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The organization providing Medicaid services in Jefferson and surrounding counties has spent lavishly on such things as travel, meals, salaries, bonuses and lobbying in recent years, the state auditor’s office said in a report released Tuesday.

The scathing report, which Gov. Steve Beshear described as “disheartening,” said two Passport Health Plan officials — Executive Vice President Shannon Turner and Associate Vice President Nici Gaines — were paid well, ate well and traveled extensively.

“Lodgings were often luxury spas and resorts,” the report said. “The executives used limousine services and dined at expensive restaurants. While these types of expenditures may be routine for many private, for-profit companies, they should not be typical in nonprofit, health care organizations.”

The report also said Passport made extraordinary efforts to burnish its public image and gain political support by spending $1 million since 2007 on lobbying and public relations, as well as $423,000 in donations and sponsorships.

Many of the donations had no connection with health care, the report said — including $600 to sponsor a reception for the Senate Republican majority in 2009, $10,000 to sponsor an “inflatable character” for the Kentucky Derby Festival's Pegasus Parade, and contributions to the Boy Scouts, Kentucky Opera, Volunteers of America and others.

Beshear responded Tuesday by calling for a “complete financial audit” of Passport, which holds state government’s largest contract — $793 million in fiscal 2010 to serve 164,000 Medicaid recipients in 16 counties.

State Auditor Crit Luallen said at a news conference Tuesday that while many of the audit’s findings are serious and demand immediate attention, her office uncovered nothing warranting a criminal investigation.

Many of the critical findings focus on Turner, whose compensation in salary and bonuses the last three years averaged $285,000. Gaines was paid $156,000 in salary and bonuses last year, with her base salary increasing 32.6 percent since 2007.

The report also found that both Turner and Gaines have been entangled in conflicts of interest, noting that in addition to duties at Passport, each also worked as a consultant for a Passport vendor they were charged with overseeing.

The report also criticized multimillion-dollar fund transfers by Passport that favored the big health-care organizations that partnered to form Passport in 1997.

The transfers to those entities — primarily groups affiliated with the University of Louisville — came at the expense of smaller providers elsewhere in the 16-county service region, the report said.

In all, the auditor’s report makes 20 findings and scores of recommendations calling for more accountability and transparency in the organization’s oversight.

Passport Chairman and Chief Executive Officer Larry Cook, who is also executive vice president for health affairs at U of L, said the organization's board has reviewed the report and “is taking actions, as appropriate, that are consistent with recommendations made by the auditor.”

“There are elements of the report with which we agree; elements with which we respectfully disagree; and many elements that will require deliberation and discussion within (Passport's) board,” Cook wrote in his response released with the audit.

He also noted in his response that Turner and Gaines have terminated all the consulting relationships they had with Passport vendors.

In his statement, Beshear said he had directed the Cabinet for Health and Family Services and the Department of Insurance to meet with the Passport board “to develop an immediate plan to correct these practices.”

“… It is disheartening to learn of Passport's excessive spending of taxpayer dollars,” Beshear said.

Luallen launched the examination of Passport in March at the request of state Sen. Tim Shaughnessy, D-Louisville, who wanted to know more about cash transfers between Passport and U of L-affiliated groups.

Shaughnessy was particularly concerned about distributions of $10 million in excess funds in late 2008 and again in and 2009 to the large Jefferson County health-care providers that formed Passport.

These distributions were reported to the Kentucky Department of Insurance as grants to cover indigent care costs incurred by Passport's provider partners — University Medical Center, University Physician Associates, Norton Healthcare, Jewish Hospital and St. Mary's Healthcare, and the Louisville/Jefferson County Primary Care Association.

But the auditor’s report said the money was distributed based on the percentage of the providers' initial investments to create Passport — not the amount of indigent care they provided. And the report said this money was placed in the general funds of these providers “rather than specifically set aside for uncompensated indigent care.”

The report also questions whether the transfers were in compliance with Kentucky law and the federal tax code.

“Outrageous and irresponsible,” Shaughnessy said of the report's findings. “It's a wake-up call for all of us, especially the board of trustees at U of L ... because U of L runs Passport.”

U of L President James Ramsey released a statement Tuesday that asked the Passport board “to address the findings of the audit so the most fragile citizens of our region continue to receive first-class health care.”

During Tuesday’s news conference, Luallen specifically questioned the money Passport spent on lobbying and public relations.

“Is it appropriate for a contractor ... who has no other means of income except public to have that much money being spent on lobbying and public relations?” she asked.

But Passport's lobbying team got both legislative chambers to insert language in the final 2010-12 budget preventing cuts in its funding — wording that Beshear vetoed because he said it unduly restricted his flexibility in managing Medicaid costs.

The report also stated that Passport's employees made campaign contributions to state legislators and wrote letters to employees of affiliated groups asking that they do the same.

In a statement, House Speaker Greg Stumbo, D-Prestonsburg, applauded the work of Luallen’s office but asked why the Cabinet for Health and Family Services had not caught such excesses. Stumbo also noted the audit did not answer the question: “Did this contract save money for Kentucky?”

Senate President David Williams, R-Burkesville, said in a statement that he had not received a copy of the audit.

In his response, Cook said, “Passport has proven successful in managing health care costs in the region. Over the past year, Passport's current medical cost increase was 4.5 percent in comparison with the regional average increase of 9.3 percent and the national average increase of 7.1 percent.”

The audit, however, found that it is impossible to conclude whether Passport saves the state money, or costs more than if the 16-county region were served by the state Department of Medicaid Services, because “a true comparison” has never been conducted.

Janie Miller, secretary of the Cabinet for Health and Family Services, said Tuesday that an independent consultant will be retained to perform such an analysis.

Cook contended that Passport has pleased providers through the region and that it has created innovative smoking-cessation programs and other initiatives to improve care for Medicaid recipients. Luallen noted that her report did not attempt to address the quality of medical services provided.

Early this year The Courier-Journal filed a request under the state open records law seeking Passport records on compensation of its executives and minutes of its board meetings. But Passport refused to release them, claiming that the law did not apply.

The attorney general's office disagreed, saying that Passport is 100 percent publicly funded and must release the records. But Passport again refused and took the matter to Jefferson Circuit Court, where it is pending.

Luallen said that because Passport is funded with federal and state dollars — money appropriated by the General Assembly — it is a “public agency” subject to the Open Records Law.

Additional Facts

What is Passport?

Passport Health Plan is a nonprofit consortium of hospitals, doctors and other health care providers that delivers services to about 165,000 Medicaid patients in the Louisville region.

It was formed in 1997 to serve as a managed care entity for Medicaid patients in Jefferson and 15 surrounding counties as part of an effort to control soaring Medicaid costs. Initially the model was to be applied across the state, but it took root only in the Jefferson County area.

The University of Louisville, through its physicians and medical school, hold the majority interest in Passport. Dr. Larry Cook, U of L's executive vice president for health affairs, serves as Passport's board chairman.

Passport contracts with AmeriHealth Mercy, a Philadelphia company, to administer services in its 16-county coverage area.

Highlights of the report

Travel: Passport spent $106,722 on more than 36 trips including trips to conferences at resorts in New Orleans, Key West, Las Vegas, Seattle, Philadelphia, Tucson, Washington and Coeur d'Alene, Idaho.

Meals: Spent $72,994 on 753 meals for groups large and small. These were mostly at Louisville restaurants but included tabs at some famous restaurants outside Kentucky, such as Emeril's and Commander's Palace in New Orleans.

Limo services: Five uses of limos totaling $3,996.

Lobbying and public relations: Spent $1 million.

Donations and sponsorships: Spent $423,000, some with no connection to health care, including $10,000 to be an “Inflatable Character Sponsor” for the Kentucky Derby Festival.

Gifts: Spent $9,311 for 95 gifts, which included flowers and Christmas gifts.

Salaries: Paid salary and bonuses of $303,750 to Executive Vice President Shannon Turner and $156, 000 to Associate Vice President Nici Gaines in most recent year.

Conflicts of interest: Both Turner and Gaines received additional compensation in contracts with subcontractor they were overseeing, AmeriHealth Mercy. Also, Larry Cook, Passport's chairman and CEO, had divided loyalties because he serves as an executive vice president of U of L. He also was reimbursed $1,717 by AmeriHealth for expenses for a trip to Ireland in 2007.

Grants: Many grants were made by Passport to groups with ties to staff and/or board members

Bonuses: Paid $242,000 in bonuses of $1,000 each to Kentucky employees of AmeriHealth Mercy on the 10-year anniversary of Passport.

The Passport board

(As listed in 2009 annual report)

Dr. Larry N. Cook, chairman, executive vice president for health affairs at University of Louisville
Robert P. Barbier, University of Louisville Hospital
Rick Buono, Jewish Hospital & St. Mary’s Healthcare
Richard Carrico, Norton Healthcare
Dr. Richard D. Clover, University Physicians Associates
Dr. Christine Cook, University Physicians Associates
Ron Farr, Jewish Hospital & St. Mary’s Healthcare
Michael W. Gough, Norton Healthcare
Dr. Edward Halperin, University Physicians Associates
Richard K. Jones, Louisville Primary Care Association
Dr. Henry J. Kaplan, University Physicians Associates
Dr. Kelly M. McMasters, University Physicians Associates
Dr. Gerard P. Rabalais, University Physicians Associates
Dr. Jesse Roman, University Physicians Associates
Dr. Allan Tasman, University Physicians Associates
James H. Taylor, U of L Hospital
William B. Wagner, ex-officio, Louisville Primary Care Association