theater, and Musical Entertainment

                The IRS requires all entertainment expenses to be directly related to the active conduct of trade or business and be adequately substantiated. (Exhibit 52.) IRS regulations require employees not only to describe the nature of the business discussion or activity, but also the name, title and corporate affiliation of the people entertained. Id. The IRS also requires each ticket in a series of season tickets to be treated as a separate item, with records maintained showing how each ticket was used. (Exhibit 53.) Since 1997, HealthPartners' policies have mirrored IRS guidelines as they relate to documentation of entertainment expenses. (Exhibit 4.)

                In spite of the policy adopted by HealthPartners, the company appeared to ignore its implementation and enforcement and often reimbursed entertainment expenses based on inadequate substantiation. HealthPartners reimbursed executives who charged sports tickets on their corporate credit cards without any reference to a business purpose for the tickets, the name and business relationship of the ticket users, or whether the executive used the ticket as a gift or entertainment.

                For instance, HealthPartners paid over $16,500 for its CEO's season tickets to the Minnesota Wild (including a reserved parking space) since 2000. (Exhibit 53.) HealthPartners also paid for its CEO's season and playoff tickets to Minnesota Vikings games for at least five consecutive seasons at a cost of more than $10,000 per season. (Exhibit 54.) The CEO did not identify any attendees at these games or the business purpose for the expenses.

                HealthPartners also paid for its executives to attend theatre and music events, often without any indication of the event's business purpose, the identity of the attendees or their relationship with HealthPartners.

                For instance, HealthPartners reimbursed two executives over $5,500 for separate sets of Ordway season tickets bought one month apart, though neither executive identified the name, title or corporate affiliation of any ticket user. (Exhibit 55.)

                HealthPartners also paid for executives to attend individual events without identifying any guests, the guests' business relationships to HealthPartners and/or the business purpose or need for the tickets. The following are a few examples:

HealthPartners reimbursed an executive vice president $250 for four tickets to Riverdance in 1998. (Exhibit 56.) No attendees or business purpose were identified. The next year, HealthPartners paid almost $550 for an executive vice president to again entertain three companions (two unidentified) with dinner at Palomino, followed by a performance of Riverdance at the Orpheum. (Exhibit 57.) No business purpose was identified.

HealthPartners reimbursed an executive vice president almost $400 for four tickets to an Elton John/Billy Joel concert. (Exhibit 58.) No attendees or business purpose were identified.

HealthPartners paid over $250 for four tickets to Phantom of the Opera. (Exhibit 59.) No attendees or business purpose were identified.

HealthPartners reimbursed an executive vice president for four seats at the Ordway's production of Barrage. (Exhibit 60.) No attendees or business purpose were identified.

HealthPartners reimbursed an executive vice president nearly $200 for an unknown number of tickets to a Yanni concert, with no supporting documentation. (Exhibit 61.) No attendees or business purpose were identified.

HealthPartners reimbursed an executive vice president for four tickets to a Lorie Line concert. (Exhibit 62.) No attendees or business purpose were identified.

HealthPartners reimbursed an executive vice president for tickets to an unidentified show at the Fitzgerald Theatre with unidentified guests. (Exhibit 63.)

HealthPartners reimbursed an executive vice president almost $200 for tickets to Kaleidoscope, with no supporting documentation. (Exhibit 64.) No attendees or business purpose were identified.

HealthPartners reimbursed an executive vice president $145 for tickets for an unidentified show with unidentified attendees. (Exhibit 65.)

                The payment of the above expenses with no attempt to identify the attendee or business purpose, calls into doubt whether management properly exercised its responsibility to ensure that the tickets advanced a "reasonable and necessary" business purpose.

In July, 2002 HealthPartners modified its entertainment policy, but still allows the HMO to pay to entertain employees if the entertainment is "appropriate" and the amount spent is "not extravagant." (Exhibit 5.) It is unclear how HealthPartners will make such a determination.

    Section 1.9     Alcohol and Staff Meetings

                HealthPartners has no separate policy on staff meetings. HealthPartners' does have, however, an alcohol policy which prohibits the use of alcohol during work activities, whether on or off Company property, unless approved in advance. (Exhibit 66.) The following sample of HealthPartners' payments for happy hours and parties raises questions as to whether this policy on alcohol was ever implemented or enforced and whether such expenditures have a legitimate business purpose:

HealthPartners regularly reimbursed an executive for "meetings" during Friday-afternoon happy hours at local bars, including a $700 "meeting" at Joe Sensor's in 1998 (Exhibit 67), an $800 "lunch meeting" (at 5 o'clock p.m.) at Joe Sensor's in 1999 (Exhibit 68), and a $1,600 "meeting" at Lil Ditty's (Exhibit 69). The executive failed to identify attendees who participated in these "meetings" or the nature of the business discussed. No itemized receipts were provided.

HealthPartners reimbursed its senior vice president and general counsel almost $600 for a Friday-afternoon, "off-site" meeting at a pool hall, including liquor and payment for four pool tables from 2:00 p.m. to 5:00 p.m. (Exhibit 70.) The executive failed to identify employees who participated in the meeting or the nature of the legal business discussed over drinks and billiards.

HealthPartners paid almost $850 for a "staff meeting" over highballs, wine, escargot, and duck at the Lake Elmo Inn. (Exhibit 71.)

HealthPartners paid more than $6,500 for drinks and parties at the night club America Live!, including one to "rebuild consumer support and trust." (Exhibit 72.)

It should be remembered that HealthPartners is a health maintenance organization. According to its web site, it is well aware of the crisis in the affordability of healthcare, making repeated references to efficiency and cost. According to its web site, it also promotes the use of "health foods" and "healthy" eating establishments. Under these circumstances, it is difficult to justify the use of patients' premiums for alcohol and staff forays.

Section 1.10 Parties for Executives and Board Members.

HealthPartners does not have a policy regarding company parties. HealthPartners does appear to have a policy, however, to honor all recently-retired employees with a modest certificate of appreciation at one annual dinner. (Exhibit 73.) One assumes that this type of recognition establishes a standard that the company should also adhere to with its executives. This does not, however, appear to be the case.

For instance, the following sample of expenditures on executive parties indicates that the company is in need of an established policy that is implemented and enforced:

HealthPartners paid more than $7,500 for a recognition dinner for board members at the St. Paul Hotel, including an open bar and over $3,500 worth of Waterford crystal and other gifts. (Exhibit 74.)

HealthPartners paid over $5,000 for cocktails and a board dinner at the St. Paul Hotel, including gifts. (Exhibit 75.)

HealthPartners paid $3,000 for another dinner at the St. Paul Hotel for members of its board of directors, including more than $800 in alcohol. (Exhibit 76.)

HealthPartners hosted a $5,800 party for an HMO medical director, including a full bar. (Exhibit 77.)

HealthPartners paid over $3,700 for a Saturday-night retirement party at Edina Country Club. (Exhibit 78.)

HealthPartners paid over $5,000 for two retirement parties at the Minnesota Club. (Exhibit 79.)

HealthPartners paid over $2,000 for a retirement party at W.A. Frost, including a gift of artwork from a Colorado gallery for the guest of honor. (Exhibit 80.) No attendees were identified.

HealthPartners reimbursed an executive over $500 for a "farewell reception" at Forepaughs based only on a credit card receipt. (Exhibit 81.)

HealthPartners hosted a $3,500 reception for an HMO medical director at the Minnesota Club. (Exhibit 82.)

HealthPartners paid more than $2,500 for a cocktail party for an executive at the Town & Country Club. (Exhibit 83.)

Section 1.11 Holiday Parties

A nonprofit charitable organization that provides healthcare during a time of rapidly rising health costs ought to be sensitive to expenditures on galas, balls and parties. The repeated and lavish expenditures in this area raise considerable question as to how the company personnel can be focused on the company's mission. For instance, HealthPartners routinely pays for numerous holiday parties, such as the following:

HealthPartners hosted a $7,500 Saturday evening holiday party at Gallery 8, including almost $1,000 for a full bar. (Exhibit 84)

HealthPartners paid over $4,500 for a holiday party at a private home in North Oaks, including engraved invitations, floral arrangements, over $500 in alcohol, and over $600 in "Looney Tunes" gifts. (Exhibit 85.)

HealthPartners hosted a $1,700 holiday party for corporate officers at the Minnesota Club, complete with piano music. (Exhibit 86) No officers were identified.

HealthPartners reimbursed its CEO more than $900 for an "officer holiday lunch" at Buca with unidentified officers. (Exhibit 87) Another year, HealthPartners paid nearly $1,300 for a holiday lunch at the Decathalon Club for unidentified corporate officers. (Exhibit 88)

HealthPartners paid over $6,000 for a holiday party at Hillcrest Country Club. (Exhibit 89)

HealthPartners paid nearly $9,500 in 1998 alone to host holiday parties at the North Oaks Golf Club, including valet parking. (Exhibit 90)

HealthPartners paid more than $4,000 in 2000 for a holiday party at North Oaks Golf Club, including liquor. (Exhibit 91)

HealthPartners hired bands for holiday parties, including $1,275 spent on "Four Shadow" in 1998 (Exhibit 92), $3,500 spent on the Casablanca Orchestra in 1999 (Id.), and $1,100 spent on a four-piece swing band in 2000. Id.

HealthPartners paid over $9,500 for three years of Saturday night holiday parties at the Midland Hills Country Club. (Exhibit 93)

HealthPartners paid almost $4,400 to D'Amico Cucina to cater holiday parties in 1997 and 1998, including liquor. (Exhibit 94) HealthPartners paid another $2,400 in 1998 for D' Amico to cater a holiday party at a rented carriage house. ld.

HealthPartners paid over $1,200 to the St. Paul Hotel for a Friday evening holiday gala, including liquor. (Exhibit 95)

HealthPartners reimbursed an executive vice president more than $1,600 for a holiday lunch at the Napa Valley Grille. (Exhibit 96) The executive did not identify any attendees or include an itemized receipt.

HealthPartners paid over $850 to the Decathlon Club for a Saturday officers' holiday lunch with unidentified "officers." (Exhibit 97)

HealthPartners reimbursed an executive almost $500 for a holiday party at Dixie's Bar, based only on a credit card statement. (Exhibit 98)

Section 1.12 Other Parties and Events

The following are but a few examples of other galas, balls and parties paid for by HealthPartners:

HealthPartners pays $40,000 for an annual invitation-only "President's Banquet," including custom invitations, flora [ centerpieces, boutonnieres and corsages, musicians, dinner, champagne, and $20,000 in custom-made videos. (Exhibit 99)

HealthPartners paid over $14,000 to host a "winter gala" for physicians in the Wabasha Street Caves in 1999 and 2000, complete with cocktails, dinner, swing music and butlers dressed in tuxedoes. (Exhibit 100)

HealthPartners hosts another annual party for physicians. (Exhibit 101) For instance, in 1997, HealthPartners paid nearly $36,000 for formal invitations, a cocktail hour, strolling music, and a $15,000 video. Id.

HealthPartners hosted receptions atop the IDS Tower at Windows on Minnesota within a few months of each other totaling nearly $10,000, including at least one partially paid for by the pharmaceutical manufacturer Merck, which supplies drugs to HealthPartners. (Exhibit 102)

HealthPartners reimbursed an executive more than $1,800 to host summer parties at his Deephaven home in 1999 and 2000 (Exhibit 103), complete with custom invitations and almost $600 in alcohol.

HealthPartners paid over $2,500 for a Friday evening cruise on the Afton Princess. (Exhibit 104)

HealthPartners paid more than $2,500 for chartered lunch cruises, sometimes with alcohoI. (Exhibit 105)

Within two weeks, HealthPartners paid more than $2,100 for dinners at the North Oaks Golf Club, including liquor. (Exhibit 106)

HealthPartners paid over $7,000 for cruises on the St. Croix River, including a $2,400 "management retreat meeting" in 1999, $3,800 in cruises on the Jubilee and Majestic Lady in 1998, and a $1,400 cruise in 1997. (Exhibit 107)

HealthPartners paid over $5,500 for cruises on the Jonathan Padelford, including a $1,600 evening cruise in 1998, a $2,000 evening cruise in 1999, and a $2,200 weekday afternoon celebration cruise in 2000. (Exhibit 108)

HealthPartners paid over $3,200 to the St. Paul Hotel for a Saturday night banquet, with liquor. (Exhibit 109)

HealthPartners paid over $1,500 for boat cruises on Lake Minnetonka, including one "retreat" which occurred on a Friday afternoon with a full bar. (Exhibit 110)

                HealthPartners' parties apparently occurred with sufficient frequency that the company hired, at a cost of at least $8,000, a consultant to help plan them. (Exhibit 111) The volume of parties underwritten with patient premiums is inappropriate and needs to be discontinued.

Section 1.13 Retreats

                Prior to July, 2002 HealthPartners had no policy on retreats. As a result, there appears to be conflicting purposes as to expenditures in this area as well.

                Since 1997 HealthPartners paid nearly $60,000 to send board members and executives on an annual fall retreat at a Wisconsin lake resort. (Exhibit 112.) HealthPartners paid nearly $4,500 for gifts for the board, as well as entertainment, such as bowling trophies and shotgun shells. Id. HealthPartners also paid over $58,000 since 1997 for a spring overnight retreat at Oak Ridge Conference Center for board members and executives. (Exhibits 113-114.) Board members were treated to $1,500 in massages at the "board meeting" (Exhibit 114), were entertained by a magician who specializes in picking pockets, and received gift certificates to a spa. (Exhibit 113.)

                HealthPartners paid $7,500 for several executives to attend retreats three years in a row at the Grandview Lodge with other HMO executives, where they were reimbursed for golf services at the pro shop. (Exhibit 115.) The general counsel appears to have been reimbursed twice for the same expenses. (Exhibit 116.)

                HealthPartners also paid for executives to attend retreats at Madden's Resort on Gull Lake, where they were reimbursed for expenses, even though they failed to include receipts showing the type of expenses incurred. (Exhibit 117.) In addition, HealthPartners paid approximately $500 for executives to attend a golfing retreat at Deacon's Lodge Golf Course in Breezy Point. (Exhibit 118.)

                HealthPartners also pays for numerous executives to attend other regular retreats each year. For example, in 1999 HealthPartners paid almost $38,000 for an overnight retreat at the Arrowwood Resort, a northern Minnesota lake resort. (Exhibit 119.) In 2000, HealthPartners paid more than $38,000 for an overnight retreat at the Northland Inn, with entertainment from the band, Latin Explosion. (Exhibit 120.)

                HealthPartners also paid for regular mini-sessions billed as "retreats." For example, HealthPartners paid the Town & Country Club over $1, I 00 for a board "retreat/dinner" in May, 2000 (Exhibit 121), more than $2,300 for a "board retreat" in October, 2000 (Exhibit 122), and another $1,800 for a board retreat in January, 2001 (Exhibit 123).

Section 1.14 Gifts

                After release of the Allina and Medica MOUs, HealthPartners adopted a policy to govern the type of gifts to be given employees, whether for achievement (Exhibit 124) or retirement or an anniversary (Exhibit 73). This policy apparently does not extend to the purchase of executive gifts. As a result, HealthPartners has no specific policy for the reimbursement of gifts exchanged among its executives and board members. Even though the IRS does not allow more than $25 to
be deducted annually for a gift (Exhibit 125), HealthPartners apparently ignores this standard and purchases far more expensive gifts for executives and board members, often without documentation of either the recipient or business purpose.

                While the CEO presents annual gift certificates to employees with a letter extolling the organization's public commitment to spend "as little money as possible" (Exhibits 2, 126), HealthPartners' does not hesitate to lavish expensive gifts on its board members and executives.

For instance:

HealthPartners reimbursed the CEO $9,000 for Ordway gift certificates he gave in 1999 as "Christmas Presents" to "Directors, Officers, etc." (Exhibit 127.) No directors, officers or other gift recipients were identified, and the CEO only attached a credit card statement for the gifts. (A few weeks later, HealthPartners ordered several copies of Ethical Challenges in Managed Care for the board. (Exhibit 128.))

HealthPartners paid nearly $1,300 for multiple retirement gifts for a board member, including over $1,000 for four golf clubs plus an additional $300 for golf balls, apparel and other accessories. (Exhibit 129.) Ironically, the company purchased separate golf balls rather than using the $25,000 in golf balls it had previously purchased. Id.

HealthPartners spent $6,200 for gift certificates as holiday gifts for board members in 1998. (Exhibit 130.) The recipients on the board were not identified.

HealthPartners paid more than $1,000 for a 12' kayak and sporting goods gift certificates for a board member's retirement gifts. (Exhibit 131.)

HealthPartners paid more than $800 for wedding gifts from its CEO and the board to another board member, including Waterford crystal and a gift certificate for a bed and breakfast. (Exhibit 132.)

HealthPartnerspaid more than $4,600 in 2000 for hammocks and other holiday gifts for the board of directors. (Exhibit 133.)

HealthPartners paid over $800 for its CEO to give Waterford crystal and other holiday gifts to his office staff. (Exhibit 134.) No gift recipients were identified.

HealthPartners gave a $500 Golf America gift certificate to a board member. (Exhibit 135.)

HealthPartners gave a board member $230 in spa services when she retired (not from HealthPartners' board, but from her regular employer). (Exhibit 136.)

HealthPartners paid more than $675 for retirement gifts for a resigning board member, including a $500 Nieman Marcus gift certificate. (Exhibit 137.)

HealthPartners paid over $400 for the board to give shower and wedding gifts to the company's general counsel. (Exhibit 138.) The HMO also paid for the board to send her Waterford crystal when she quit less than a year later. Id.

HealthPartners gave board members nearly $2,500 in clocks as gifts in 1998. (Exhibit 139.)

                HealthPartners also paid for other merchandise billed to the CEO's office. For instance, HealthPartners bought numerous books and tapes for its CEO (Exhibit 140), and paid for him to join the Book-of-the-Month club (Exhibit 141). HealthPartners paid for many books based only upon a business justification such as "books" or "books for President." (Exhibit 140.) The purchase of a Garrison Keillor satire and a book about Harley Davidson motorcycles was described as "business strategies research." (Exhibit 142.)

                HealthPartners also paid for merchandise -- dubbed "office supplies" or "president's office" -- apparently for the comfort of the CEO or his personal staff. For instance, HealthPartners bought "items" such as pantyhose (billed as "supplies") (Exhibit 143); bath and hand towels (billed as "supplies for president's office") (Exhibit 144); a hammer purchased near the CEO's Northern Minnesota cabin (Exhibit 145); and cropped pants (Exhibit 146). HealthPartners also purchased repeated breakfasts and lunches for the CEO as "supplies." (Exhibit 147.)

                One executive alone bought almost $3,000 worth of "recognition" gift certificates from top-scale restaurants, rarely identifying the recipient. (Exhibit 148.) This was a common occurrence among HealthPartners executives. (Exhibit 149.)

                As noted above, HealthPartners had no specific policy on "recognition" gifts until October, 2001, when, following the Allina and Medica MOUs, it adopted policies that permit the purchase of gift certificates or merchandise to recognize employee contributions if the purchaser completes both a standard expense report form and a special recognition award form.

(Exhibit 124.) HealthPartners has also adopted a policy prohibiting the purchase of golf clubs and sporting equipment for employees, but the new policy does not extend to other types of gifts. (Exhibit 5.)

                It is necessary that a policy on gifts for employees be extended to the executives and that it be implemented and enforced.

Section 1.15 Meals and Liquor

                Since 1997 HealthPartners' policy has required employees to use "good judgment" in selecting eating establishments and required managers to ensure that meal expenses are "reasonable and necessary." (Exhibit 4.) HealthPartners' policies also required documentary substantiation for all meals, including original receipts and "detailed information" setting forth the business purpose for and participants at the meal. Id. Since late 1999, HealthPartners has had an alcohol policy that permits alcohol at company-sponsored events if approved in advance. (Exhibit 66.) The company apparently has no policy with regard to the use of alcohol during meals which do not take place during company parties.

                In July, 2002 HealthPartners adopted a policy requiring employees to submit itemized receipts (as opposed to credit card receipts) for restaurant and entertainment expenses. (Exhibit 5.) The company also adopted a new corporate credit card policy which prohibits payment on corporate credit cards unless the expense is thoroughly documented on an expense report. (Exhibit 5.)

                Because HealthPartners often reimbursed executives for meals that were not properly substantiated, it is prudent that the organization take steps to implement the new policy. After the Allina compliance review by this Office, HealthPartners stated that no payments were made on corporate credit cards unless the employee submitted detailed documentation on the attendees, business purpose and the like. (Exhibit 150.) Yet, executives often charged meals on corporate or their own credit cards without providing such documentation. Because credit card statements alone do not provide any documentation of what was charged (type of food, liquor, etc.), they do not allow the company to verify compliance with its policy that expenses be "reasonable and necessary."

                HealthPartners has developed a list of "healthy restaurants" and "healthy menu selections" which it encourages its members to follow. (Exhibit 151.) HealthPartners executives generally avoided these recommendations when dining out, except for a handful of participating restaurants in the "fine dining" category. Id. HealthPartners provided no documentation that its managers -- the "gatekeepers" who are supposed to ensure the necessity of expenses -- denied
any request for reimbursement of meal and liquor expenses. It is questionable whether HealthPartners executives used the requisite "good judgment" in selecting restaurants and whether managers properly exercised their responsibility to ensure that meal and liquor expenses were reasonable, necessary and properly substantiated:

HealthPartners paid over $2,200 for a dinner at Goodfellows, including nearly $400 in alcohol. (Exhibit 152.) Individual diners are not identified.

HealthPartners paid over $1,800 for sixteen top executives and company lawyers to dine privately at D'Amico Cucina, including over $500 for alcohol. (Exhibit 153.) (Four days later, the company blamed double digit premium increases for members on increasing medical costs.) Id.

HealthPartners paid nearly $400 for two executives to enjoy lobster and Friday night drinks with at least one of their wives at Aquavit. (Exhibit 154.)

HealthPartners paid over $1,100 for eight executives to dine at the Napa Valley Grille without an itemized vendor receipt. (Exhibit 155.)

HeaIthPartners paid over $800 for a four-hour dinner at Goodfellows. (Exhibit 156.)

HealthPartners paid over $800 for "facilitators" to dine together at W.A. Frost. (Exhibit 157.) The meal is variously described as a "dinner," "luncheon" and "supper," but the participants and purpose remain unidentified.

Health Partners paid almost $700 for "offsite" diners at the Lafayette Club on Minnetonka Beach, for which no business purpose or participants were identified. (Exhibit 158.)

HealthPartners paid over $650 for an "officer lunch" at the Napa Valley Grille, though the business purpose and the attending "officers" were not identified. (Exhibit 159.)

HealthPartners paid more than $600 for executives to dine and drink together at a "leadership retreat" at the St. Paul Hotel. (Exhibit 160.) No individual participants were identified.

HealthPartners paid over $600 for a dinner with unidentified employees at Pazzaluna. (Exhibit 161.) Only a sales draft was attached as documentation.

HealthPartners paid $550 for an executive to have dinner at Nava, a top gourmet restaurant in Atlanta. (Exhibit 162.) The executive attached only a sales draft for documentation, and failed to identify fellow diners or a business purpose.

HealthPartners paid over $500 for a dinner at Forepaugh's, including valet parking. (Exhibit 163.) No attendees were identified.

HealthPartners paid over $400 for an "annual meeting" at a hotel bar. (Exhibit 164.) The subject of the meeting is not identified, nor are the participants.

HeaIthPartners paid over $400 for a meal at W.A. Frost with no business purpose or attendees identified. (Exhibit 165.)

HealthPartners paid over $400 for a late-night dinner at Kincaid's, with no attendees identified. (Exhibit 166.)

HealthPartners paid almost $400 for six of its corporate medical directors to dine together at the St. Paul Hotel. (Exhibit 167.) The business purpose for the dinner was not identified.

HeaIthPartners paid more than $350 for a board "orientation" at Kincaid's, though no business need was stated. (Exhibit 168.)

HealthPartners paid almost $350 for a "cardiovascular dinner" at Kincaid's Steak House. (Exhibit 169.) No individual attendees were identified .

HealthPartners paid more than $300 for four executives to dine together at Morton's Steak House. (Exhibit 170.) Only a charge slip was attached as documentation.

HealthPartners paid over $250 for four executives to dine together at Murray's Restaurant. (Exhibit 171.) No business purpose was identified.

Section 1.16 Recommendations

HealthPartners has spent money on travel and entertainment expenses in a manner that does not adequately document the reasonableness, necessity and business purpose of such expenditures. HealthPartners is commended for adopting new policies in July, 2002 which, if properly implemented, should help to deter wasteful spending of limited health care resources. In light of the above comments, we recommend that HealthPartners undertake the following additional steps:

1. HealthPartners should ensure that its new policies are rigorously enforced and fully implemented and that it reject requests for reimbursement which are not in compliance with the policies.

2. HealthPartners' new club policy requires the board to continue to approve executive club memberships. In light of a national policy articulated by IRS regulations which provide that such expenses are not tax deductible, however, it would be prudent for the organization to prohibit the purchase of any executive club memberships.

3. HealthPartners' new entertainment policy forbids reimbursement for the purchase of golf or sports equipment and spa or exercise charges. The policy does not, however, extend to charges for participation in sporting events, such as golf. It would be prudent for HealthPartners to prohibit reimbursement for expenses relating to participation in sports such as golf and sporting event season tickets, unless approved by the board chair or his designee. For any such expenses the board chair or his designee approves, there should be a demonstration that the expenses have a legitimate business purpose for HealthPartners.

4. HealthPartners' new travel policy requires travel to be approved in advance by a supervisor. In addition, HealthPartners' new continuing education policy requires international travel to be approved by a medical team leader. Because HealthPartners, by its own account, engages in a significant amount of out-of-state travel, it would be prudent for the board to review on a quarterly basis a schedule setting forth all travel and take steps to eliminate unnecessary travel.

5. It would be prudent for HealthPartners to modify its travel policy to prohibit reimbursement for deluxe or luxury hotels. It would also be prudent for HealthPartners to establish a daily maximum (per diem) that employees can spend while traveling. (The employee should only be reimbursed for amounts actually spent.)

6. HealthPartners' new retreat policy bans out-of-state retreats (except those in western Wisconsin). It would be prudent for HealthPartners to require that any overnight retreats be approved in advance by the board chair or chair's designee.

7. It would be prudent for HealthPartners to require advance managerial approval for all entertainment expenses to be reimbursed, so that a demonstration of the business purpose and reasonableness of the expense is made prior to the expense being reimbursed.

8. HealthPartners should modify its policies to provide that valet service, clothing, and toiletry articles are not reimbursable. HealthPartners should also ensure that policies that ban reimbursement for personal expenses are fully implemented.

9. HealthPartners should modify its gift policies to require advance approval by the board chair or designee for the purchase of gifts.

10. It would be prudent for HealthPartners to adopt specific policies regarding reimbursement of expenses for company parties to ensure that the costs of such parties are reasonable and that the nature and frequency of such parties are subject to meaningful oversight.

11. It would be prudent for the company to extend its alcohol policy to the use of liquor during company-paid meals.

Section 1.17 Conclusion

The Board Chairman of Allina has advised this Office of the difficulty in changing the environment of a major nonprofit corporation as it relates to travel and entertainment. He states that he was immediately confronted with resistance, with complaints ranging from "this is in lieu of higher compensation" to "everybody is doing it." He noted that health care executives will be pressured to please peers and subordinates who are accustomed to a culture of luxury. Accordingly, in an effort to create an environment of fiscal prudence, it is recommended that, for each month during the first six months following this report, the chair file a report with this Office which itemizes the expenses incurred in these areas. It is hoped that, after a six month period of fiscal prudence, the need for further reporting will be eliminated.

AG: #720612-vl