State moves to fire HMO regulator

Times Staff Writers

The Schwarzenegger administration is moving to fire a top HMO regulator who held stock in UnitedHealth Group Inc. when he helped review the 2005 acquisition of PacifiCare Health Systems Inc.

The $9.2-billion-dollar deal was approved in December after four months of consideration by state officials.

The regulator is Kevin Donohue, an attorney and deputy director of the California Department of Managed Health Care. He is on paid administrative leave pending a civil service disciplinary hearing.


Donohue failed “to recuse himself from participating in the merger approval process, based on the fact that he had a financial interest in UnitedHealth,” the department said in a statement Wednesday.

Donohue is fighting the move, saying he complied with California disclosure laws and played no role in the state’s decision to approve the deal. He said the Schwarzenegger administration had decided to approve the acquisition before he was involved.

“I was never asked whether the transaction should be approved,” he said. “I never gave my opinion. This was decided well above my level by the administration.”

What’s more, he noted that he complied with conflict-of-interest laws by reporting his UnitedHealth holdings in annual filings beginning in 2002.

An annual Statement of Economic Interest for 2005 filed by Donohue reported ownership of stock worth $10,000 to $100,000 in United Healthcare. State law does not require more precise reporting.

The department described Donohue as its point person in a final round of negotiations that sought to ensure that the 3.2 million members of Cypress-based PacifiCare would not see their benefits reduced or premiums increased to pay for the controversial acquisition by the 22-million-member UnitedHealth of Minnetonka, Minn.

Donohue, who has worked as a lawyer for the state for 7 1/2 years, said he had no need to recuse himself from the negotiations. All major decisions to tentatively approve the merger had been made before he was brought in, he said.

Decisions to approve the merger were reached, he said, by his boss, Director Cindy Ehnes, and high-ranking officials at the department’s parent agency -- the Business, Transportation and Housing Agency -- and the governor’s office.

“Even before they asked me to come in and assist in the negotiations, memos had been going up to the agency and the governor’s office outlining” the agreement, Donohue said.

The department said that both an internal investigation and consultation with an outside legal expert indicated that Donohue violated state conflict-of-interest laws.

Officials of the administration of Gov. Arnold Schwarzenegger, including Ehnes, relieved Donohue from his $110,472-a-year job Oct. 24.

“It was an egregious matter, and that’s why we moved forward,” department spokeswoman Lynne Randolph said. But Donohue’s alleged violation of conflict-of-interest laws is not likely to provide grounds to set aside the merger, she said.

“We don’t have any evidence that he unduly influenced those negotiations for his own gain,” Randolph said.

Randolph denied that Schwarzenegger’s office had a role in approving the PacifiCare acquisition. The ultimate decision to approve the merger, she said, was made by the director based on recommendations from the staff involved in reviewing the proposed terms of the merger, including Donohue.

As for Donohue’s financial disclosure forms, Randolph said the department had not read any of them, other than to ensure that he had complied with the law and filed in a timely manner.

She said the department became aware of Donohue’s alleged violation when its lawyers looked at Donohue’s filings as part of complying with a Public Records Act request from the California Medical Assn. on an unrelated matter.

“The department knew about my disclosure. How could they require the whole department to file them and then for four years not look at them?” Donohue said. He said he would appeal his dismissal at a departmental hearing and before the state Personnel Board, if necessary.

Randolph said the department planned to more closely examine its employees’ economic interest reports as well as institute a beefed-up in-house ethics training program.

A spokesman for UnitedHealth said the company did not know about Managed Health Care’s probe or that Donohue owned stock in the company.

But any stock ownership by Donohue would have had no bearing on the agency’s approval of the acquisition, UnitedHealth spokesman Tyler Mason said.

“The public process was thorough and rigorous,” he said. “From our perspective, it was pretty transparent. We didn’t know about any other issues surrounding anybody there.”

Donohue was integrally involved in Managed Health Care’s review of the proposed acquisition and the agency’s negotiation of conditions for approval.

He also headed some of the hearings to solicit testimony on the potential effect of the acquisition on consumers and the state’s healthcare network.

Consumer advocates said Donohue seemed particularly tough on patients at public hearings.

“He was argumentative with anyone who criticized the [health] plans,” said Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

“He limited our time and was extremely argumentative with patients -- people who had gone out of their way to come and give their testimony,” he recalled.

Flanagan said the disclosure of Donohue’s stock holding puts a cloud over the acquisition, and he called upon California Atty. Gen. Bill Lockyer to investigate.

Jack Lewin, chief executive of the California Medical Assn., said physicians were concerned that HMOs and insurance companies have too much influence over government regulators.

But, he said, he doesn’t believe that Donohue is to blame. “Kevin’s an honorable man in a tough job.”