Recommendations

February 2016 High Risk—Covered California It Must Ensure Its Financial Sustainability Moving Forward, and Its Use of Sole-Source Contracts Needs Improvement Report 2015-605 COMMITMENT INTEGRITY LEADERSHIP The first five copies of each California State Auditor report are free. Additional copies are $3 each, payable by check or money order. You can obtain reports by contacting the California State Auditor’s Office at the following address: California State Auditor 621 Capitol Mall, Suite 1200 Sacramento, California 95814 916.445.0255 or TTY 916.445.0033 OR This report is also available on our website at www.auditor.ca.gov. The California State Auditor is pleased to announce the availability of an online subscription service. For information on how to subscribe, visit our website at www.auditor.ca.gov. Alternate format reports available upon request. Permission is granted to reproduce reports. For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255. For complaints of state employee misconduct, contact the California State Auditor’s Whistleblower Hotline: 1.800.952.5665. Elaine M. Howle State Auditor Doug Cordiner Chief Deputy February 16, 2016 2015-605 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: This report presents the results of our high risk audit concerning Covered California’s administration of California’s Health Benefit Exchange (exchange). State law required Covered California to create and operate the exchange to implement provisions of the federal Patient Protection and Affordable Care Act (Affordable Care Act). This report concludes that Covered California has made progress in implementing key federal and state requirements pertaining to the establishment of an exchange, but certain concerns remain. Covered California is required to be self-supporting and, although it has developed a plan to help ensure its future financial viability, it needs to continue to monitor its plan and conduct a formal analysis of its reserve level. Covered California projects that in fiscal year 2017–18 it will have enough consumers enrolled in qualified health plans that its revenues will cover its operating expenditures. Covered California annually updates its enrollment projections and used six key assumptions to determine its multiyear enrollment projections. Using these assumptions, Covered California has developed a range of enrollment estimates, from low to high, all of which show continued enrollment growth through fiscal year 2018–19. However, as with all forecasts, some degree of uncertainty about future enrollment should be anticipated, and Covered California’s short operational history suggests that its enrollment projections are an area of risk that it will need to carefully monitor in order to ensure its financial sustainability. Covered California’s contracting practices must be improved to ensure the integrity of the process it uses to award sole-source contracts. We reviewed the justifications for 20 of Covered California’s sole-source contracts and another 20 applicable amendments to those contracts, for a total of 40 justifications. The policy adopted by Covered California’s board of directors (board) and in place during our review stated that sole-source contracts should be justified in writing. In our review, we found that nine of the 40 justifications were insufficient according to Covered California’s board-adopted policy. For example, Covered California did not sufficiently justify the use of a noncompetitive procurement method to award a contract for marketing and outreach services totaling nearly $134 million. In addition, we question the validity of an additional three justifications because, even though Covered California asserts either timeliness or unique expertise as a basis for using the noncompetitive procurement process, available documentation indicates that either Covered California had sufficient time to use a competitive procurement process or the vendor was not unique. Finally, although the California Healthcare Eligibility, Enrollment, and Retention System (CalHEERS) is functional, its rapid design, development, and implementation have resulted in some risks to system maintainability. Without continued oversight, specifically from independent verification and validation, these system issues may go unidentified or unresolved, resulting in long-term cost and schedule implications for the ongoing maintenance of CalHEERS. Respectfully submitted, ELAINE M. HOWLE, CPA State Auditor 621 Capitol Mall, Suite 1200 Sacramento, CA 95814 916.445.0255 916.327.0019 fax www.auditor.ca.gov Blank page inserted for reproduction purposes only. California State Auditor Report 2015-605 v February 2016 Contents Summary 1 Introduction 5 Chapter 1 Covered California Must Continue to Monitor Its Financial Sustainability and Enrollment Projections to Ensure Its Solvency 11 Recommendations 28 Chapter 2 Covered California’s Sole‑Source Contracting Practices Need to Be Improved, and CalHEERS Needs Continued Oversight 29 Recommendations 43 Response to the Audit Covered California 45 California State Auditor’s Comments on the Response From Covered California 51 vi California State Auditor Report 2015-605 February 2016 Blank page inserted for reproduction purposes only. California State Auditor Report 2015-605 1 February 2016 Summary Audit Highlights . . . Results in Brief Our review of Covered California highlighted the following: Covered California has made progress in implementing key » Although it has developed a plan to federal and state requirements that pertain to establishing a health help ensure its future financial viability, insurance exchange (exchange), but certain concerns remain. In Covered California needs to: our July 2013 report New High‑Risk Entity: Covered California Appears Ready to Operate California’s First Statewide Health • Continue to monitor its revenues from Insurance Exchange, but Critical Work and Some Concerns Remain, enrollment and its expenditures. Report 2013‑602, we noted that Covered California’s financial sustainability depends wholly on enrollment in qualified health • Conduct a formal analysis of its plans (QHPs) offered through the exchange. We also pointed out reserve level to ensure it maintains that future enrollment is both unpredictable and based on market financial solvency if enrollment factors outside of Covered California’s control. Thus, we concluded significantly decreases. that enrollment in the exchange and the financial sustainability of » Its contracting practices must be improved. Covered California will need to be monitored. In this current audit we found that Covered California will exhaust available federal • It did not sufficiently justify nine of the funds by September 2016 and, without any federal funds or the 40 sole-source contracts and applicable State’s General Fund to assist it in its operations, Covered California amendments we reviewed. is required to be self‑supporting. As a result, it must continue to monitor its revenues from enrollment and its expenditures • Its board-adopted policy in place to ensure its future financial sustainability. For this reason, we during our review used generic believe Covered California should continue to be designated as a terms such as timeliness and unique high‑risk state agency under the California State Auditor’s high expertise as justification for using a risk program. In addition, we identified some issues regarding its noncompetitive process. sole‑source contracting practices. » Along with the California Department of Health Care Services and the Centers for Although Covered California has developed a plan to help ensure Medicare and Medicaid Services, Covered its future financial viability, it needs to continue to monitor that California spent $493 million to rapidly plan and conduct a formal analysis of its reserve level. Covered build a system that interfaces with certain California projects that in fiscal year 2017–18, it will have enough state, federal, and private entities— consumers enrolled in QHPs that its revenues will cover its CalHEERS—and which has resulted in operating expenditures. Until then, if Covered California does not some risks to system maintainability. meet its revenue goals, it can increase its plan assessments (the charge it assesses on QHPs), use its reserves, or cut expenditures as necessary to maintain its solvency. However, Covered California has yet to formally analyze whether its goal of maintaining a reserve of three to six months is sufficient. Although Covered California has done some work in this area, we believe that it could benefit from a formal analysis of its reserve level to ensure it maintains financial solvency if enrollment significantly decreases. Covered California annually updates its enrollment projections. For its Fiscal Year 2015–2016 Budget (2015–16 budget), Covered California based enrollment projections primarily on prior year or other recent data as well as the California Simulation of 2 California State Auditor Report 2015-605 February 2016 Insurance Markets.1 However, as with all forecasts, some degree of uncertainty about future enrollment should be anticipated, and Covered California’s short operational history and its uncertainty about the adequacy of its reserves suggest that its financial sustainability remains an area of risk that needs to be closely monitored. To help meet its enrollment goals, Covered California’s marketing division and its outreach and sales division use strategies that target the populations they need to reach. Under state law, Covered California is required to market and publicize the availability of health care coverage and federal subsidies through the exchange. To satisfy this requirement and to target key populations, the marketing division has adjusted its marketing strategy for each open enrollment period to reach consumers eligible for health insurance. The outreach and sales division generates reports from the California Healthcare Eligibility, Enrollment, and Retention System (CalHEERS), the computerized system that enables consumers to enroll in Covered California’s QHPs, among other functions. The outreach and sales division uses these reports to review the performance of certified enrollment representatives who inform consumers about and help them enroll in QHPs, and to identify new outreach opportunities to increase enrollment during future enrollment periods. We also found that Covered California’s contracting practices must be improved. State law requires Covered California to establish and use a competitive process to award contracts, and the law also gives it broad statutory authority to establish its own procurement and contracting policy. Covered California’s board of directors (board) adopted a procurement policy in 2011 that provided Covered California the flexibility to use sole‑source contracts when timeliness or unique expertise are required. However, we found that Covered California did not sufficiently justify nine of the 40 sole‑source contracts and applicable amendments we reviewed from fiscal years 2012–13 through 2014–15, thereby not consistently following its board‑adopted policy to do so. Further, we question the validity of an additional three justifications because, even though Covered California asserted either timeliness or unique expertise as the basis for using the noncompetitive procurement process in these cases, available documentation indicates that Covered California had sufficient time to use a competitive procurement process or that the vendor was not unique. 1 The California Simulation of Insurance Markets model, a joint project of the University of California, Los Angeles Center for Health Policy Research and the University of California, Berkeley Center for Labor Research and Education, is designed to estimate the impacts of elements of the federal Patient Protection and Affordable Care Act on employer decisions to offer insurance coverage and individual decisions to obtain coverage in California. California State Auditor Report 2015-605 3 February 2016 Without competitively bidding such contracts, Covered California cannot be assured that the contractor it chooses is the most qualified or cost‑effective. Further, on June 24, 2015, state law was revised to implement a new requirement that Covered California adopt a contract manual that is substantially similar to the provisions in the State Contracting Manual. The State Contracting Manual permits the use of a noncompetitive process when there is an emergency requiring immediate acquisition for the protection of the public health, welfare, or safety, or when no known competition exists. Our review identified concerns with Covered California’s board‑adopted policy that was in place during our review which used generic terms such as timeliness and unique expertise as justification for using a noncompetitive process. These terms are overly broad and do not limit the use of sole‑source contracts to the conditions under which such contracts are allowed by the State Contracting Manual. In our review of the November 2015 draft procurement manual, we determined that it included criteria allowing for sole‑source contracts in circumstances that the State Contracting Manual does not authorize. After bringing this to the attention of Covered California, they made changes to the draft procurement manual to address our concerns, which the board formally adopted in January 2016. Finally, over the first three full fiscal years of the project, fiscal years 2012–13 through 2014–15, Covered California, the California Department of Health Care Services, and the Centers for Medicare and Medicaid Services together spent about $493 million on CalHEERS, which interfaces, or communicates, with certain state, federal, and private entities. Although CalHEERS is functional, its rapid design, development, and implementation have resulted in some risks to system maintainability, and several changes to systems interfacing with CalHEERS will necessitate continual releases to update the system for several years. Covered California has contracted with consultants for independent oversight of the system, and they have identified various risks, such as risks to the system’s maintainability—its ability to isolate and easily correct system issues to maximize the cost‑effective productive life of the system—or delays to or partial release of change requests, which could increase project costs. However, the contract with one of these key oversight consultants recently expired and according to the chief of the project management office at CalHEERS, as of January 2016, independent project oversight services have ended. Given the size and technical complexity of the project, as well as the significant number of maintenance items and change orders that remain outstanding, our information technology (IT) expert believes the project should reinstitute the independent verification and validation (IV&V) services. Without this oversight, our 4 California State Auditor Report 2015-605 February 2016 IT expert believes certain system issues may go unidentified or unresolved, resulting in long‑term cost and schedule implications for the ongoing maintenance of CalHEERS. Recommendations Covered California should continue to monitor its plan for financial sustainability and revise the plan accordingly as factors change. Further, it should complete a formal analysis of the adequacy of its reserve level by December 31, 2016, and update this analysis as needed so that it is prepared if it does not meet its revenue projections and needs to increase its funding or decrease its expenditures to maintain solvency. This formal analysis should identify those contracts it could quickly eliminate, among other actions it would take, in the event of a shortfall in revenues. Covered California should continue to regularly review its enrollment projections and update the projections as needed to help ensure its financial sustainability. To comply with state law, Covered California should ensure that its staff comply with the changes to its recently‑adopted procurement manual that incorporate contracting policies and procedures that are substantially similar to the provisions in the State Contracting Manual. Before executing any sole‑source contracts, Covered California should adequately document the necessity for using a noncompetitive process in its written justifications and, in doing so, demonstrate valid reasons for not competitively bidding the services. To ensure that CalHEERS does not face delays and cost overruns in the implementation of planned releases, Covered California should immediately contract with an independent party for IV&V services to highlight and address potential risks going forward. Agency Comments Covered California agreed with our recommendations and indicated that it has already taken steps to address them, although it recognizes that its work is not complete. California State Auditor Report 2015-605 5 February 2016 Introduction Background State law authorizes the California State Auditor to establish a state high risk audit program and to issue reports with recommendations for improving state agencies or statewide issues that it identifies as high risk. Programs and issues that are high risk include not only those that are particularly vulnerable to fraud, waste, abuse, and mismanagement but also those that have major challenges associated with their economy, efficiency, or effectiveness. To expand health insurance coverage and make health care more accessible and affordable, in March 2010 the U.S. Congress enacted the Patient Protection and Affordable Care Act (Affordable Care Act). California was the first state to enact legislation creating a state‑operated health insurance exchange (exchange), one of the provisions of the Affordable Care Act. This exchange is a competitive insurance marketplace in which eligible individuals and small businesses have been able to purchase qualified health plans (QHPs) since October 1, 2013. In our July 2013 report titled New High‑Risk Entity: Covered California Appears Ready to Operate California’s First Statewide Health Insurance Exchange, but Critical Work and Some Concerns Remain, Report 2013‑602, we reviewed Covered California’s establishment of this exchange. In that report we concluded that although Covered California had made great strides in implementing key federal and state requirements pertaining to the exchange and its operations, critical work and some concerns remained. Specifically, we made four initial recommendations to Covered California, including that it conduct regular reviews of enrollment, costs, and revenue; that it make prompt adjustments to its financial sustainability plan based on those reviews; and that it develop monitoring, recertification, and decertification procedures for QHPs offered through the exchange. In this report we update our analysis of Covered California’s implementation of those recommendations and reassess its status as a high‑risk state agency. Because of our continuing concern regarding financial sustainability, Covered California remains on our high risk list. We will continue to monitor the risk we have identified and the actions Covered California takes to address this risk. When, in our professional judgment, Covered California’s actions result in sufficient progress toward resolving or mitigating the risk, we will remove the high risk designation. 6 California State Auditor Report 2015-605 February 2016 Governance and Funding of Covered California Covered California is an independent public entity governed by a five‑member board of directors (board). The board’s membership consists of the secretary of the California Health and Human Services Agency, or the secretary’s designee, and four other California residents—two appointed by the governor, one by the speaker of the Assembly, and one by the Senate Committee on Rules. State law requires the board to meet the minimum requirements of the Affordable Care Act, as well as other specified criteria, and prohibits it from using California’s General Fund to establish or operate Covered California. To provide initial funding, the federal government has awarded Covered California more than $1 billion in State Planning and Establishment Grants for the Affordable Care Act’s Exchanges (establishment grants) since September 2010. Covered California may spend these establishment grants on a wide range of activities, including marketing, service centers, finance and accounting, and information technology (IT) development.2 Beginning with fiscal year 2012–13 an independent auditing firm annually reviews Covered California’s compliance with the requirements of the establishment grants. As of December 2015, the most recent available audit report concluded that Covered California complied for the fiscal year ending June 30, 2014, in all material respects, with the establishment grants’ requirements, including that it spend these funds only on allowable activities. Although the Affordable Care Act requires Covered California to be self‑sustaining beginning in January 2015, Covered California requested—and was granted—two extensions to continue spending a federal establishment grant it began receiving in January 2013. As of November 2015, documentation from Covered California indicated that it had roughly $107 million in federal funds remaining and it intends to expend these funds by the new deadline of September 2016. To generate revenue to support its development, operations, and cash management, Covered California assesses a charge on the QHPs—referred to as plan assessments—offered by insurance issuers (issuers). These plan assessments are paid by the issuers who sell insurance to consumers from within the exchange. Since the pooling of risk is fundamental to health insurance, federal regulations require each QHP issuer to spread the cost of plan assessments across all of its insured consumers, both those whom the issuer serves through Covered California and those whom it 2 Covered California’s service centers are staffed by representatives who assist consumers with understanding health plan options, determining eligibility for subsidies and tax credits, and enrolling consumers in health plans. California State Auditor Report 2015-605 7 February 2016 insures through its other insurance plans. Specifically, issuers are to include plan assessments in their determination of all consumers’ health plan premiums. In fiscal year 2014–15, according to its financial records, Covered California charged QHP issuers more than $210 million in plan assessments. In addition, Covered California for Small Business (CCSB), California’s small business health options exchange, is available to small businesses with one to 50 employees, as described in Covered California’s Fiscal Year 2015‑2016 Budget. The program makes it possible for small businesses to offer their employees a wide choice of health insurance plans. Although Covered California’s financial records indicate that CCSB generated a very small amount of its $210 million in revenue, beginning January 1, 2016, the program is scheduled to expand to businesses with up to 100 employees, and that larger market should increase the revenue this program generates. CalHEERS The California Healthcare Eligibility, Enrollment, and Retention System (CalHEERS) is an online system that consumers can use to request evaluation for enrollment in QHPs offered through Covered California and other affordability assistance programs, including the California Medical Assistance Program (Medi‑Cal). According to the chief of the CalHEERS project management office, consumers can either complete the application process themselves or seek assistance from certified enrollment representatives, such as insurance agents; Covered California’s service center representatives; or county eligibility workers. Once eligibility has been determined, consumers can either continue to shop and enroll in QHPs offered through Covered California or be electronically transferred for assistance to their local county office for confirmation of eligibility and enrollment in California’s affordability assistance programs, such as Medi‑Cal. CalHEERS consists of three major system components that provide eligibility determination, enrollment functionality, and financial accounting in conjunction with other entities that interface, or communicate, with the system. According to the CalHEERS project management office, these entities include the Centers for Medicare and Medicaid Services, the Internal Revenue Service, and the California Employment Development Department. Covered California and the California Department of Health Care Services (Health Care Services) jointly sponsored CalHEERS and, according to documentation from the CalHEERS project management office, the cost for the IT project totaled approximately $493 million over its first three full fiscal years, 2012–13 through 2014–15. This documentation further 8 California State Auditor Report 2015-605 February 2016 indicates that the total costs of the project are estimated to reach more than $700 million by the end of fiscal year 2015–16. During the first two fiscal years of the project, Covered California paid for 80 percent of the system’s development and implementation costs. However, beginning in fiscal year 2014–15, it has paid for less than 20 percent of the system’s operations and maintenance costs, as Health Care Services and the Centers for Medicare and Medicaid Services have since become the project’s primary funders. Scope and Methodology Table 1 presents the status of the four recommendations we made in our 2013 report that we followed up on during this audit. For the first of these recommendations, we found that as of October 2015, Covered California had not updated its administrative manual to agree with the current version of state law pertaining to Covered California’s contract transparency, which became effective October 2013. After our inquiry regarding its outdated administrative manual, Covered California updated its policy in November 2015 to not only remove its reference to obsolete state law but also to further limit its use of its statutory authority to those deliberative processes, discussions, and communications relating to its contract negotiations. As a result of this action, it has fully addressed this recommendation. In addition, we reviewed Covered California’s contracting processes and practices for its use of sole‑source contracts. To review the contracting practices, we accessed Covered California’s contracts database and identified the number of sole‑source contracts that Covered California awarded during fiscal years 2012–13 through 2014–15. We judgmentally selected 20 of the 64 sole‑source contracts awarded during this period to determine whether Covered California appropriately justified the need to bypass the competitive bidding process. In addition, we judgmentally selected five contracts exempt from competitive bidding, which include interagency agreements and legal services, and we determined that Covered California appropriately classified these contracts as exempt from competitive bidding. Further, with the assistance of our IT expert, we obtained an understanding of the status of CalHEERS by interviewing key staff from the CalHEERS project management office. In addition, we reviewed the six most current oversight reports as of July 2015 from the independent verification and validation (IV&V) consultant and the independent project oversight (IPO) consultant to identify any significant concerns or risks regarding the project. IV&V is used to ensure that a system satisfies its intended use and user needs, whereas IPO is used to ensure that effective project management practices are in place and in use. California State Auditor Report 2015-605 9 February 2016 Table 1 Status of Actions Taken in Response to Recommendations in the California State Auditor’s Report 2013-602 and the Methods Used to Assess Their Status STATUS OF RECOMMENDATION METHOD RECOMMENDATION 1. To provide as much public • Identified and documented the relevant state law pertaining to contract transparency and transparency as possible, confidentiality. Covered California’s board • Determined whether Covered California’s policy and procedures regarding release of contracts should formally adopt a are consistent with state laws. policy to retain confidentiality • Selected five contracts that had been requested through the California Public Records Act to Fully only for contracts, contract determine whether Covered California acted in accordance with federal and state laws and implemented amendments, and payment regulations and with its own policies regarding the release of information in these contracts. rates that are necessary to protect Covered • Tested these five contracts and found minor inconsistencies with state law that had no material California’s interests in future effect on the information sought by requesters. contract negotiations. 2. To comply with federal • Identified and documented the relevant federal and state laws and regulations pertaining to requirements, Covered qualified health plans (QHPs). California should develop • Determined whether Covered California’s plan and procedures regarding monitoring, a plan and procedures for recertification, and decertification of QHPs are consistent with federal and state laws monitoring, recertification, and regulations. and decertification of qualified Fully • For each of the three largest QHP issuers by enrollment and one small QHP issuer, determined health plans. implemented whether Covered California performed monitoring and recertification procedures for contracts ending December 31, 2015. Reviewed the data collected using these procedures and determined whether the QHP issuers were compliant with key federal and state regulations. • For any QHPs that Covered California decertified, determined whether Covered California acted in accordance with key federal and state regulations. 3. To ensure the success of its • Identified and documented the relevant federal and state laws and regulations pertaining to outreach effort, Covered marketing and outreach requirements under the Patient Protection and Affordable Care Act, and California should track the determined whether Covered California complied with these requirements. effect on enrollment figures • Determined whether Covered California documented its marketing campaign. Identified its goals of its planned outreach and and actions for accomplishing those goals. Determined whether Covered California had met its marketing activities and of its marketing goals during the two open enrollment cycles since its inception, and whether any assister program. changes were necessary for the third open enrollment cycle. • Obtained evidence that Covered California tracks the effectiveness of its marketing approach. Interviewed relevant staff and determined whether Covered California used these data in its strategic planning efforts to inform future marketing endeavors. Fully • Interviewed relevant staff to determine how the outreach and sales division managed its implemented certified enrollment representatives. Identified and documented navigator grants from fiscal years 2014–15 and 2015–16 to identify the goals outlined in the agreements and, for fiscal year 2014–15, determined whether the grant recipients achieved those goals. Interviewed staff to determine how the performance of the navigator program during fiscal year 2014–15 affected its strategic planning approach for fiscal year 2015–16. • Obtained and reviewed reports generated by the outreach and sales division to determine the type of information it tracks regarding the effectiveness of its outreach campaign. Interviewed relevant staff and determined whether Covered California used these data to inform its strategic planning efforts for future outreach. 4. To ensure financial • Identified and documented the relevant federal and state laws and regulations pertaining sustainability, Covered to financial sustainability and determined whether Covered California complied with these California should conduct requirements. regular reviews of enrollment, • Using Covered California’s Fiscal Year 2015–2016 Budget, documented the enrollment costs, and revenue and make forecasting methodology and identified the factors, or assumptions, used in this methodology. Partially prompt adjustments to its • Documented how annual budget forecasts have changed since the program began. implemented financial sustainability plan as necessary. • Identified which expenditures are fixed and which are projected to decrease to lower total expenditures. • Reviewed its reserve level and determined whether it has conducted a formal analysis of the adequacy of the reserve level. Sources: Recommendations made in the report by the California State Auditor titled New High‑Risk Entity: Covered California Appears Ready to Operate California’s First Statewide Health Insurance Exchange, but Critical Work and Some Concerns Remain, Report 2013-602, July 2013, and analysis of information and documentation identified in the table column titled Method. 10 California State Auditor Report 2015-605 February 2016 Assessment of Data Reliability The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support our findings, conclusions, and recommendations. In performing this audit, we relied on Covered California’s data maintained in the California Department of Finance’s (Finance) California State Accounting and Reporting System (CALSTARS). We used data from CALSTARS for the period from July 1, 2013, through June 30, 2015, for the purpose of identifying Covered California’s expenditures by fiscal year. To evaluate these data, we performed data‑set verification procedures and electronic testing of key data elements and did not identify any significant issues. Further, we tested the completeness of the CALSTARS data by comparing Covered California’s expenditures to the California State Controller’s Office’s appropriation control ledger. We found the data to be materially complete. Finally, we tested the accuracy of the CALSTARS data by tracking key data elements for a selection of 31 transactions to supporting documentation and found no errors. Therefore, we found that Covered California’s CALSTARS data that are maintained by Finance are sufficiently reliable for the period from July 1, 2013, through June 30, 2015, for the purpose of identifying its expenditures by fiscal year. California State Auditor Report 2015-605 11 February 2016 Chapter 1 COVERED CALIFORNIA MUST CONTINUE TO MONITOR ITS FINANCIAL SUSTAINABILITY AND ENROLLMENT PROJECTIONS TO ENSURE ITS SOLVENCY Chapter Summary Covered California has demonstrated progress in implementing key federal and state requirements that pertain to establishing a health insurance exchange (exchange), but some concerns remain. In our July 2013 report we recommended that Covered California conduct regular reviews of enrollment, costs, and revenue and make prompt adjustments to its financial sustainability plan as necessary. During this current audit we found that Covered California has conducted these reviews and made necessary adjustments as part of its annual budget process. Nevertheless, to better ensure its financial sustainability, Covered California should formally analyze whether its proposed reserve is adequate and determine the steps it would take to reduce its operating expenditures in the event that enrollment significantly decreases. For instance, it could identify the contracts it would eliminate to reduce its expenditures. This audit found that Covered California has annually updated its enrollment projections. Using six key assumptions to determine its multiyear enrollment projections, Covered California has developed a range of enrollment estimates, from low to high, which show continued enrollment growth through fiscal year 2018–19. To help ensure that Covered California meets its enrollment projections, the marketing division develops and executes marketing campaigns promoting the products and services offered through the State’s exchange. In addition, Covered California has established a network of certified enrollment representatives consisting of entities and individuals that educate consumers on, and enroll them in, qualified health plans (QHPs) and the California Medical Assistance Program (Medi‑Cal). Although Covered California Has a Plan to Help Ensure Its Financial Sustainability, It Must Complete a Formal Analysis of Whether Its Reserve Is Adequate State law requires Covered California’s board of directors (board) to ensure that the costs of establishing, operating, and administering the exchange do not exceed the combination of federal funds, private donations, and other available money. Covered California may not use money from the State’s General Fund to help support 12 California State Auditor Report 2015-605 February 2016 its operations. Its revenue is generated from plan assessments— charges on the QHPs that insurance issuers offer, as state law If Covered California falls short of requires and as discussed in the Introduction. As a result, if achieving its enrollment goals, its Covered California falls short of achieving its enrollment goals, its financial condition will suffer. financial condition will suffer. In our July 2013 report we found that, given the limits of its information at the time, Covered California appeared to have engaged in a thoughtful planning process to ensure that it would remain solvent in the future. We also noted that Covered California’s financial plans greatly depend on patterns of enrollment in its QHPs by individuals and small business employers, which could only be projected at that time. Consequently, we concluded that financial sustainability would continue to be an area of risk that would need to be closely monitored, and we recommended that Covered California conduct regular reviews of enrollment, costs, and revenue and make prompt adjustments to its financial sustainability plan as necessary. During our current audit we found that Covered California has conducted these reviews and made necessary adjustments as part of its annual budget process. According to Covered California’s Fiscal Year 2015–2016 Budget (2015–16 budget), this process was conducted over six to seven months, with particular attention paid to updating its enrollment forecast, which relies to a great extent on its actual enrollment experience in 2014 through the end of the second open enrollment period in February 2015. The goal of this process is for Covered California to ensure that its revenues will cover its expenditures for each fiscal year as state law requires. For fiscal year 2015–16 Covered California created a robust budget document that outlines the steps it needs to be financially sustainable. In that document Covered California explains that its fiscal year 2015–16 budget reflects a multiyear financial strategy of providing continuous fiscal integrity, transparency, and accountability. The budget includes low, medium, and high enrollment forecasts and corresponding revenue projections. In its budget Covered California states that, to the extent that enrollment varies from the medium forecasted amounts, it will be able to adjust its revenue by increasing or decreasing its plan assessments or by adjusting its budgeted expenditures. Table 2 shows Covered California’s multiyear budget forecast through fiscal year 2018–19. As the table indicates, Covered California projects that expenditures will decrease while revenues increase so that both are balanced at approximately $300 million in fiscal year 2017–18—the first year in which Covered California estimates that its operations will break even. Covered California plans to begin fiscal year 2016–17 with approximately $197 million in reserve funding to address any California State Auditor Report 2015-605 13 February 2016 unforeseen economic uncertainties and to facilitate the transition to supporting its operations solely on plan assessments. The table also shows that in the beginning of fiscal year 2015–16, Covered California estimated that $100 million in federal establishment funds were remaining. As of November 2015, documentation provided by Covered California indicated that it had roughly $107 million in federal funds remaining, which it can spend on a variety of purposes, including consulting with stakeholders and developing information technology (IT). As described in the Introduction, the federal government has extended the deadline by which Covered California must spend these funds to September 30, 2016, and Covered California intends to ensure that it will exhaust these funds by that deadline. Table 3 on the following page summarizes Covered California’s progress in complying with certain federal and state requirements for funding its operations. Table 2 Covered California’s Multiyear Budget Forecast (Dollars in Millions) FISCAL YEAR 2015–16 2016–17 2017–18 2018–19 Effectuated enrollment* 1,476,342 1,666,617 1,809,095 1,977,792 Beginning balance of unrestricted funds $197.9 $197.2 $156.4 $160.0 Balance of federal establishment funds 100.0† - - - Opening balance $297.9 $197.2 $156.4 $160.0 Plan assessments—cash basis $234.4 $269.2 $303.6 $329.2 Total funds $532.3 $466.4 $460.0 $489.2 Expenditures ($335.0) ($310.0) ($300.0) ($300.0) Year-end operating reserve $197.2 $156.4 $160.0 $189.2 Estimated number of months the 7.1 5.6 5.4 6.1 operating reserve will cover expenditures Sources: Adapted from Covered California’s Fiscal Year 2015‑2016 Budget (2015–16 budget), dated June 30, 2015, and documentation provided by Covered California’s financial management division. * Effectuated enrollment is the number of enrollees who complete an application, select a qualified health plan, and pay at least their first month’s premium. † Although Covered California estimated in its 2015–16 budget that it would have $100 million in federal funds for this fiscal year, as of November 25, 2015, Covered California reported that it had roughly $107 million of these funds remaining that it plans to spend by September 30, 2016. Covered California’s 2015‑16 budget indicates that if it falls short of meeting its enrollment goals, it will consider increasing plan assessments, reducing costs, or using its reserves to maintain its solvency. Covered California’s interim chief actuary stated that a large body of work from different health economists shows that if health insurance premiums were to increase by 1 percent, with all other factors held constant, the resulting reduction in enrollment 14 California State Auditor Report 2015-605 February 2016 would not be significant—between 0.2 and 0.6 percent. Therefore, Covered California believes that if it needs to moderately increase its plan assessments, the small increases that insurance issuers would distribute across all of their California members would have little effect in causing current enrollees in the exchange to cancel their coverage or in deterring individuals from enrolling in the future. Table 3 Covered California’s Compliance With Key Federal and State Requirements for Funding Its Operations PROGRESS REQUIREMENTS FOR COVERED CALIFORNIA TOWARD STEPS THAT COVERED CALIFORNIA HAS TAKEN COMPLETION Federal Have sufficient funding to support Created a financial sustainability plan (financial plan), which it submitted to the ↑ its ongoing operations beginning federal government in November 2012 as a part of its grant application. Through its January 1, 2015.* annual budget process, Covered California conducts reviews of enrollment, costs, and revenues; develops multiyear budget forecasts to help ensure its financial sustainability going forward; and makes necessary adjustments. State Assess a fee on the qualified health Established an initial fee of $13.95 assessed on a per-member, per-month plans (QHPs) offered by health insurance basis for individual QHPs sold through the exchange and created a similar issuers through the health insurance fee structure for QHPs offered to small businesses. In its Fiscal Year 2015–2016 ↑ exchange (exchange) that is reasonable Budget, Covered California indicated that it will consider adjusting the fees, or and necessary to support the operations plan assessments, based on enrollment. of the exchange. Maintain enrollment and expenditures Through its annual budget process, Covered California develops a budget to help to ensure that expenditures do not ensure that it covers operating costs under a range of enrollment scenarios. Beginning in ↑ exceed revenue, and institute appropriate fiscal year 2013–14, its goal has been to maintain a three- to six-month reserve. measures to ensure fiscal solvency. Sources: 42 United States Code, section 18031; 45 Code of Federal Regulations, part 155.160; California Government Code, section 100503; Covered California’s 2012 Financial Sustainability Plan; and Covered California’s Fiscal Year 2015–2016 Budget. * Covered California must spend its remaining federal establishment grant funds by September 30, 2016. These funds can be used for establishment costs but cannot be used to support ongoing operations. ↑ = Progressing as expected. According to Covered California’s 2015‑16 budget, an increase in its plan assessments would require between nine and 18 months to have an impact on revenue. As explained by its chief financial officer, this delay would be necessary because an increase in the plan assessments must be approved by Covered California’s board and then presented during Covered California’s next round of negotiations with insurance issuers for the following plan year. Consequently, a plan assessment increase can take effect only on January 1 of the year following the next contract negotiation. According to Covered California’s Health Insurance Companies and Plan Rates for 2016, QHP premiums increased by an average of approximately 4 percent in 2015 and 2016; however, Covered California has not increased its plan assessments. For the California State Auditor Report 2015-605 15 February 2016 projections it includes in its 2015‑16 budget, Covered California used its monthly plan assessments for the individual and small business markets of $13.95 and $18.60, respectively, as the basis for its projections through fiscal year 2018–19. Covered California projects that its expenditures will decrease and level out over the next several years and that it will achieve a balance between its revenues and expenditures in fiscal year 2017–18. Specifically, its costs for the California Healthcare Eligibility, Enrollment, and Retention System (CalHEERS) and for outreach, sales, and marketing represented 70 percent of Covered California’s expenditures in its fiscal year 2013–14 budget. In subsequent fiscal years expenditures for CalHEERS have decreased, and Covered California projects that expenditures for outreach, sales, and marketing will decrease for the current fiscal year. In its 2015–16 budget Covered California projects that these expenditures will continue to decrease through at least fiscal year 2016–17 as it becomes more established. Table 4 presents a breakdown of Covered California’s budgeted and actual expenditures for the last two fiscal years and its budgeted expenditures for fiscal year 2015–16. Table 4 Covered California’s Budgeted and Actual Expenditures for Fiscal Years 2013–14 and 2014–15 and Budgeted Expenditures for Fiscal Year 2015–16 FISCAL YEAR FISCAL YEAR 2013–14 FISCAL YEAR 2014–15 2015–16 BUDGET ACTUAL* BUDGET ACTUAL* BUDGET Service centers† $64,732,239 $79,031,302 $97,022,224 $96,836,382 $100,103,078 California Healthcare Eligibility, Enrollment, 181,042,718 114,714,737 88,177,616 93,607,718 42,410,485 and Retention System (CalHEERS) Outreach & sales, marketing‡ 134,218,916 131,718,285 189,831,459 153,558,948 121,512,473 Plan management and evaluation 22,788,018 4,939,390 17,334,578 11,286,694 17,300,582 Administration 36,556,839 32,571,736 37,796,386 36,460,965 46,159,372 Other expenditures# 9,504,885 151,547 12,589,363 1,543,057 13,493,138 Total expendituresll $448,843,615 $363,126,997 $442,751,626 $393,293,764 $340,979,127 Sources: California State Auditor’s analysis of data obtained from Covered California’s data as maintained in the California Department of Finance’s California State Accounting and Reporting System; Covered California Policy and Action Items, dated June 19, 2014; Covered California’s Fiscal Year 2015–2016 Budget, dated June 30, 2015; and budget reconciliation documents provided by Covered California. * These amounts exclude prior year expenditures for each fiscal year and any pass-through payments to issuers of qualified health plans (QHPs) and insurance agents. † Covered California’s service centers are staffed by representatives who assist both consumers and certified enrollment representatives with understanding health plan options, determining eligibility for subsidies and tax credits, and enrolling consumers in QHPs. ‡ For fiscal year 2013–14 this expenditure was listed as “Enrollment Activities,” whereas for fiscal years 2014–15 and 2015–16, it was listed as “Outreach & sales, marketing.” # For fiscal year 2013–14 these budgeted amounts are for Covered California for Small Business (CCSB). For fiscal years 2014–15 and 2015–16 these budgeted amounts are for statewide general administrative costs and strategic initiatives. However, according to Covered California the actual expenditures for these categories are reported in different categories. Specifically, the actual expenditures for CCSB are included in the “Outreach & sales, marketing” actual column. In addition, Covered California stated while the actual expenditures for statewide general administrative costs remain in this category, the actual expenditures for the strategic initiatives are reported within the appropriate organizational category. ll These totals do not include reimbursements or CalHEERS cost-sharing. 16 California State Auditor Report 2015-605 February 2016 State law requires Covered California to establish and maintain a prudent reserve and as of January 1, 2016, it requires Covered California to reduce plan assessments during a subsequent fiscal year if, at the end of any fiscal year, the reserve is equal to or more than Covered California’s operating budget for the subsequent fiscal year. As shown earlier in Table 2 on page 13, Covered California projects that it will end fiscal year 2015–16 with approximately seven months of operating funds in its reserve, and it will have nearly six months in its reserve as of the end of fiscal year 2016–17. As expressed in its 2015–16 budget, one of Covered California’s guiding financial principles is to maintain a reserve that is sufficient to cover its financial obligations and allow for time to adjust revenue and expenditures in the event of an unanticipated event. The chief financial officer stated that Covered California’s board has established a target reserve of three to six months of operating expenditures rather than a one‑year reserve—the maximum state law allows. He explained that building a larger reserve would be possible but at the expense of increasing the plan assessments, which would increase the premiums paid by enrollees in QHPs. The chief financial officer also stated that the targeted reserve of three to six months would allow Covered California sufficient time to make adjustments to revenue or expenditures in order to maintain solvency. For example, most, if not all, of Covered California’s contracts allow it the flexibility to cancel them with 30 days’ notice and according to its 2015–16 budget, over $200 million of its expenditures are for contracts. However, he acknowledged that a thorough review of the contracts would be necessary to determine which ones could be canceled. In addition, he stated that if a significant revenue change were to surface, Covered California would evaluate the magnitude of that change and develop plans to resolve the resulting issues. These plans might include initiating adjustments to the plan assessments charged to QHP issuers, reducing discretionary expenditures, and reducing contract expenditures. Further, he said that Covered California would consider a hiring freeze, terminating temporary employees, or reducing vacant positions. Were Covered California to Were Covered California to undertake such a large reduction in undertake such a large reduction expenditures in such a brief period of time, it might not be adequately in expenditures in such a brief prepared to respond effectively to the market conditions that period of time, it might not necessitated those expenditure reductions. For example, Covered be adequately prepared to California could find that it is without the funds necessary to respond effectively to the market undertake additional marketing efforts that might be necessary to conditions that necessitated those increase enrollment and, in turn, to increase revenues. Despite these expenditure reductions. risks and the fact that it is now nearing completion of its third open enrollment period, Covered California has not completed a formal analysis of the adequacy of its reserve level. Nonetheless, Covered California has conducted some work in this area, such as a review California State Auditor Report 2015-605 17 February 2016 of a reduction in enrollment countered with adjustments to plan assessments and expenditures. When we inquired about this, the chief financial officer stated that as Covered California gathers more data over time on expenditure trends and revenues, it will continue to fine‑tune its reserve requirement estimates. Specifically, he explained that the data from 2014 and 2015 would not be indicative of typical business cycles and reserve requirements; thus, using these data would likely lead to overestimating the reserve. He stated that although 2016 data should be more reflective of future years’ business cycles, it would be premature to establish the reserve using only one year of data. Covered California would like to use data for 2016 and 2017 to prepare a formal reserve analysis soon after December 2017. However, we believe that Covered California can conduct a meaningful, formal analysis to determine an adequate reserve level with the data available following this third open enrollment period, which was scheduled to end on January 31, 2016. In addition, to ensure that the most recent data are incorporated into its analysis, Covered California should update the analysis periodically. Covered California’s financial plans are highly dependent upon its enrollment projections, which in turn largely rely on its limited experience from its first two open enrollment periods. If Covered California does not enroll as many consumers as its fiscal year 2015–16 budget projects, its revenues will suffer. Further, increasing its revenues by adjusting its plan assessments could take nine to 18 months, as described earlier. To better position itself to ensure its financial sustainability in this scenario, Covered California could formally analyze the steps it would take to ensure that its reserve is adequate to cover its operating expenditures. For instance, as part of this analysis, it could identify the contracts it would eliminate to reduce its expenditures. Although Covered California has done some work in this area, we believe it could benefit from a formal analysis related to its reserve level to ensure it maintains its financial solvency if enrollment significantly decreases. Consequently, Financial sustainability continues to financial sustainability continues to be an area of risk that will need be an area of risk that will need to to be closely monitored. be closely monitored. It Is Too Early To Tell Whether Enrollment Projections Accurately Reflect the Market To ensure Covered California’s financial sustainability, our July 2013 report recommended that it conduct regular reviews of enrollment, as well as other factors, and make prompt adjustments to its financial sustainability plan as necessary. During our current audit, we found that Covered California has annually updated its enrollment projections. For its fiscal year 2015–16 budget, Covered California primarily based these enrollment projections on prior 18 California State Auditor Report 2015-605 February 2016 year or other recent data, as well as the California Summary of Covered California’s Six Key Simulation of Insurance Markets.3 However, as Assumptions Used to Forecast Enrollment Covered California has acknowledged, a number of potential developments could lead to more or Enrollment of the subsidy-eligible population: Proportion less enrollment and revenue than anticipated. In of the population eligible for federal subsidies that has enrolled in the exchange. fact, Covered California stated that the biggest uncertainty in its forecasts is the pace at which the Effectuation rate: Proportion of enrollees who completed population eligible for federal subsidies on health an application, selected a qualified health plan, and paid at insurance (subsidy‑eligible population) enrolls in least their first month’s premium. QHPs through Covered California. Thus, future Monthly enrollment rate during special enrollment: enrollment is uncertain, and Covered California’s Average number of new monthly enrollments in Covered limited operational history suggests that its California for qualifying events, such as loss of coverage from enrollment projections are an area of risk that it loss of employer‑provided insurance or loss of coverage will need to carefully monitor in order to ensure under the California Medical Assistance Program. its financial sustainability. Monthly disenrollment rate: Proportion of current effectuated enrollees terminated each month. Covered California used six key assumptions to Nonrenewal rate: Proportion of enrollees who did not determine its multiyear enrollment projections. renew or were found ineligible for renewal. Using these assumptions, Covered California developed a range of enrollment estimates—from Subsidized and unsubsidized enrollments: Ratio low to high, which show continued enrollment of subsidy‑eligible enrollees to enrollees not eligible growth through fiscal year 2018–19. The for subsidies. text box describes Covered California’s six key Source: Covered California’s Fiscal Year 2015‑2016 Budget, as of forecasting assumptions. June 30, 2015. One of Covered California’s key assumptions is the proportion of the subsidy‑eligible population that has enrolled in health insurance through the exchange. Covered California used external estimates and participation in similar programs, such as the Healthy Families program, to arrive at low, medium, and high alternatives for this assumption in its forecast. Covered California forecasts that by 2018 it will enroll 75 percent— the medium alternative—of those who are eligible for subsidies and do not already have coverage. According to Covered California’s 2015–16 budget, the California Simulation of Insurance Markets model estimates the subsidy‑eligible population in California to be approximately 2.5 million, increasing to 2.7 million by 2017. Another of Covered California’s key assumptions is the monthly enrollment rate during special enrollment, which consists of individuals who enroll outside of the open enrollment period because of qualifying events, such as the loss of employer‑provided 3 The California Simulation of Insurance Markets model, a joint project of the University of California, Los Angeles, Center for Health Policy Research and the University of California, Berkeley, Center for Labor Research and Education, is designed to estimate the impacts of elements of the Patient Protection and Affordable Care Act on employer decisions to offer insurance coverage and individual decisions to obtain coverage in California. California State Auditor Report 2015-605 19 February 2016 insurance or the loss of Medi‑Cal coverage. 4 Although an average of 31,000 special enrollments occurred each month from June 2014 through November 2014, Covered California used a conservative assumption of 25,000 new monthly special enrollments for its projection, in part because the actual month‑to‑month pace slowed noticeably after July 2014. A third assumption that Covered California used is its effectuation rate, which is the proportion of enrollees who completed an application, selected a QHP, and paid at least their first month’s premium. Covered California based its effectuation rate for subsequent years on the actual effectuation rate of those who enrolled in 2014, which was approximately 80 percent for those enrolled during open enrollment and approximately 75 percent for those enrolled outside of the open enrollment period. Using this data, Covered California projected an 80 percent effectuation rate during open enrollment and a 75 percent effectuation rate during special enrollment. Covered California bases its budgets on its medium enrollment projections. According to its 2015‑16 budget, individuals from the subsidy‑eligible population made up 83 percent of its 2014 enrollment; therefore, Covered California’s revenues are Covered California’s revenues are primarily dependent on the number of individuals it enrolls from primarily dependent on the number this subpopulation of Californians. As shown in Figure 1 on the of individuals it enrolls from following page, in fiscal year 2013–14, the year of its first open the subsidy‑eligible population enrollment period, Covered California exceeded its high projection of Californians. of roughly 894,000 by enrolling more than 1.1 million consumers. For its second open enrollment period, Covered California’s enrollment, including renewals, was nearly 1.3 million, falling slightly short of its low projection of 1.4 million and well below its high projection of nearly 2 million. As of September 30, 2015, Covered California had roughly 1.3 million consumers enrolled in the exchange. Its third open enrollment period began on November 1, 2015, and continued through January 31, 2016. 4 Open enrollment is a designated period during which all eligible consumers may apply for health coverage. wal wal wal wal wal 20 California State AuRd en i e tor Report 2015-605 Rene Rene Rene Rene February 2016 Figure 1 Covered California’s Projected and Actual Enrollment Fiscal Years 2013–14 to 2018–19 2.5 Actual New Actual Renewal High Projection Low Projection 2.0 1.5 1.0 0.5 0.0 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19 Projections Actual Projections Projections Projections Projections Ne w Rene wal* Total Ne w Rene wal* Total Ne w Rene wal Total Ne w Rene wal Total Ne w Rene wal Total snoilliM ni tnemllornE Sources: Covered California’s Request for Approval of Proposed FY 2013–14 Budget; Covered California Policy and Action Items, June 19, 2014; Fiscal Year 2015–2016 Budget; and data provided by Covered California. Note: Data for actual enrollment consist of consumers who effectuated, which means they completed an application, selected a qualified health plan, and paid at least their first month’s premium. * Covered California did not include distinct renewal data in its projections. Therefore, we arrived at its renewal data by subtracting nonrenewals and disenrollments from its beginning effectuated enrollment. The fact that its high projections for these fiscal years contained much larger numbers of disenrollments than its low projections was primarily responsible for reducing the high renewal projections that we calculated for these fiscal years to below the level of its low renewal projections. Covered California Evaluates and Modifies Its Marketing Approach to More Effectively Reach Eligible Program Participants Covered California’s marketing division develops and executes marketing campaigns promoting the products and services offered through the State’s exchange. Under state law Covered California is required to market and publicize the availability of health care coverage and federal subsidies through the exchange. To satisfy this requirement and to target key populations and ensure a positive effect on enrollment, the marketing division has adjusted its marketing strategy for each open enrollment period to reach consumers eligible for health insurance. Table 5 summarizes how Covered California’s key marketing strategies have evolved for each of the three enrollment periods based on its evaluations of enrollment and survey data. California State Auditor Report 2015-605 21 February 2016 For the first open enrollment period, the marketing division focused on educating consumers throughout the State about the exchange. According to documentation regarding its marketing campaign, Covered California’s objective was to establish a media presence to generate awareness about the exchange and reach the subsidy‑eligible population. To accomplish this objective, its marketing campaign included television advertisements that promoted the benefits of enrolling in a health plan through Covered California and newspaper advertisements regarding sources of more information about available plans and services such as a toll‑free phone number and website. The advertisements emphasized that Covered California provides financial assistance for those who need help with their monthly insurance bills and that nobody can be denied coverage because of a preexisting condition. Table 5 Summary of Selected Key Marketing Strategies by Enrollment Period ENROLLMENT PERIOD ONE ENROLLMENT PERIOD TWO ENROLLMENT PERIOD THREE Marketing expenditures $74 $67.5 $60.8* (Dollars in millions) Selected marketing strategies • Allocate the media plan budget • Increase awareness and • Market to a population that based on the percentage of enhance the image of Covered more closely aligns with the the uninsured population in California, with particular core target age of 25 through different areas of the State, with focus on Hispanic and 54, and reallocate the media adjustments made to account African American segments, budget to increase digital for media costs. while building loyalty among advertising and revise its radio • Advertise in as many as current enrollees. advertising strategy. eight different languages • Promote messages through • Outreach to the Hispanic market depending on the area, using media channels frequently statewide with enhanced different forms of media accessed by members of the direct mail in areas with a high channels, such as television, non native English-speaking concentration of Hispanics. radio, print, and digital. communities, including • Planned use of innovative • Raise awareness of Covered Hispanic and Asian population technology to advertise to California and how to access segments, as well as the African specific market groups instantly. information regarding American and lesbian, gay, affordable health coverage. bisexual, and transgender communities. • Use social media to remind consumers of open enrollment dates, and direct mail to describe the benefits of membership to current enrollees. Total enrollment by period† 1,395,929 1,408,362 Not available as of December 2015 Sources: Various documents, including those related to its marketing campaigns and expenditures, provided by Covered California and selected executive director reports to Covered California’s board of directors. Note: The enrollment periods include designated open enrollment periods, during which all eligible consumers may apply for health coverage, and special enrollment periods, during which consumers with certain qualifying life events, such as loss of health insurance or marriage, may apply. * Enrollment periods one and two include actual marketing expenditures according to Covered California’s financial documents. For enrollment period three we present its marketing budget because, as of December 2015, all expenditures had not yet occurred. † Enrollment figures include those consumers who selected a plan and enrolled during open enrollment periods, but who may or may not have made a payment to maintain insurance. These amounts do not include enrollees who signed up during special enrollment periods. These amounts are distinguishable from those in Figure 1, which include only those consumers who enrolled during open and special enrollment periods and paid their first month’s premium. 22 California State Auditor Report 2015-605 February 2016 According to documents related to According to documents related to its marketing campaign for the its marketing campaign for the first first open enrollment period, Covered California designated roughly open enrollment period, Covered half of its marketing budget to the Los Angeles market, which California designated roughly includes San Bernardino and Orange counties. Covered California half of its marketing budget to designated the remainder of the marketing budget across the the Los Angeles market, which additional 11 marketing areas in the State, including San Francisco– includes San Bernardino and Oakland–San Jose, Sacramento–Stockton–Modesto, San Diego, Orange counties. and Fresno–Visalia, with an emphasis on the type of media it determined to be most effective to reach the target populations it identified. To determine the effectiveness of the strategies it used to inform consumers about its products and services, and to increase enrollment following the first open enrollment period, Covered California evaluated data, such as demographic data, regarding the consumers enrolled in QHPs. Further, it analyzed survey data regarding public awareness of Covered California and consumers’ overall experience with the exchange. According to the director of marketing, Covered California relied on these data to determine whether its marketing efforts were effective in enrolling consumers in QHPs. Covered California used consumer enrollment data during and after the first open enrollment period to develop future targeted marketing campaigns. It determined that enrollment among Hispanic and African American consumers during the first three months of the first open enrollment period was significantly lower than its projections for that period. Although enrollment figures for these consumers eventually increased by the end of the first open enrollment period, Covered California focused its efforts for the second open enrollment period in part, toward underrepresented segments of the population, including the Hispanic and African American populations, to better ensure that they were aware of the opportunities to acquire health insurance. For example, Covered California used local platforms such as community newspapers and television advertisements specific to those communities to reach the underinsured in these target populations. According to Covered California’s available enrollment data, the percentage of new Hispanic and African American enrollees increased in 2015 from the previous year. In addition, during and following the first open enrollment period, Covered California surveyed or interviewed enrolled consumers; members of its outreach community, such as its service center representatives and enrollment counselors; and uninsured consumers to identify barriers to enrollment and to adjust its marketing strategy. For example, it conducted interviews to gauge consumer attitudes toward health insurance, awareness of Covered California, and barriers to obtaining health insurance through California State Auditor Report 2015-605 23 February 2016 Covered California. The results indicated that, although consumers were generally aware of Covered California, many indicated that they would not enroll because they were confused about how Covered California works and were concerned about not being able to afford insurance. Further, based on interviews with enrollment counselors, Covered California learned that the biggest barriers to enrollment of Hispanic consumers were confusion surrounding the program, technological barriers, and cost. Covered California’s second open enrollment marketing campaign included an advertising approach aimed at addressing the results of these surveys and interviews. Specifically, this campaign included advertisements containing testimonials from actual enrollees discussing positive experiences, such as cost savings and peace of mind, from enrolling in QHPs. In addition, Covered California encouraged consumers to seek free, in‑person enrollment assistance or to visit its multilanguage website to obtain additional information. In March 2015, after the close of the second open After the close of the second open enrollment period, one of Covered California’s consultants enrollment period, a consultant conducted focus groups of uninsured consumers in select areas to reported that although nearly all understand key barriers and motivators for enrolling in a health participants had heard of Covered insurance plan, among other factors. The results the consultant California, those who had looked reported indicated that, although nearly all participants had heard into it had not found what they of Covered California, those who had looked into it had not found considered an affordable plan. what they considered an affordable plan. In addition, some had negative experiences with the website and, as a result, had not returned. The consultant also reported that almost all focus group participants wanted health insurance but were resigned to the idea that they could not currently afford to enroll in a plan. Following the second open enrollment period, Covered California used survey data to inform its marketing strategies moving forward. In particular, it contracted with the National Opinion Research Center (NORC) at the University of Chicago to conduct market research and evaluation. NORC surveyed approximately 2,200 California residents during March through May of 2015. The purpose of the survey was to assess recent changes in public knowledge, attitudes, and behaviors related to purchasing health insurance and the effectiveness of Covered California’s marketing and outreach campaigns. The resulting report, released in October 2015, reached two important conclusions that affected Covered California’s marketing strategy. It indicated that overall consumer awareness of Covered California rose from 12 percent in 2013 to 85 percent in 2015. The report also stated that 72 percent of respondents who purchased a health plan through Covered California indicated that financial assistance was an extremely important motivator in obtaining insurance. Further, the survey closely examined respondents’ knowledge of the availability of financial assistance for lower income groups and the tax penalty for not having minimum essential coverage. According to the report 24 California State Auditor Report 2015-605 February 2016 Because of a moderate level of the results showed that 64 percent of the uninsured population were awareness of the subsidy, Covered aware of the subsidy in 2015. As a result of this moderate level of California runs the risk that some awareness of the subsidy, Covered California runs the risk that some uninsured individuals may decline uninsured individuals may decline health care coverage because of the health care coverage because of the cost, even though they may qualify for financial assistance. cost, even though they may qualify for financial assistance. Covered California has taken steps to address the report’s findings in its marketing campaign for the third open enrollment period. According to its director of marketing, in addition to facilitating retention and renewal of existing members, Covered California’s goals include attracting new enrollees who are unsure about how to enroll or are unaware of the available federal subsidies. To accomplish these goals Covered California is promoting radio and television advertisements to inform general and Hispanic audiences that most uninsured Californians can receive financial assistance to pay for insurance, and that four out of five consumers who receive their insurance through Covered California have received financial assistance. In addition, Covered California’s English and non‑English language advertisements include notice of a deadline to enroll to avoid a tax penalty. Although it anticipates that this effort will increase awareness of the subsidy and tax penalties, according to the director of marketing, Covered California plans to reevaluate both enrollment and awareness data following the third open enrollment period to determine whether its efforts were effective. Covered California Has Established a Network of Entities to Help Strengthen Its Outreach Efforts Covered California’s outreach and sales division reviews the performance of certified enrollment representatives (enrollment representatives) and provides numerous resources and service center support to the entities that educate and enroll program participants. Under federal requirements the exchange must conduct outreach and education activities that meet specified standards to inform consumers about the exchange and insurance affordability programs to encourage participation. Similarly, state law requires Covered California to conduct public education actions to raise awareness of the availability of QHPs and to conduct outreach activities to assist enrollees. In our July 2013 report we concluded that Covered California’s planned outreach efforts were extensive and appeared to satisfy federal and state requirements. Covered California has established a network of enrollment representatives, consisting of entities and individuals that educate consumers on, and enroll them in, QHPs and Medi‑Cal. As shown in Table 6 enrollment representatives include certified application entities and counselors as well as certified insurance agents. California State Auditor Report 2015-605 25 February 2016 Table 6 Summary of the Types and Responsibilities of Covered California’s Certified Enrollment Representatives FISCAL YEAR TYPE OF CERTIFIED ENROLLMENT NUMBER OF ENROLLMENT ENROLLMENT REPRESENTATIVE (ENROLLMENT REPRESENTATIVES REPRESENTATIVES REPRESENTATIVE) AS OF NOVEMBER 2015 RESPONSIBILITY BEGAN WORK Certified application entity or 340 certified application A public or private entity designated by Covered California to 2015–16 certified application counselor entities, certify its staff members or volunteers as certified application 1,797 certified counselors that provide information to consumers about application counselors the full range of qualified health plans (QHP) options and insurance affordability programs for which they are eligible, assist them in applying for coverage, and facilitate enrollment of eligible individuals in QHPs and insurance affordability programs. Certified insurance agent 14,037 Agents, certified by Covered California to transact in the 2013–14 individual and Small Business Health Options Program exchanges, now called Covered California for Small Business. In-person assister (certified Program discontinued Staff at entities, such as nonprofit community organizations, 2013–14* enrollment entity and faith-based organizations, or local government agencies, certified enrollment counselors) whose responsibilities include maintaining expertise in eligibility, enrollment, and program specifications; providing information and services in a fair, accurate, and impartial manner; and facilitating consumers’ selection of a QHP. Navigator 68 contractors Entities, receiving grant funding to perform services for 2014–15 and an additional consumers, that demonstrate an existing relationship 64 subcontractors or could readily establish relationships with employers and employees, consumers, or self-employed individuals likely to be eligible for enrollment. These groups include community and consumer-focused nonprofit groups, trade and professional associations, and state or local human services agencies. The navigator’s responsibilities include maintaining expertise in eligibility, enrollment, and program specifications and facilitating consumers’ selection of a QHP. Plan-based enroller 11 QHP issuers, and Staff employed or contracted by a QHP issuer to provide 2013–14 1,602 plan-based enrollers enrollment assistance to consumers. The enrollers’ responsibilities include maintaining an expertise in eligibility enrollment and program specifications, providing information and services to consumers, informing consumers of the availability of other QHP products offered through the exchange, and facilitating enrollment in QHPs. Sources: Documentation and information provided by Covered California; 45 Code of Federal Regulations, parts 155.205(d), 155.210, 155.215, 155.220, and 155.225; 10 California Code of Regulations, sections 6652, 6654, 6664, 6702, 6710, 6800, and 6802. * Covered California used the in-person assister program, which compensated enrollment representatives for each person enrolled in the program, to help enroll as many consumers as possible during the first two enrollment periods. The certified application entity and certified application counselor program took over the role of the in-person assister program beginning in fiscal year 2015–16. This role is administered by local entities whose mission it is to provide services to people without being paid an incentive for their efforts. The outreach and sales division generates reports from CalHEERS to review the performance of enrollment representatives. It uses this information to determine gaps in services and to identify new outreach opportunities to increase enrollment during future enrollment periods. For example, the outreach and sales division generates certain detailed reports to better inform local enrollment representatives during their planning processes. Using these reports, enrollment representatives can quickly identify consumers 26 California State Auditor Report 2015-605 February 2016 who began working with a team member but who never enrolled. The enrollment representatives can use this information to contact those consumers and continue to discuss enrollment options. The outreach and sales division uses other reports to better assess overall program performance and make necessary changes that can help enrollment representatives in better serving consumers. For example, Covered California modified the structure of its navigator program, described in Table 6 on the previous page, from an incentive‑based grant program during fiscal year 2014–15 to a block grant program for fiscal year 2015–16, after evaluating the program’s milestones and enrollment data. Covered California began the navigator grant program shortly before the beginning of the second open enrollment period, using its operational funds and not federal establishment funds, in accordance with the Patient Protection and Affordable Care Act. We reviewed data Covered California collected that specifies each grant recipient’s target goals for new effectuated enrollments (enrollment goals) and whether those goals were reached during the grant award period, which included the Many navigators fell short of second open enrollment period. According to these data, many reaching the enrollment goals navigators fell short of reaching the enrollment goals outlined in outlined in their grant agreements. their grant agreements. Specifically, according to the grant agreements for the first award period of October 1, 2014, through June 30, 2015, each navigator received an initial payment, or 25 percent of its total grant award, for achieving the milestone of submitting a strategic work plan and campaign strategy to Covered California. The grant agreements further specify that the navigators would receive subsequent payments whenever they achieved 25, 75, or 100 percent of their enrollment goals and satisfied certain reporting requirements. However, many navigators failed to reach their enrollment goals. Of the 65 entities awarded navigator grants, only 10 met or exceeded 100 percent of their enrollment goals, and seven achieved only 75 percent of their goals. Of the remaining 48 navigators that fell short of achieving 75 percent of their enrollment goals, 20 did not even attain 25 percent of the goals. As a result, many navigators were in jeopardy of not receiving additional grant payments since they were not achieving the enrollment goals specified in their grant agreements. In January 2015 Covered California’s executive director indicated during a presentation to the board that navigators were spending much of their time helping consumers renew and enroll in health plans. The former acting deputy director of Covered California’s outreach and sales division told us that the support many navigators were providing to consumers was more extensive than anticipated, particularly for non‑native English speakers. As a result, in January 2015 Covered California’s board approved a one‑time California State Auditor Report 2015-605 27 February 2016 payment modification of the grant agreements to base payments on the number of consumers who enroll in a plan while assisted by a navigator rather than on effectuated enrollment, the number of consumers who enroll in a plan and make their first monthly payment. The former acting deputy director of the outreach and sales division stated that this change alone would allow navigators to attain the next payment. She also explained that those who still fell short of the revised enrollment goals could demonstrate progress and achievement of goals through a narrative report to receive grant funding. After the second open enrollment period, Covered California After the second open enrollment evaluated the results of the navigator program and modified its period, Covered California approach to funding navigators. Specifically, at an April 2015 evaluated the results of the board meeting, the former acting deputy director of the outreach navigator program and modified its and sales division asserted that these entities are key contributors approach to funding navigators. to the effort to provide outreach, education, enrollment and renewal assistance, and post‑enrollment support, implying that the navigators’ compensation should reflect this effort. Subsequently, the board approved changes to the navigator grant program for the third open enrollment period so that it operates in a manner similar to a traditional block grant program by paying navigators in equal installments on an established schedule. Navigator grantee payments are now not based solely on achieving actual enrollment and renewal goals but are also based on the work they perform related to consumer outreach, education, enrollment, renewal assistance, and post‑enrollment support on behalf of Covered California. As a result, navigators can earn the full installment amount without reaching their enrollment goals, provided their work in these other areas has been satisfactorily documented in their progress reports and approved by Covered California. As a result of these changes, Covered California’s new navigator agreements, which have a duration that includes the third open enrollment period, require additional accountability measures. In addition to the monthly performance reporting previously required, the new grant agreements require information pertaining to performance and quality assurance. This added information includes the number of consumers assisted or enrolled by demographic category, successful educational and enrollment strategies, and any barriers or technical difficulties preventing navigators from meeting their enrollment or renewal goals. According to a manager in the navigator grant program, Covered California will finalize its evaluation of the success of the navigator program under the new funding format at the conclusion of the third open enrollment period, and it will make necessary modifications to help grant recipients better deliver services to consumers. This evaluation should help inform any necessary changes to the navigator program. 28 California State Auditor Report 2015-605 February 2016 The outreach and sales division also routinely informs the enrollment representatives of new developments and strategies to help generate additional enrollments or renewals. To assist in this effort, the outreach and sales division provides numerous webinars to keep enrollment representatives informed of ways to promote their business and provide effective service to consumers. Covered California also provides its enrollment representatives, which include certified insurance agents, with online access to webinars and information about the open enrollment and renewal process as well as electronic agent briefings that describe pertinent information, such as reminders, and available resources. Moreover, Covered California established service centers to help ensure that all enrollment representatives have their enrollment questions answered. Finally, the outreach and sales division is using geographic information software (GIS) to further inform Covered California’s outreach efforts. As of November 2015 using GIS technology, the outreach and sales division had created and allowed regional sales staff and community partners to access a map book displaying the estimated remaining subsidy‑eligible population. The map book hones in on certain regions within the State’s eight sales areas and provides overlaid, color‑coded information about estimated subsidy‑eligible populations and the location of enrollment representatives in the region. The map book enables regional sales staff and local enrollment representatives to identify underserved areas with high levels of uninsured consumers who qualify for the federal subsidy. A manager within the outreach and sales division stated that, by tracking the enrollments made by enrollment representatives before and after they began using this tool, Covered California intends to evaluate the effectiveness of the map book and establish best practices for enrollment representatives. Recommendations Covered California should continue to monitor its plan for financial sustainability and revise the plan accordingly as factors change. Further, it should complete a formal analysis of the adequacy of its reserve level by December 31, 2016, and update this analysis as needed, so that it is prepared if it does not meet its revenue projections and needs to increase its funding or decrease its expenditures to maintain financial solvency. This formal analysis should identify those contracts it could quickly eliminate, among other actions it would take, in the event of a shortfall in revenues. Covered California should continue to regularly review its enrollment projections and update the projections as needed to help ensure its financial sustainability. California State Auditor Report 2015-605 29 February 2016 Chapter 2 COVERED CALIFORNIA’S SOLE‑SOURCE CONTRACTING PRACTICES NEED TO BE IMPROVED, AND CALHEERS NEEDS CONTINUED OVERSIGHT Chapter Summary Covered California needs to improve its contracting practices to ensure the integrity of the process it uses in awarding sole‑source contracts. In reviewing sole‑source contracts, we found that nine out of 40 justifications were insufficient. Specifically, we found that two of its contracts were missing justifications, and the remaining seven failed to assert either timeliness or unique expertise as the basis for sole‑sourcing the contracts. Covered California’s policy, which was approved by its board of directors (board) and in place during our review, permitted the use of sole‑source contracts when timeliness or unique expertise may be required. In some instances the justifications asserted reasons that the board had not approved for using a noncompetitive procurement process. In other instances the justifications failed to explain why Covered California was using a sole‑source contract at all. Rather, the justifications explained the reasons for the respective services and why the selected vendor was qualified to provide them. Our review also identified concerns with Covered California’s board‑adopted policy itself, particularly in light of the new requirement that Covered California’s contract manual be substantially similar to the State Contracting Manual. Specifically, Covered California’s policy referenced generic terms such as timeliness and unique expertise as justification for using a sole‑source contract. We believe that these terms are overly broad and are not substantially similar to the State Contracting Manual. Without competitively bidding such contracts, Covered California cannot be assured that the contractor it hires is the most qualified or cost‑effective vendor. Further, the aggressive schedule and rapid design, development, and implementation of the California Healthcare Eligibility, Enrollment, and Retention System (CalHEERS), although resulting in a functional system, has required trade‑offs that in some cases present longer‑term risks to system maintainability. Without independent verification and validation (IV&V) oversight, our information technology (IT) expert believes certain system issues may go unidentified or unresolved, resulting in long‑term cost and schedule implications. 30 California State Auditor Report 2015-605 February 2016 Covered California Often Did Not Adequately Justify Its Use of Sole-Source Contracts State law requires Covered California to establish and use a competitive process to award contracts, and it also provides Covered California with broad statutory authority to establish its own procurement and contracting policy. In December 2011 the board adopted a procurement policy, updated in February 2013 and in place during our review, that provided Covered California the flexibility to use standard state procurement methods such as leveraged procurement agreements, (which allow departments to buy directly from suppliers through existing competitively bid contracts and agreements) or to use its own competitive contracting methods. However, Covered California’s board‑adopted policy also included a noncompetitive process that allows Covered California to use sole‑source contracts when timeliness or unique expertise may be required. In addition, the board‑adopted policy stated that the use of sole‑source contracts should be justified in writing. During fiscal years 2012–13 through During fiscal years 2012–13 through 2014–15 Covered California 2014–15 Covered California did not consistently follow the part of its board‑adopted policy did not consistently follow that addressed noncompetitive procurements. We reviewed the the part of its board‑adopted justifications for 20 of Covered California’s sole‑source contracts policy that addresses and another 20 applicable amendments to those contracts, for noncompetitive procurements. a total of 40 justifications. Our review found that nine of the 40 justifications were insufficient according to the board‑adopted policy. Specifically, Covered California was missing two justifications altogether—one for an original contract and another for an amendment; the remaining seven justifications—five for original contracts and two for amendments—failed to assert either timeliness or unique expertise as the basis for sole‑sourcing these contracts. In two instances the justifications asserted other nonboard approved reasons for using a noncompetitive procurement process. In other instances the justifications failed to explain why a sole‑source contract was being used at all. Rather, the justifications explained only the reasons Covered California needed the respective contract or amendment and why the selected contractor was qualified to provide the services, none of which were reasons covered in the board‑adopted policy for justifying a noncompetitive process. For example, Covered California did not sufficiently justify the use of a noncompetitive procurement method with respect to Covered California’s largest sole‑source contract (and the third largest contract overall): a contract for marketing and outreach services with Weber Shandwick for nearly $134 million, as shown in Table 7. In December 2011 Covered California released a solicitation for a variety of marketing and outreach services, to which it received 13 proposals. Covered California executed the contract, ultimately worth over California State Auditor Report 2015-605 31 February 2016 $28 million, with Ogilvy Public Relations Worldwide (Ogilvy) in April 2012. Covered California’s director of marketing reported that Ogilvy executed the first two phases of the marketing plan, which laid the foundation for Covered California’s advertising campaign. She explained that at that time, Covered California decided another vendor would be better suited to carry out the advertising campaign. As a result, Covered California executed a sole‑source contract with Weber Shandwick in May 2013. Covered California initially awarded the contract on the basis that (1) Weber Shandwick had submitted the second best proposal for the solicitation that led to awarding the contract to Ogilvy, (2) the services were needed, and (3) the vendor was qualified. However, none of these reasons were appropriate justifications for using a sole‑source procurement method under the board‑adopted policy. Instead, Covered California determined that, having excluded Ogilvy, Weber Shandwick remained the best value. However, the scope of the Weber Shandwick contract was more focused on the implementation of the advertising campaign, whereas the scope of the Ogilvy contract was initially centered on creating a marketing plan, and it later developed and implemented a public relations plan. Table 7 Covered California’s 10 Largest Contracts by Final Dollar Amount From July 1, 2012, Through June 30, 2015 FINAL CONTRACT FISCAL ORIGINAL AMOUNT, YEAR CONTRACT INCLUDING ORIGINALLY SCOPE OF WORK AMOUNT AMENDMENTS AWARDED VENDOR PROCUREMENT TYPE (TOTAL CONTRACT TERM IN YEARS*) 1$294,038,767 $423,711,058 2012–13 California Health and Human Interagency California Healthcare Eligibility, Enrollment, Services Agency agreement and Retention System (CalHEERS) project management (2.75) 2 157,000,000 157,000,000 2014–15 Campbell Ewald Company Competitive Advertising and marketing campaign (3) 3 98,694,500 133,915,722 2012–13 Weber Shandwick Sole-source Marketing and publicity (2.25) 4 50,037,142 61,098,334 2012–13 Pinnacle Claims Management, Inc. Competitive Small Business Health Options Program administration (3.5) 5 36,613,862 52,499,973 2012–13 California Department of Interagency CalHEERS reimbursement (3.25) Social Services agreement 6 25,398,647 33,754,425 2012–13 Contra Costa County Competitive Provide additional service center (4.5) 7 813,600 33,594,509 2013–14 Richard Heath and Associates, Inc. Sole-source Outreach and education grant (4) 8 9,800,000 23,700,000 2014–15 Faneuil, Inc. Competitive Call center support and data entry (0.75) 9 6,716,000 16,784,000 2013–14 California Department of Interagency Review appeals of applicant eligibility (2.75) Social Services agreement 10 9,145,400 16,369,720 2013–14 K/P Corporation Competitive Develop and disseminate print materials (3) Source: California State Auditor’s review and analysis of all contracts awarded during fiscal years 2012–13 through 2014–15. Note: Includes amendments awarded before August 2015. * Contract term rounded to nearest quarter of a year. 32 California State Auditor Report 2015-605 February 2016 Covered California amended the Weber Shandwick contract twice using the noncompetitive procurement method in both instances. Neither of the justifications for the amendments cited the reasons that were included in the board’s adopted policy as a basis for avoiding a competitive process. Rather, the amendment justifications only indicated that the services were needed and that Weber Shandwick was qualified to provide the needed services. Finally, in March 2015 when Weber Shandwick’s $134 million contract neared expiration, Covered California sought competitive bids for a vendor to undertake a new advertising and marketing campaign. Although Weber Shandwick submitted a proposal for the new advertising and marketing campaign, Covered California determined that another contractor, Campbell Ewald Company, was the best value for that bid. When we brought this to the attention of Covered California, the marketing director stated that it takes anywhere from six months to one year to competitively bid a marketing contract and there was not enough time to competitively bid for a marketing contract after Ogilvy. In addition, she stated that Weber Shandwick did an outstanding job on Covered California’s behalf in terms of quick turnaround, quality of work, and cost‑efficiencies. The term of the contract began in May 2013 and by September 2013, she stated, Weber Shandwick We believe Covered California had a comprehensive campaign on air to launch the first open did not sufficiently justify using enrollment of Covered California. Nevertheless, as we stated a noncompetitive procurement earlier, we believe Covered California did not sufficiently justify process as its board‑adopted using a noncompetitive procurement process as its board‑adopted policy outlined. policy outlined. We also question the validity of three additional justifications. Specifically, although Covered California asserted either timeliness or unique expertise as the basis for using the noncompetitive procurement process, in these three instances available documentation suggests that either the vendor was not unique or that Covered California had sufficient time to use a competitive procurement method. As noted previously, in April 2012 Covered California executed a contract with Ogilvy to provide marketing and outreach services. Richard Heath and Associates, Inc. (Richard Heath) became a subcontractor to Ogilvy for this contract. The original Ogilvy contract was set to expire in October 2013. In late September 2013 Covered California executed a sole‑source contract with Richard Heath for more than $813,000 for the purpose of supporting, training, and managing the Outreach and Education Grant, In‑Person Assister, and Navigator Grant Programs. Covered California then amended the Ogilvy contract by removing, among other things, the corresponding portions related to these grant programs. Three days after it removed these items from the Ogilvy contract, which was 18 days after awarding Richard Heath’s original contract, Covered California amended the contract with Richard Heath to increase the contract total to California State Auditor Report 2015-605 33 February 2016 just over $44 million —again without using a competitive process. As of January 2016 the contract totaled nearly $37 million after a subsequent amendment lowered the total contract amount.5 Covered California justified the original Richard Heath contract and the subsequent first amendment on the basis that the sole‑source contract was necessary because of the severe time constraints it was facing. However, we question this justification in light of the fact that Covered California had the time and capacity to seek competitive bids for these services. As previously indicated, when Covered California executed the contract with Ogilvy, it was aware that the contract would expire in October 2013. Further, in its justification to use a sole‑source contract with Richard Heath, it stated that during the first year of the contract with Ogilvy, which began in March 2012, Covered California determined that it needed a different vendor to provide Considering the size of the contract services related to Ogilvy’s marketing plan. This acknowledgement award and that Covered California indicates that Covered California was aware that it needed another had time to competitively bid contract by or before March 2013; thus, it could have begun a the contract, we believe it was competitive procurement process and successfully awarded a contract paramount for Covered California by October, when the Ogilvy contract was set to expire. Considering to ensure that it awarded this the size of the contract award and that Covered California had time contract using a method that to competitively bid the contract, we believe it was paramount for offered the best opportunity for Covered California to ensure that it awarded this contract using selecting the most qualified vendor a method that offered the best opportunity for selecting the most at the most competitive cost. qualified vendor at the most competitive cost. In response to our review, the assistant general counsel noted that the federal requirements for the outreach program and all its components were new and complex. He also stated that conducting a competitive procurement process for the outreach services that Richard Heath had already performed for over a year under the Ogilvy contract would have been more costly than awarding the contract to Richard Heath, as a new contractor would have had to expend additional time and resources to get up to speed on the program. Covered California believes awarding a sole‑source contract to Richard Heath for these services was the best value. He further noted that by the time Covered California realized it needed a direct contract with Richard Heath, there was not enough time to competitively bid the contract and have the contractor certify and support the enrollment personnel in advance of open enrollment. Even with using a noncompetitively bid contract, the Richard Heath contract was only executed one week before the start of the first open enrollment period. He stated that for these reasons Covered California followed its board‑adopted policy, which allowed the use of noncompetitively bid contracts under these conditions. Regardless of the assistant general counsel’s rationale, we still question the justification used in this instance. Covered California was aware as early as April 2012 that 5 The contract total here differs from the total in Table 7 because the table information is as of August 2015. 34 California State Auditor Report 2015-605 February 2016 outreach services were needed and it knew the federal requirements for the outreach program were new and complex; we therefore believe it could have competitively bid for these services earlier. In addition, we found that in April 2014 the board granted Covered California staff the authority to enter into a competitive procurement process for a vendor to develop and implement a data analytics program. About five months later, Covered California awarded a $540,000 sole‑source contract to Equanim Technologies, Inc. (Equanim) to perform lead responsibility over the request for proposal process, oversee the competitive process to be used in selecting the vendor to develop and implement the data analytics program, and to manage the project. In its justification Covered California indicated, in part, that the competitive procurement process was unnecessary because the selected project management vendor was uniquely qualified and had to begin work immediately. However, we question whether the project management vendor was unique, that is, that it was the only vendor that could provide the type of project management services Covered California wanted to procure. In fact, many vendors provide project management services. Further, in Covered California’s justification for a noncompetitive procurement process, it also claimed that time was of the essence. However, we believe that Covered California should have been aware of the complexity of the data analytics program when it requested approval to competitively bid for that program and, therefore, had the time to also competitively bid for the project management services. Covered California’s delay is not an acceptable reason to use a sole‑source contract. Using such justifications as the basis for entering into sole‑source contracts undermines the integrity of the competitive procurement process. The assistant general counsel stated that Covered California needed specific expertise in creating and implementing the data analytics program in order to support its statutory charge to be a driver of the health care quality improvement goals laid out in the Patient Protection and Affordable Care Act. He explained that it needed a project management vendor that had unique experience in this area. Specifically, he stated that because Equanim had successfully assisted other state agencies in getting similar programs up and running, Covered California believed Equanim had the unique expertise that justified the sole‑source contract. Additionally, he noted that if Covered California had competitively bid these services, its ability Although Equanim had assisted to operationalize the data analytics program and deliver critical data other state agencies by providing to inform policy decisions would have been jeopardized. However, project management services we believe Covered California could have identified the need for a for data analytics programs, this project management vendor earlier in the process. Further, although experience does not make it the Equanim had assisted other state agencies by providing project only vendor available to provide management services for data analytics programs, this experience such services. does not make it the only vendor available to provide such services. California State Auditor Report 2015-605 35 February 2016 As shown in Table 8, over the last three fiscal years, the total number of sole‑source contracts Covered California has used has decreased each year. The assistant general counsel stated that Covered California faced many challenges at the inception of the exchange because it was a newly created public entity. He stated that it had no office, no employees, no technology platform, and only about two years to implement the largest health care reform legislation since the creation of Medicare. He explained that the exchange could not have been successfully implemented without using sole‑source contacts. However, as we pointed out previously, we identified certain instances where Covered California had time to competitively bid certain services and because it did not, it lacks assurance that the contractor was the most qualified or cost‑effective vendor. In April 2015 Covered California implemented a noncompetitive bid justification form to provide more specific guidance on the information that staff requesting a sole‑source contract need to include in their justifications. Our review of the form found that using it could contribute to adequately justifying the need for sole‑source contracts. Table 8 Covered California Contracts Awarded July 1, 2012, Through June 30, 2015 (Dollars in Thousands) FISCAL YEAR 2012–13 FISCAL YEAR 2013–14 FISCAL YEAR 2014–15 TOTAL TOTAL TOTAL TOTAL NUMBER OF DOLLAR NUMBER OF DOLLAR NUMBER OF DOLLAR NUMBER OF TOTAL DOLLAR PROCUREMENT TYPE CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT Competitive Competitive 76 $149,080 52 $28,195 105 $226,991 233 $404,266 Leveraged procurement agreement* 15 3,329 17 1,688 12 2,938 44 7,960 Noncompetitive Interagency agreement 14 377,583 28 (2,540) 8 1,172 50 376,215 Nonmonetary contracts† 2 - 7 - 10 - 19 - Sole-source 27 147,958 24 40,825 13 10,053 64 198,836 Exempt‡ 8 68 14 1,133 17 1,321 39 2,522 Grand Total 142 $678,018 142 $69,306 166 $242,501 450 $989,799 Sources: State Contracting Manual, Covered California’s draft procurement manual, California State Auditor’s review and analysis of all contracts awarded in fiscal years 2012–13 through 2014–15. Note: Includes amendments awarded before August 2015. * Leveraged procurement agreements allow departments to buy directly from suppliers through existing competitively bid contracts and agreements; under certain circumstances these contracts may be exempt from bidding. † As defined by Covered California, these types of agreements are created to protect the State’s interests to complete a project or comply with regulations but do not require the exchange of funds. These agreements, such as memorandums of understanding, are not subject to normal procurement processes. ‡ As defined by the California Department of General Services, contracts exempt from bidding include those for legal services and contracts with other public entities or with a certified small business. 36 California State Auditor Report 2015-605 February 2016 Covered California Needs to Improve Its Noncompetitive Procurement Policy As previously noted, while state law requires Covered California to establish and use a competitive process to award contracts, it also provides Covered California with broad statutory authority to establish its own procurement and contracting policy. For example, state law exempts Covered California from certain contracting As of June 24, 2015, state law requirements, such as obtaining approval from the California requires Covered California to Department of General Services (General Services) before entering adopt a contract manual that is into a contract. However, as of June 24, 2015, state law requires substantially similar to the State Covered California to adopt a contract manual that is substantially Contracting Manual. similar to the State Contracting Manual. Contrary to the board‑adopted policy in place during our review, which permitted Covered California to use the noncompetitive procurement process when timeliness or unique expertise may be required, the State Contracting Manual allows for the use of a noncompetitive process in two types of situations: when there is an emergency where immediate acquisition is necessary for the protection of the public health, welfare, or safety; or when the acquisition of goods and services are the only goods and services that meet the State’s need and no known competition exists. Our review identified concerns with the board‑adopted policy in light of the new requirement that Covered California’s contract manual be substantially similar to the State Contracting Manual. The board‑adopted policy used generic terms such as timeliness and unique expertise as justification for using a sole‑source contract. We believe that these terms are overly broad and are not substantially similar to the State Contracting Manual. The term timeliness does not restrict the use of a sole‑source contract to those instances where there is an emergency. Further, the term unique expertise does not restrict the use of a sole‑source contract to those instances when only one vendor with the requisite qualifications is available to complete the needed work. Covered California’s procurement manual has been revised in its draft form numerous times and the manager within its business services branch and contracts section indicated that Covered California’s staff has been using it since the inception of the exchange. In our review of the November 2015 draft manual, we found that it includes criteria that allow for a sole‑source contact in circumstances other than those that the State Contracting Manual permits. Specifically, in addition to allowing for the use of a sole‑source contract when there is an emergency or when only one vendor with the requisite qualifications is available, the draft procurement manual allowed the use of a noncompetitive process when “the services are urgently needed to fulfill Covered California’s obligations or mission.” After bringing this to the attention of Covered California, California State Auditor Report 2015-605 37 February 2016 staff made subsequent changes to the draft procurement manual to address our concerns. Covered California’s draft procurement manual was adopted by the board in January 2016 and takes the place of the 2011 board‑adopted policy. Our review of the January 2016 board‑adopted procurement manual found that it is substantially similar to the State Contracting Manual as state law requires. Although Covered California was required to comply with the We found an instance in which board‑adopted policy in place during our review, we found Covered California’s staff an instance in which its staff followed the draft procurement followed the draft procurement manual instead of the board‑adopted policy. Specifically, the manual instead of the board‑adopted policy suggests a written justification is necessary board‑adopted policy. for all sole‑source contracts regardless of the amount. However, the October 2013 draft procurement manual and all subsequent draft versions allow staff to award sole‑source contracts for less than $25,000 without a written justification. Our review included one sole‑source contract that was less than $25,000 and, contrary to the board‑adopted policy, no written justification was provided. Covered California staff explained that they were following the draft procurement manual, not the board‑adopted policy. Similarly, the assistant general counsel stated that the draft procurement manual served as Covered California’s formal contract amendment policy. Inconsistent policies and procedures regarding its procurement processes further affect Covered California’s ability to comply with state laws. Covered California’s Contracts Database Is Inaccurate, Hindering Its Ability to Keep Adequate Records of Its Contracts Covered California’s database of the contracts that it has awarded suffers from inconsistent and inaccurate information. According to the chief of business services, Covered California uses this database as its internal tracking tool and to provide quarterly reports to the board. However, although Covered California has written desk procedures for entering information into its database, we found errors in the data provided. These problems occur, in part, because staff enter contract information inconsistently and adequate review does not occur to ensure accurate entry as called for by Covered California’s desk procedures. For instance, we found that some contracts were categorized under an incorrect procurement type, such as contracts labeled as exempt from bidding when they were competitively bid. In addition, we noted a contract in the database for $130,000 that, according to the contracts manager, was never executed. Because of our concerns regarding the accuracy of the information in this database, we recreated three years of data using Covered California’s hard‑copy contract files and discovered a significant 38 California State Auditor Report 2015-605 February 2016 We determined that the award number of errors. Our results indicated that Covered California values of 75 individual contracts had entered into 449 contracts valued at just less than $990 million had been incorrectly recorded during fiscal years 2012–13 through 2014–15. However, we in the database. The value of determined that the award values of 75 individual contracts had 44 contracts was understated by been incorrectly recorded in the database. Specifically, the value about $11.7 million, and the value of 44 contracts was understated by about $11.7 million, and the of 31 contracts was overstated by value of 31 contracts was overstated by roughly $32.2 million with roughly $32.2 million. a net discrepancy of about $20.5 million. In one instance, Covered California’s database shows a contract with Pinnacle Claims Management, Inc., for almost $65 million, but we determined that this contract was actually worth $61 million. Because state and federal law require Covered California to keep an accurate accounting of all activities, receipts, and expenditures, and because the contracts database is used as the central information system for its contract management activities, it is essential that Covered California follow its procedures to ensure the database’s accuracy. CalHEERS Needs Continued Oversight The aggressive schedule and rapid design, development, and implementation of CalHEERS, although resulting in a functional system, has required trade‑offs that present longer‑term risks to system maintainability in some cases. According to federal regulations, each state is to develop, for all applicable state health subsidy programs, a secure electronic interface for the exchange of data that allows a consumer’s eligibility to be determined for all health care programs based on a single application. Covered California entered into a contract with a systems developer in 2012 to provide design, development, implementation, and maintenance services for CalHEERS, which supports the maintenance, operations, and on‑going business of Covered California. CalHEERS is also one of the systems that supports the same functions for the California Department of Health Care Services. The system also interfaces, or communicates electronically, with an array of federal, state, and private entities. This communication involves sharing sensitive data that are used for potential eligibility for other programs, such as CalFresh and California Work Opportunities and Responsibility to Kids. Given that the continuing development and maintenance activities for the system are anticipated to occur until 2017, CalHEERS must receive adequate technical oversight in order to identify risks and issues that threaten system viability and to ensure such risks and issues are adequately resolved. To assist the CalHEERS project by ensuring that deficiencies are detected and corrected as early as possible, Covered California contracted with a system expert to evaluate every aspect of the design, development, and implementation phase and to provide California State Auditor Report 2015-605 39 February 2016 monthly IV&V reports. These reports assess the strengths and weaknesses of the project and include recommendations for correcting the findings and risks identified. We had our IT expert review the six most recent IV&V reports for the periods covering August 2014 through January 2015, the month the final report was issued (the IV&V contract with Covered California expired in February 2015). According to our IT expert, although the IV&V reports do not suggest that the CalHEERS project is deficient, the risks identified in the reports are significant and may pose threats to system maintainability moving forward. For example, the IV&V consultant identified concerns over the ability to isolate and easily correct defects in order to cost‑effectively maximize the productive life of the system. This type of risk represents a challenge to the future ability of the system to readily expand its capacity in users served or increased transaction volumes. According to the project director of CalHEERS, decisions were made to prioritize certain system fixes, based on the risk they presented, at specific times in an effort to meet project release deadlines. According to the chief of the CalHEERS project management office, the management team established a quality assurance team in July 2014 to undertake activities focusing on continual improvement of processes and products, among other issues. However, as of November 2015, this team was still working through a list of issues that may affect system functionality that, according to its documentation, CalHEERS plans to address through future releases. As a result, the risks related to the underlying system issues have not been fully mitigated. According to the project director, the project management team is actively considering whether an IV&V skill set is needed going forward. Our IT expert believes that given the size and technical complexity of the project, as well as the significant number of maintenance items and change orders that remain outstanding, the project should reinstitute IV&V services as soon as practical. In fact, he explained that the CalHEERS project should maintain IV&V services until the size and frequency of significant modifications greatly diminish. The IV&V processes determine whether the development products of a given system activity conform to the requirements of that activity and whether the Our IT expert believes that product satisfies its intended use and user needs. Tasks involved effectively implemented in making this determination may include the analysis, evaluation, IV&V services will assist the review, inspection, assessment, and testing of products. Our IT CalHEERS project with technical expert believes that effectively implemented IV&V services will oversight, inform decisions about assist the CalHEERS project with technical oversight, inform system development processes, decisions about system development processes, and identify the and identify the implications of any implications of any technical trade‑offs that the system builder technical trade‑offs that the system might make or propose. builder might make or propose. 40 California State Auditor Report 2015-605 February 2016 Covered California also entered into a contract Selected Significant Risks to the CalHEERS with the Office of Systems Integration—an office System as of a July 2015 Independent Project within the California Health and Human Services Oversight Consultant Report Agency (Health and Human Services)—for project management and quality assurance services. Health • Continued loss of skilled contractor staff in key positions, and Human Services entered into a memorandum which has affected the release schedule and quality of deliverables. of understanding with the California Department of Technology for independent project oversight • A delay in or partial implementation of change requests, (IPO) to provide additional advice and consulting which could increase project costs. on the management of the project during the • A struggle to enforce the change management process to design, development, and implementation phase. ensure that the new functionality added to a release has Our IT expert reviewed six of the IPO reports for the appropriate design document approval and provides February through July 2015. The reports include an assessment of when it is best to add a change without updates on project releases of a list of overdue affecting other changes. action items, a summary of the status of recent Source: July 2015 independent project oversight project deliverables, and a description of pending consultant report. and resolved risks. The text box gives examples of the unresolved risks that are most significant to completing the system within the approved schedule. The IPO consultant’s reports indicate whether the CalHEERS project team has taken steps to address them. The July 2015 report, the last issued by the IPO consultant, identified outstanding risks that still need to be addressed. However, according to the chief of the CalHEERS project management office, as of January 2016 IPO services have ended because the project met its milestones and moved into the operations and maintenance phase. Our IT expert indicated that the necessity of IPO diminishes as a project evolves from development to ongoing operations. As a consequence, he suggested there is a reduced need for IPO and he said that it might be reasonably terminated. He indicated that the size and complexity of the system and the ongoing effort to enhance it, however, suggest that quality assurance processes remain key to the efforts to maintain the project. Although CalHEERS has moved into operations and maintenance mode, the level of development activity remains high; thus, our IT expert suggests IV&V be continued. According to the project director, the CalHEERS project management office has instituted a number of processes in recent months to address issues in the IPO reports and it continues to prioritize improvements to the system based upon severity and risk to the project. Nevertheless, our IT expert indicated that the most critical risks regarding the system architecture and management, if not mitigated, could compromise system functionality. Without adequate oversight at this point in the project, specifically from an IV&V standpoint, these system issues may go unidentified or unresolved, resulting in long‑term cost and schedule implications for the ongoing maintenance of CalHEERS. California State Auditor Report 2015-605 41 February 2016 Covered California Has Created a Process to Monitor, Recertify, and Decertify Qualified Health Plans As Federal Law Requires Federal regulations require state health insurance exchanges to monitor QHP issuers for their demonstration of ongoing compliance with certification requirements. In addition, the exchanges must establish a process for recertifying QHPs that includes a review of general certification criteria, and they must create a process for decertifying QHPs that meets federal requirements. Similarly, state law requires the board to implement procedures for recertifying and decertifying QHPs that are consistent with guidelines from the U.S. Secretary of Health and Human Services. Our July 2013 report noted that Covered California correctly prioritized the QHP certification process over other considerations and that this process ensured that the QHPs selected for sale through the exchange would, among other requirements, provide essential health benefits and be available for Covered California’s first open enrollment in October 2013. Moving forward, however, we recommended in that 2013 report that Covered California develop a plan and procedures for monitoring, recertifying, and decertifying QHPs, or it would risk not complying with federal requirements. Our current review Our current review found that found that Covered California has developed these procedures Covered California has developed in addition to its comprehensive, multistep certification process procedures for monitoring, for QHPs that are sold through the exchange. Specifically, we recertifying, and decertifying QHPs. reviewed QHPs for three of the largest insurance issuers and for one small issuer and found that Covered California appropriately monitored these QHPs using data the issuers provided. These data include numerous measures of quality and network management. Covered California uses the data to develop performance scores and customer service metrics, and to determine the extent to which issuers are paying health care providers based on the quality and outcomes of their services. Table 9 on the following page shows the federal requirements for QHPs that we determined Covered California has satisfied. Further, Covered California’s annual recertification process results in an extensive review of QHPs’ compliance with state and federal requirements. Covered California annually recertifies QHPs, even though federal regulations do not specify how often they must be recertified. Covered California’s contracts with QHP issuers are detailed, lengthy documents that result in an extensive recertification process. According to Covered California’s general counsel, its recertification process requires the issuer to demonstrate why its QHPs should be recertified and may take the issuer months to perform. Based on our review of selected contracts between Covered California and QHP issuers, we determined that these contracts incorporate applicable 42 California State Auditor Report 2015-605 February 2016 federal regulations. The general counsel also noted that Covered California’s annual recertification process is, in effect, another mechanism for monitoring QHPs for compliance with federal and state requirements. Therefore, we believe the annual frequency and extensive nature of this recertification process is reasonable, considering that Covered California is using the process as a component of its monitoring activities. Table 9 Covered California’s Compliance With Key Federal and State Requirements for Qualified Health Plans PROGRESS PROGRESS TOWARD TOWARD COMPLETION, COMPLETION, REQUIREMENTS FOR COVERED CALIFORNIA JULY 2013* FEBRUARY 2016 STEPS COVERED CALIFORNIA HAS TAKEN Federal Establish and complete a process for certifying qualified Previously Established a QHP certification process and, for each health plans (QHPs).  completed plan year, has selected issuers to offer QHPs through the health insurance exchange. Monitor QHP issuers for ongoing compliance with Monitors QHP issuers monthly using issuer metrics and ↑  certification requirements. annually via the recertification process. Establish a process for recertifying and decertifying QHPs. Established a process and an application X  for recertification and a process template for decertification of QHPs. State In each region of the State, provide a choice of QHPs at Previously Each region of the State has a choice of QHPs at each of  each of the five federally specified coverage levels. completed the five federally specified coverage levels. Sources: 45 Code of Federal Regulations, part 155; California Government Code, section 100503; and California State Auditor’s analysis of documents obtained from Covered California.  = Completed. ↑ = Progressing as expected. X = Yet to begin. * We most recently reported on the progress of Covered California in our July 2013 report—New High‑Risk Entity: Covered California Appears Ready to Operate California’s First Statewide Health Insurance Exchange, but Critical Work and Some Concerns Remain, Report 2013-602. Covered California has also developed a decertification procedure, which consists of a series of action steps across its program areas, and it followed this decertification procedure for one QHP issuer in July 2014. Specifically, the issuer of the QHP withdrew from the exchange because it chose to no longer offer the same plans both through and outside of Covered California. We reviewed Covered California’s application of its decertification procedure for this issuer’s QHPs and found that it was consistent with federal regulations. California State Auditor Report 2015-605 43 February 2016 Recommendations To comply with state law, Covered California should ensure that its staff comply with the changes to its recently‑adopted procurement manual that incorporate contracting policies and procedures that are substantially similar to the provisions contained in the State Contracting Manual. Before executing any sole‑source contracts, Covered California should adequately document the necessity for using a noncompetitive process in its written justifications and, in doing so, demonstrate valid reasons for not competitively bidding the services. Covered California should improve its project management of contracts to ensure that it allows adequate time so it can use the competitive bidding process as appropriate. Covered California needs to develop a process by June 2016 to ensure that it accurately enters information regarding its contracts into its contract database. To ensure that CalHEERS does not face delays and cost overruns in the implementation of planned releases, Covered California should immediately contract with an independent party for IV&V services to highlight and address potential risks going forward. 44 California State Auditor Report 2015-605 February 2016 We conducted this audit under the authority vested in the California State Auditor by section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions. Respectfully submitted, ELAINE M. HOWLE, CPA State Auditor Date: February 16, 2016 Staff: Laura G. Kearney, Audit Principal Rosa I. Reyes Ryan Grossi, JD Michaela Kretzner, MPP Derek J. Sinutko, PhD Legal Counsel: Heather Kendrick, Sr. Staff Counsel IT Audits: Michelle J. Baur, CISA, Audit Principal Richard W. Fry, MPA, ACIOA Lindsay H. Harris, MPA, CISA For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255. California State Auditor Report 2015-605 45 February 2016 * * California State Auditor’s comments begin on page 51. 46 California State Auditor Report 2015-605 February 2016 California State Auditor Report 2015-605 47 February 2016 1 48 California State Auditor Report 2015-605 February 2016 2 3 California State Auditor Report 2015-605 49 February 2016 4 50 California State Auditor Report 2015-605 February 2016 Blank page inserted for reproduction purposes only. California State Auditor Report 2015-605 51 February 2016 Comments CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM COVERED CALIFORNIA To provide clarity and perspective, we are commenting on Covered California’s response to our audit. The numbers below corresponds to the numbers we have placed in the margin of Covered California’s response. During the course of our audit work, Covered California informed 1 us that it anticipated that its draft procurement manual would be presented to its board of directors (board) for approval in February 2016. However, as indicated in Covered California’s response, the board adopted the draft procurement manual at its meeting on January 21, 2016, which was the first day of Covered California’s official review of our draft report. As a result, we modified the text in our report on pages 3, 36, and 37 to reflect the board’s action. Additionally, we revised our recommendation on pages 4 and 43 to clarify that Covered California should ensure that its staff comply with the changes to its board’s recently‑adopted procurement manual. Although Covered California’s recent board‑adopted procurement 2 manual requires a written justification for all noncompetitively bid contracts of $25,000 and above, it will be important for Covered California to ensure that its staff adequately document the necessity for using a noncompetitive process in its written justification. Further, on page 35 we acknowledge that Covered California implemented a noncompetitive bid justification form, as it indicates in its response, to provide more specific guidance on the information that staff requesting a sole‑source contract need to include in their justifications. Also, on page 35 we conclude that our review of the form found that using it could contribute to adequately justifying the need for sole‑source contracts. Despite our numerous discussions with Covered California, it never 3 informed us of the process described in its response that it asserts was implemented in 2015 by which staff receive advance notice of contracts which are set to expire within the next six months. We look forward to Covered California’s 60‑day response to further explain and provide evidence of this process. We are concerned about Covered California’s belief that it can 4 adequately and competently perform independent verification & validation (IV&V) services by using a mix of both its civil service staff and independent contractors. Specifically, industry standards require the responsibility for the IV&V effort to be vested in an organization that is separate from the development 52 California State Auditor Report 2015-605 February 2016 and program management organizations. However, as stated on page 40, Covered California contracted with the Office of Systems Integration (OSI) for project management and quality assurance services. Further, this is the first time Covered California has mentioned the potential transition of the California Healthcare Eligibility, Enrollment, and Retention System project to the OSI, and it is unclear to us how this transition will address our recommendation. Nevertheless, we stand by our recommendation that IV&V services are still needed and should be contracted for immediately.