Sprenger said many of the trips and golf outings were incentives for sales staff.

"Sales incentives are what drives them," he said. "If they outcompete, outsell their colleagues, you reward them."

Without incentives, he said, Allina would lose its top sales people. "We are in a competitive health care business," he said. "Just because we are nonprofit doesn't mean we are immune from the competitive market."

While Hatch said these expenditures are improper for a nonprofit health care organization, he said even more disturbing is how Allina accounts for them.

He alleged that Allina hides administrative costs by improperly accounting for them as patient treatment costs. Some of the costs that Allina categorized as belonging to the health care side of the ledger include $7,200 for Minnesota Timberwolves tickets and $11,470 for golf packages at Majestic Oaks Golf Club.

Jim Korin, an outside accountant hired by Hatch to direct a team of auditors working in Allina's Minnetonka headquarters, called Allina's expense reporting "a shell game." Korin is vice president of the Carlson, Lundquist & Company accounting firm.

Hatch said it is difficult to determine Allina's true administrative costs because it commingles funds and expenses among dozens of affiliates. The only way to understand the nonprofit's finances is to see all the documents, he said.

Korin said he believes that if all the records are examined, the 47percent estimate will hold up.: "If I pay a dollar into Medica and I'm using the Allina system's clinics, the bottom line is that of that dollar I paid, 47percent of it goes to administrative functions."

The perks uncovered by Hatch have angered some Allina doctors who have long complained that they are paid late and have to do without vital equipment.

Dr. Mary Dunn, neurosurgeon and chief of medical staff at Allina's United Hospital in St. Paul, said Wednesday that "Allina's executives have lost sight of their mission of providing health care in this community. I can't even buy a $52,000 ultrasound machine for the cardiac operating room that I've needed for the last six years and meanwhile, if the attorney general is correct, they're out golfing in California at a sales meeting," Dunn said. "Big items on the United Hospital campus are now being provided by philanthropy -- not from our capital budget," she said. It's time doctors question how Allina's health dollars are being spent, she said.

"I'd rather go down in a ball of fire than let the health-care dollar not go to patient care," she said.

The division between administration costs and medical care costs is part of the ongoing debate about managed care. Critics say that HMOs, with their managers, computer systems, office buildings and executive salaries, add an unnecessary layer of costs.

HMOs insist that managed care saves people money by controlling medical costs.

Minnesota HMOs typically report that for every dollar in premiums, about 10 cents goes to administrative overhead. However, the Minnesota Physician-Patient Alliance challenges those numbers. The lobbying group claims that HMOs classify some administrative costs as medical -- even the salaries of bureaucrats who approve or deny payment for care. The group argues that 40 cents of every health care dollar pays for the cost of managing health care.

Administrative costs are the third-fastest growing category of health care spending, according to the Minnesota Department of Health. Prescription drugs went up 16 percent, outpatient care rose 13 percent, and administrative costs were up 8 percent from 1997 to 1999.

Michael Scandrett, executive director of the Minnesota Council of Health Plans, which represents HMOs, said Hatch is being unfair.

"He doesn't have a genuine interest in working on issues that need to be corrected," Scandrett said. "We get the feeling that he either wants to put us out of business or wants to get attention around his battle with us."

Hatch said that Allina has certain tax advantages because of its nonprofit status and that it should be accountable to legislators and the public by opening its books. "How do they handle the money?" he said. "We want to know and the public has a right to know."

Hatch said that many more examples of inappropriate spending may be contained in documents Allina has refused to provide. So far, his investigation has turned up these questionable expenses, according to the memorandum:

Sprenger said it is not unusual for companies to use two services from the same large firm. "There are appropriate firewalls and no lack of independence," he said.

Auditors also questioned the management incentive pay plans, which included expensive life insurance policies for top Allina executives Dr. K. James Ehlen, the former president, and David Strand, chief operating officer. Medica paid $333,000 in annual premiums for Ehlen's policy, which last year had a cash value of $3.3 million and a $10.2 million death benefit. Strand's policy had a $1.7 million cash value last year and a $7.1 million death benefit.

"The purpose of such policies, which are expensive and inefficient, is to to create a fringe benefit for an executive," the memorandum said.

Sprenger said the whole-life policies were established when Medica was a small company in the 1990s to provide a form of pension compensation for top executives.

"He has taken something out of context and just run with it," said Sprenger. "The executives didn't own the policies, the organization owned them."

The policies were terminated in 2000.

Hatch's memorandum said Allina also appeared to manipulate its finances so that executives would receive their annual incentive bonuses. For example, in 1998, the incentive plan provided that bonuses would be awarded if the company achieved at least 80 percent of its net income goal. When it became clear that it would fall short of that goal, it simply changed the threshold to 60 percent of its income goal.

"As a result, the executives were then paid the bonus," the memorandum said.

Golfing trips ranged from California to some of the best courses in Minnesota.

"In spite of restrictions on golf fees in Allina's business expense policy, there appears to be a great deal of interest in the sport by Allina executives," the memorandum states.

A federal audit released last year also raised questions about Medica's spending on such things as massages for employees and 55 Waterford crystal vases for board members and senior managers.

Although all companies have to spend money to attract clients and reward employees, nonprofit health care organizations should be held to a higher standard, said Patricia Werhane, professor of business ethics at the University of Virginia and author of a book on health care ethics.

"Rather than gifts, pay the employees more money, improve the working conditions, give them better jobs," she said. "Besides, not all employees play golf. It puts them in an unfair position."

Gifts and trips also set the wrong tone for a nonprofit, making it possible for extravagances to eclipse the mission, she said. "That is not the kind of way you want your employees to think about themselves."

What's next

Hatch said that when he's satisfied auditors have a detailed accounting of Allina's finances, he will take his findings to Allina's board of directors with recommendations. If there is proof of mismanagement, he hopes the board will institute reforms, he said. If the board chooses not to or is unsuccessful, then regulators from his office and the Health and Commerce departments would have to decide whether the board should be replaced, he said.

Paul McEnroe can be contacted at pmcenroe@startribune.com .Josephine Marcotty can be contacted at marcotty@startribune.com .Glenn Howatt can be contacted at howatt@startribune.com .