Evolving legislation under which nonprofit HMOs in Minnesota could convert into for-profit health insurers has sparked a debate over laws governing what assets the new businesses should be able to keep.

Earlier this year, the Legislature eliminated a 40-year ban on for-profit HMOs in Minnesota as part of a bill to provide premium relief for those who buy health insurance in the state's troubled market for individual policies. Critics at the time said the bill lacked important consumer protections to make sure charitable funds now controlled by nonprofit HMOs would not be wrongly shifted into for-profit hands.

Republicans in the state Senate responded with a bill backed by DFL Attorney General Lori Swanson that required regulatory approval of HMO conversions, including a broad definition of the "public benefit assets" that would be subject to review. However, Republican lawmakers changed the legislation last week to include a much narrower definition of assets — those from state contracts — since they believe existing law governing all others is very strong.

"They essentially gutted the bill," said Ben Wogsland, a spokesman for the state attorney general's office. "The current language that's in there does not protect those assets."

Sen. Michelle Benson, R-Ham Lake, said the language was changed to address concerns in the Republican-controlled House that the Senate had defined public benefit assets too broadly in its legislation.

In a conversion, an HMO's public benefit assets would be transferred to a new nonprofit group and would not be retained by the health insurance company.

"We wanted to focus on those assets that had been accumulated because of their public contracts," Benson said. "But that is hard to define and separate, so we're asking for some technical support on where that line could be drawn."

For decades, Minnesota law prevented for-profit HMOs from bidding on contracts to manage care in state public health insurance programs. For many years, the contracts in those programs have been lucrative for health plans — and helped grow the HMO asset base, consumer groups say.

With the changes, House Republicans say the legislation directs the transfer of assets accrued from public programs to another nonprofit entity in the event of a conversion or other substantial transaction. They maintain that all other charitable assets are protected by existing law.

The Senate bill gave the attorney general authority to block an HMO conversion, but that authority was removed with the changes made last week. House Republicans argue applicable consumer protections are already on the books.

"We want to protect the public, but we think that under current law the [attorney general] has enough powers to stop anything," said Rep. Joe Hoppe, R-Chaska. "What we're going after is trying to make sure that we're not too deeply involved in a private sale, or purchase agreement between private entities."

In March, Swanson sent a letter to lawmakers saying there are no existing laws in place in Minnesota to prevent a nonprofit health plan from selling its assets to a for-profit corporation. Stronger laws are needed, she wrote, to protect nonprofit assets for the benefit of the public in the event of a sale.

"By taking legislative action this session to adopt a comprehensive conversion law, Minnesota can prevent the experience of other states where nonprofit executives received millions of dollars in bonuses," she wrote, "and financial incentives for presiding over for-profit conversions that left taxpayers insufficiently compensated for the value of the nonprofit assets."

The Senate's legislative language on HMO conversions was incorporated into a large health and human services spending bill that's now being handled by a conference committee, where House and Senate members are negotiating differences. The changes adopted last week were part of the conference committee process.

The final bill isn't complete, but it's one of the major pieces of legislation that lawmakers are rushing to finish before adjournment.

When lawmakers passed the bill for premium relief in January, they also opened up the HMO market to for-profits in hopes of attracting more competition among health insurers. Health care analysts said the change could prompt local HMOs to change their tax status, or outside insurers to enter the market by acquiring one the Minnesota nonprofits.

Nationally, the 1990s and 2000s saw several examples of nonprofit hospitals and health insurers switching to for-profit status — either via sale or conversion — including several health insurers that sell coverage in other states under the Blue Cross and Blue Shield brands. But there haven't been significant examples of such conversions in Minnesota. The state's nonprofit HMOs have said they had no intention of becoming for-profits.

The tax-exempt status of nonprofit HMOs in Minnesota gave them a competitive advantage for more than two decades against taxpaying, for-profit health plans, Twila Brase, president of the Citizens Council for Health Freedom, said in a statement. The advantage allowed nonprofit HMOs to crowd out for-profit carriers, argued Brase, whose group promotes free-market approaches to health care.

In a statement, Brase's group lauded the earlier Senate bill for providing "significant oversight and protections against private inurement and self-interested choices by tax-exempt health plans."

The changes in the bill were criticized by TakeAction Minnesota, a group that supports expanding public options in health care. The new legislative language, for example, deletes a requirement that a nonprofit receiving assets through a conversion be free of influence from the old HMO, the group says, or new for-profit insurance company.

Minnesota's health insurers built their assets over the years through public funds, said David Zaffrann, the health care manager at TakeAction Minnesota.

"In other states, health insurance executives have cashed in because the laws were weak," he said in a statement. "Protections need to be put back."

But Hoppe said the current bill prevents "public health program revenue from being used for bonuses and golden parachutes."

Wogsland said Minnesota's nonprofit health plans have assets of $7.1 billion and reserves of $3.3 billion. Republicans, however, said the figures vastly overstate the assets that can be linked to public programs.

Twitter: @chrissnowbeck