It’s hard to guess who critics thought got the profits when nonprofit Medica transferred capital to its for-profit health insurance subsidiary.

No one does, of course.

The Medica Insurance Co. is owned by Medica, a nonprofit with no shareholders. No one gets a distribution of profits, stock options, stock appreciation rights, dividends or any other form of owners’ income.

That didn’t keep Medica from getting pounded by Gov. Mark Dayton and others this fall for moving some capital from a subsidiary called Medica Health Plans to its sister company.

If anyone gets worked up about a nonprofit owning a for-profit subsidiary, they are not thinking clearly. What’s worse about this whole story of Medica’s capital allocation is that all the complaining only reinforces the enduringly popular delusion that nonprofits shouldn’t ever make a nickel.

What all nonprofits need is capital. That’s true for Mayo Clinic and the other big health care companies on the top of the list of largest nonprofits down to the local food shelf or community theater.

It doesn’t matter whether it’s called the reserve, a surplus or net assets — it’s all capital. There’s only one reliable way to get such a cushion: That’s consistently spending a little less than they take in.

Yes, that means making a profit.

During the financial crisis of nearly a decade ago and in the years that followed, a lot of nonprofits found themselves financially strapped. From firsthand experience as a volunteer I can tell you that a lot of hand-wringing among board members concerned progress on the annual budget.

What was really needed was a quick look at the balance sheet, too.

In a nonprofit there won’t be shareholders equity, but in the lower right there might be something called net assets. That’s the capital. And in the upper left — and in the same place it would appear on the Target Corp. balance sheet — is cash and investments.

If the nonprofit had money in the checking account, or at least positive net assets, then it had some time. It could get to work on trimming expenses or figuring out ways to charge for a service or cultivate more donors. No money and zero net assets, well, then it was time to start laying off staff while praying for divine intervention.

Nonprofit managers rarely seem to think about this scenario, because adopting a balanced budget and then hitting it always seem like the right things to do. Yet that’s just breaking even. To do better than that at a social service or arts nonprofit takes some unrestricted money, too, as government and foundation grants must get spent on the programs they were meant to fund.

A financial cushion in a neighborhood arts organization plays the same role it does in a big insurance company, like at HealthPartners or Medica. It absorbs the financial blow of an unpopular play, an unexpected expense or a down year in the business.

Minnetonka-based Medica has a set of challenges to keep the proper cushion, given that it’s got a portfolio of subsidiaries to offer coverage in different segments of its market, all closely regulated, too.

Its units include a big nonprofit health plan, a smaller nonprofit health plan organized in Wisconsin and a for-profit health insurer now covering people in several states. All three lost money last year.

Medica had net assets at the end of last year of more than $700 million, its consolidated capital cushion, but it was far closer to $1 billion at the end of 2015.

Most of the financial pain was felt in its big nonprofit HMO. That’s why more than a year ago the company notified the state that it wanted to stop covering people in some state-run programs that had led to much of the consolidated net loss.

So through three quarters of 2017, the latest information available, the Medica Health Plans HMO unit has significantly contracted. By one measure of the people covered by this unit, it’s about half the size of what it was in 2016.

As described by Mary Quist, Medica’s corporate controller, this contraction in the big health plan unit left it with too much cushion, as fewer people covered means fewer risks of losses. The capital wasn’t needed, but it could sure be used elsewhere.

So Medica made this same case to state regulators in its application to move capital. The Medica Insurance Co. was growing. It could use a bigger cushion.

It’s true this went into a for-profit unit of Medica, but it’s important to point out that Bloomington-based HealthPartners and other traditional nonprofits have for-profit insurance companies, too.

Why? To get an insurance license in the state of Minnesota, the company essentially has to be for-profit, even if owned by a nonprofit holding company.

And nonprofit Medica, the parent, hasn’t used this for-profit subsidiary to abandon its mission of helping people get high-quality, affordable health care. Medica is the only player in the Iowa and Nebraska health insurance exchange markets, for example.

I asked Medica to explain all of this in a telephone call with Quist, with an hour blocked out for the call. It could have wrapped up in 10 minutes, as Medica’s practices are so straightforward and sensible.

It is a coincidence that this capital transfer took place the same year it became legal for an HMO to be for-profit in the state. There’s no reason to expect a flood of for-profit competitors coming in to take on HealthPartners, Medica and the other nonprofits.

A state survey from 10 years ago nicely summarized what happened to many of the for-profit insurers that once sold coverage here.

Of the reasons listed for leaving the market, ongoing losses was the most popular response, followed closely by “cannot compete.”

Medica, UCare and the other nonprofits are still around. All still without any shareholders pocketing the profits.

 

Lee Schafer • 612-673-4302