Minnesota Attorney General Lori Swanson on Thursday accused Allina Hospitals and Clinics of charging patients unlawfully high interest rates on unpaid medical bills and filed a lawsuit that could affect the bills of thousands of local consumers.

The Twin Cities' biggest hospital and clinic chain charged patients interest rates as high as 18 percent on medical debt, even though, Swanson asserted, state law caps rates on such debt at 8 percent.

The suit is one symptom of growing financial strains in the health care system and dramatic changes in the insurance market, where consumers find themselves subject to more out-of-pocket costs and medical debt has become a leading cause of personal bankruptcy.

"You have insurance, so you think you're protected," Swanson said at a news conference. But even after insurance has settled its portion, she added, many patients find themselves struggling to pay deductibles, co-pays or co-insurance.

Swanson said she wants Allina to reduce interest rates charged by its MedCredit Financial Services unit and make refunds to patients who were charged high rates in the past. She is also pursuing civil penalties of up to $25,000 per violation.

In a statement, Allina said it had earlier decided to reduce the interest rate on all current and future MedCredit accounts to 8 percent and told the attorney general of the decision last month. However, it maintained that its previous interest rates were "fully consistent with Minnesota law."

"Allina believes MedCredit remains a valuable tool to help some patients pay their medical bills and that it may be a better alternative to financing such debt through a credit card, which may charge a much higher rate," Allina said.

Allina said that beginning Feb. 1, all accounts will be charged 8 percent interest. MedCredit, which has been around since 1988, has about 8,000 open accounts.

Big deductibles

Consumers once took it for granted that insurance would pay all but a small share of large hospital bills, but that has changed quickly with the spread of new, high-deductible policies. Enrollment in high-deductible plans has soared in recent years as consumers and employers accepted higher risk for lower premiums.

"As people are trying to maintain coverage, they are taking those $3,000 to $5,000 deductibles," said Eileen Smith, a spokeswoman for the Minnesota Council of Health Plans. At the end of 2007, 11 percent of all Minnesota health plan enrollees, or 456,000 people, had high-deductible policies with health savings accounts. Even those in traditional plans are facing higher deductibles, with $1,000 now the norm, according to benefits consultant Mercer.

Several months ago, Swanson's office began receiving complaints from patients about Allina's MedCredit program.

Patients said they were offered three options: immediate payment in full; payment in monthly installments, or opening an account with Allina's MedCredit. This, they said, often left them with an unacceptable choice: Open a MedCredit account, despite high interest rates, or be sent to collection agencies and ruin their credit rating.

Elissa Satterlund of Hudson, Wis., was one of them. A 2006 laparoscopy and a 2007 hysterectomy landed her with a combined bill of just under $5,000 at River Falls Area Hospital, which is owned by Allina. She signed on for MedCredit at 18 percent interest. Since December 2006, she has paid more than $1,050 in interest, she said.

"It's that or kill my credit," said Satterlund, 28. "Eeny meeny miny mo."

According to the attorney general's lawsuit, MedCredit charges 18 percent interest on debts of up to $4,999 and 12 percent interest on debts from $5,000 to $9,999.

James Caputo of Coon Rapids had surgery to remove kidney stones at Mercy Hospital last spring. His bill was $1,800. Caputo, 46, signed up for MedCredit. His minimum payment was $30 a month, of which $20.85 was interest. After several months, an outraged Caputo contacted the attorney general.

Legal question

Swanson's suit centers on the question of whether MedCredit constitutes an "open-ended credit" plan under Minnesota law, which would enable it to charge interest of up to 18 percent. Swanson says it doesn't, because it does not extend credit but merely services and collects debt for Allina. Allina says MedCredit is indeed "open-ended credit," because patients can continue to use the program for subsequent care.

Last year, Allina provided $90.8 million in free care, up 56 percent from a year earlier, spokesman David Kanihan said. Almost 80 percent of patients who got some free care also had insurance coverage.

Allina isn't the only hospital group struggling with patient debt. In 2008, uninsured and insured patients left $601 million in unpaid bills at Minnesota hospitals, according to the Minnesota Hospital Association. That's up from $238 million in 2002.

"There are a lot of financial pressures on hospitals these days," said Allan Baumgarten, an independent Twin Cities analyst on health care finance. "They're definitely paying more attention to collections."

Swanson said she isn't aware of other health care groups charging unlawfully high interest rates.

The root problem, she said, is increasingly skimpy health insurance. "I call it Swiss cheese coverage," she said. "It's riddled with holes." Chen May Yee • 612-673-7434