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.
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 2014–15 Covered California did not consistently follow the part of its board adopted policy that addressed noncompetitive procurements. 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. 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 $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.
| Original Contract Amount | Final Contract Amount, Including Amendments |
Fiscal Year Originally Awarded | Vendor | Procurement Type | Scope of Work (total contract term in years*) |
|
|---|---|---|---|---|---|---|
| 1 | $294,038,767 | $423,711,058 | 2012–13 | California Health and Human Services Agency | Interagency agreement | California Healthcare Eligibility, Enrollment, 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 Social Services | Interagency agreement | CalHEERS reimbursement (3.25) |
| 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 Social Services | Interagency agreement | Review appeals of applicant eligibility (2.75) |
| 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.
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 had a comprehensive campaign on air to launch the first open enrollment of Covered California. Nevertheless, as we stated earlier, we believe Covered California did not sufficiently justify using a noncompetitive procurement process as its board adopted 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 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 services related to Ogilvy’s marketing plan. This acknowledgement indicates that Covered California was aware that it needed another contract by or before March 2013; thus, it could have begun a competitive procurement process and successfully awarded a contract by October, when the Ogilvy contract was set to expire. Considering the size of the contract award and that Covered California had time to competitively bid the contract, we believe it was paramount for Covered California to ensure that it awarded this contract using a method that offered the best opportunity for selecting the most 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 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 to operationalize the data analytics program and deliver critical data to inform policy decisions would have been jeopardized. However, we believe Covered California could have identified the need for a project management vendor earlier in the process. Further, although Equanim had assisted other state agencies by providing project management services for data analytics programs, this experience does not make it the only vendor available to provide such services.
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.
| Procurement Type | Fiscal Year 2012–13 | Fiscal Year 2013–14 | Fiscal Year 2014–15 | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of Contracts | Total Dollar Amount | Number of Contracts | Total Dollar Amount | Number of Contracts | Total Dollar Amount | Number of Contracts | Total Dollar 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.
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 requirements, such as obtaining approval from the California Department of General Services (General Services) before entering into a contract. However, as of June 24, 2015, state law requires Covered California to adopt a contract manual that is substantially 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, 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 board adopted policy in place during our review, we found an instance in which its staff followed the draft procurement manual instead of the board adopted policy. Specifically, the board adopted policy suggests a written justification is necessary 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 number of errors. Our results indicated that Covered California had entered into 449 contracts valued at just less than $990 million during fiscal years 2012–13 through 2014–15. However, we determined that the award values of 75 individual contracts had been incorrectly recorded in the database. Specifically, the value of 44 contracts was understated by about $11.7 million, and the value of 31 contracts was overstated by roughly $32.2 million with 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 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 product satisfies its intended use and user needs. Tasks involved in making this determination may include the analysis, evaluation, review, inspection, assessment, and testing of products. Our IT expert believes that effectively implemented IV&V services will assist the CalHEERS project with technical oversight, inform decisions about system development processes, and identify the implications of any technical trade offs that the system builder might make or propose.
Selected Significant Risks to the CalHEERS System as of a July 2015 Independent Project Oversight Consultant Report
- Continued loss of skilled contractor staff in key positions, which has affected the release schedule and quality of deliverables.
- A delay in or partial implementation of change requests, which could increase project costs.
- A struggle to enforce the change management process to ensure that the new functionality added to a release has the appropriate design document approval and provides an assessment of when it is best to add a change without affecting other changes.
Source: July 2015 independent project oversight consultant report.
Covered California also entered into a contract with the Office of Systems Integration—an office within the California Health and Human Services Agency (Health and Human Services)—for project management and quality assurance services. Health and Human Services entered into a memorandum of understanding with the California Department of Technology for independent project oversight (IPO) to provide additional advice and consulting on the management of the project during the design, development, and implementation phase. Our IT expert reviewed six of the IPO reports for February through July 2015. The reports include updates on project releases of a list of overdue action items, a summary of the status of recent project deliverables, and a description of pending 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.
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 found that Covered California has developed these procedures in addition to its comprehensive, multistep certification process for QHPs that are sold through the exchange. Specifically, we 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 shows the federal requirements for QHPs that we determined Covered California has satisfied.
| Requirements For Covered California | Progress Toward Completion, July 2013* |
Progress Toward Completion, February 2016 |
Steps Covered California Has Taken |
|---|---|---|---|
| Federal | |||
| Establish and complete a process for certifying qualified health plans (QHPs). | ✓ | Previously completed | Established a QHP certification process and, for each plan year, has selected issuers to offer QHPs through the health insurance exchange. |
| Monitor QHP issuers for ongoing compliance with certification requirements. | ↑ | ✓ | Monitors QHP issuers monthly using issuer metrics and annually via the recertification process. |
| Establish a process for recertifying and decertifying QHPs. | X | ✓ | Established a process and an application for recertification and a process template for decertification of QHPs. |
| State | |||
| In each region of the State, provide a choice of QHPs at each of the five federally specified coverage levels. | ✓ | Previously completed | Each region of the State has a choice of QHPs at each of 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.
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 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.
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.
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.
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 based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
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.
Footnotes
5 The contract total here differs from the total in Table 7 because the table information is as of August 2015. Go back to text