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.

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 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 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.

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
Recommendation		Method	Status of Recommendation
1.	To provide as much public transparency as possible, Covered California’s board should formally adopt a policy to retain confidentiality only for contracts, contract amendments, and payment rates that are necessary to protect Covered California’s interests in future contract negotiations.	Identified and documented the relevant state law pertaining to contract transparency and confidentiality. Determined whether Covered California’s policy and procedures regarding release of contracts are consistent with state laws. Selected five contracts that had been requested through the California Public Records Act to determine whether Covered California acted in accordance with federal and state laws and regulations and with its own policies regarding the release of information in these contracts. Tested these five contracts and found minor inconsistencies with state law that had no material effect on the information sought by requesters.	Fully implemented
2.	To provide as much public transparency as possible, Covered California’s board should formally adopt a policy to retain confidentiality only for contracts, contract amendments, and payment rates that are necessary to protect Covered California’s interests in future contract negotiations.	Identified and documented the relevant state law pertaining to contract transparency and confidentiality. Determined whether Covered California’s policy and procedures regarding release of contracts are consistent with state laws. Selected five contracts that had been requested through the California Public Records Act to determine whether Covered California acted in accordance with federal and state laws and regulations and with its own policies regarding the release of information in these contracts. Tested these five contracts and found minor inconsistencies with state law that had no material effect on the information sought by requesters.	Fully implemented
3.	To ensure the success of its outreach effort, Covered California should track the effect on enrollment figures of its planned outreach and marketing activities and of its assister program.	Identified and documented the relevant federal and state laws and regulations pertaining to marketing and outreach requirements under the Patient Protection and Affordable Care Act, and determined whether Covered California complied with these requirements. Determined whether Covered California documented its marketing campaign. Identified its goals and actions for accomplishing those goals. Determined whether Covered California had met its marketing goals during the two open enrollment cycles since its inception, and whether any 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. Interviewed relevant staff to determine how the outreach and sales division managed its 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.	Fully implemented
4.	To ensure financial sustainability, Covered California should conduct regular reviews of enrollment, costs, and revenue and make prompt adjustments to its financial sustainability plan as necessary.	Identified and documented the relevant federal and state laws and regulations pertaining to financial sustainability and determined whether Covered California complied with these requirements. Using Covered California’s Fiscal Year 2015–2016 Budget, documented the enrollment forecasting methodology and identified the factors, or assumptions, used in this methodology. Documented how annual budget forecasts have changed since the program began. 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.	Partially implemented

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.

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.

Footnote

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. Go back to text.