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Department of Health Care Services
Elaine M. Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814
Dear Ms. Howle:
The California Department of Health Care Services (DHCS) hereby provides responses to the draft findings of the California State Auditor's (CSA) report entitled, Department of Health Care Services: It Oversees Medi-Cal Managed Care Health Plans' Quality of Care Sufficiently, but Does Not Ensure Plans' Administrative Costs Are Reasonable And Necessary. The CSA conducted this audit and issued five findings and four recommendations.
DHCS agrees with three recommendations and partially agrees with one recommendation, and has prepared corrective action plans to implement them. DHCS appreciates the work performed by CSA and the opportunity to respond to the findings. If you have any questions, please contact Ms. Nicole Jacot, External Audit Coordination Manager, at (916) 713-8812.
Sincerely,
Jennifer Kent
Director
Enclosure
cc: Ms. Mari Cantwell
Chief Deputy Director
Health Care Programs
State Medicaid Director
Email: Marianne.Cantwell@dhcs.ca.gov
1501 Capitol Avenue, MS 0000
P.O. Box 997413
Sacramento, CA 95899-7413
Ms. Nicole Jacot
External Audit Coordination Manager
Internal Audits
Email: Auditcor@dhcs.ca.gov
1500 Capitol Avenue, MS 2001
P.O. Box 997413
Sacramento, CA 95899-7413
Finding 1: Although DHCS appropriately monitors health plans’ implementation of their improvement projects for quality Corrective Action Plans (CAP), it is missing an opportunity to ensure that health plans formally adopt successful projects and to identify best practices that can be shared with other plans. Specifically, once an improvement project reaches its completion, the health plan can choose to adopt or abandon the project. If a health plan chooses to adopt the improvement project, it may do so at only the location where it was completed or it may expand the project to other locations. In instances in which the improvement projects are successful and the health plan indicates it will adopt, DHCS acknowledged that it does not formally follow up on whether the health plans do so.
Finding Agreement: Fully Agrees with Finding
Recommendation 1: To help identify best practices from successful improvement projects, by September 2019, DHCS should require health plans to annually report the results of those projects they plan to continue or expand to other locations. Using this information, by December 2019, DHCS should compile a list of successful improvement projects to share with other health plans on a periodic basis, but at least annually.
Recommendation
Agreement: Fully Agrees with Recommendation
Response: DHCS currently compiles information from Medi-Cal managed care health plan (MCP) Plan Do Study Act (PDSA) cycles, Performance Improvement Projects, and CAP submissions to track the types of interventions that MCPs are exploring. DHCS shares promising practices as well as lessons learned based on this information with MCPs through individual MCP technical assistance calls, Quality Collaborative Teleconferences attended by all MCPs, Quality Improvement Highlights that are sent to all MCPs, and a variety of in person meetings, including the quarterly Medical Directors Meetings.
DHCS also has developed a Quality Improvement Toolkit that allows MCPs to access many applicable resources in one location through an external SharePoint site.
DHCS will engage further with MCPs to share promising practices and issue a document summarizing those promising practices, including results of successful PDSA cycles that the MCPs plan to expand. DHCS will work with MCPs to identify appropriate promising or best practices to be implemented in their respective geographic areas.
In addition, DHCS will require MCPs to annually report the results of successful improvement projects they plan to continue or expand to other locations, including whether or not prior year efforts were adopted.
| Implementation Status: | ☐ | Fully Implemented:
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| ☒ | Not Fully Implemented:
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| ☐ | Will Not Implement |
Finding 2:
DHCS should improve its efforts to ensure health plans have adequate
processes in place to prevent or detect fraud. Federal regulations mandate
that DHCS’ contracts with managed care plans require the plans to implement
and maintain procedures that are designed to detect and prevent fraud,
waste, and abuse.
Although DHCS’ annual medical audits include steps for evaluating whether
health plans have a fraud and abuse program that includes processes to
detect and prevent fraud, they did not identify shortcomings in this area
for three of the nine audit reports reviewed.
Finding Agreement: Fully Agrees with Finding
Recommendation 2: To ensure DHCS consistently identifies health plans that do not have required processes to detect and prevent fraud, it should immediately reevaluate its audit program for medical audits and revise it as necessary to ensure that staff follow the audit procedures concerning fraud and abuse programs.
Recommendation
Agreement: Fully Agrees with Recommendation
Response: DHCS accepts this finding with respect to Kern. DHCS plans to perform an internal review of audit work papers to identify the extent of this issue. DHCS also plans to follow up with staff to identify gaps in internal controls surrounding our audit procedures.
Additionally, DHCS is reevaluating our medical audit review process and looking for ways to implement controls to ensure that staff follow annual medical audit procedures.
| Implementation Status: | ☐ | Fully Implemented:
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| ☒ | Not Fully Implemented:
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| ☐ | Will Not Implement |
Finding 3: DHCS does not verify the steps health plans take to identify and prevent conflicts of interest. DHCS’ contracts with the health plans we reviewed require them to adhere to specified state conflict of interest regulations and requirements, which include prohibiting health plans from contracting with certain individuals who have a substantial financial interest in the health plan. However, we found that DHCS does not determine through its annual medical audits whether health plans adhere to the state’s conflict of interest requirements. When DHCS fails to determine whether health plans are taking steps to identify and prevent conflicts of interest, it risks that health plans are not compliant with applicable requirements and lessens assurance in a plan’s ability to confirm that its staff is aware of the need to avoid contracting with providers who may have a financial interest in the plan.
Finding Agreement: Fully Agrees with Finding
Recommendation 3: By September 2019 and periodically thereafter, DHCS should conduct another risk assessment and ensure that it includes a comprehensive evaluation of which contract areas—including conflicts of interest—it should focus on in its annual medical audits. Going forward, it should conduct this type of comprehensive risk assessment and ensure that it reviews health plans’ conflicts of interest controls at least once every three years.
Recommendation
Agreement: Fully Agrees with Recommendation
Response: The scope of DHCS’ annual medical audits is risk based and, to date, conflict of interest controls and procedures have not been considered a high risk area. In light of the recommendation, DHCS plans to develop additional audit steps to review each plan’s conflict of interest process. Specifically DHCS will draft audit procedures to verify the steps taken by the plans to prevent conflict of interest and determine whether they adhere to the state’s requirements. DHCS will also look at the plan’s processes and controls.
DHCS’ annual audit scoping for each year’s medical audits includes a reassessment of each respective plan’s associated risks. The scope of the audit is then augmented, or modified, to include audit test work in the areas that warrant the most attention. DHCS will revisit our processes to evaluate risks during both the annual audit planning/scoping and the assessment of global risk categories to ensure our evaluation of risks are comprehensive.
| Implementation Status: | ☐ | Fully Implemented:
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| ☒ | Not Fully Implemented:
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| ☐ | Will Not Implement |
Finding 4: Federal and state regulations generally require that health plans’ administrative expenses be below 15 percent of their revenue, and be reasonable. State regulations also require administrative expenses to be necessary. DHCS is the oversight entity to ensure compliance with applicable provisions of state and federal Medi-Cal laws. However, DHCS does not do enough to ensure, as its contracts and regulations require, that health plans’ administrative expenses are reasonable and necessary. DHCS issues guidance to health plans regarding contract and legal requirements in All-Plan Letters; however, it has not issues such guidance as it relates to reasonable and necessary administrative expenses. Further, it has not specifically defined what constitutes reasonable and necessary administrative expenses under state regulations.
Finding Agreement: Partially Agrees with Finding
Finding 5: State and federal regulations both allow health plans to use Medi-Cal funding to pay employees reasonable bonuses. However, we found that the three health plans we reviewed take different approaches when determining executive and staff bonuses, resulting in amounts that vary widely from one plan to another. Likely contributing to these inconsistencies is that DHCS does not oversee health plans’ employee bonuses. Specifically DHCS does not provide guidance to health plans on the types of bonus programs that are reasonable. As state law designates DHCS as the oversight entity to ensure full compliance with both its Medi-Cal contracts and applicable provisions of state and federal law, DHCS is responsible for ensuring the health plans it contracts with and oversees have reasonable and necessary administrative costs, including bonuses.
Finding Agreement: Disagrees with Finding
Recommendation 4: DHCS should develop and issue an All-Plan letter or other binding guidance by March 2020 to the health plans that specifically defines what constitutes reasonable and necessary administrative expenses. Further, it should provide guidance to health plans on what is a reasonable bonus program. In doing so, DHCS should perform the necessary oversight to ensure health plans comply with this direction.
Recommendation
Agreement: Partially Agrees with Recommendation
Response: DHCS supports the prudent use of federal and state Medicaid resources. DHCS is prohibited by federal law from directing a plan’s administrative expenditures, absent express approval which is not available in this context. Therefore, DHCS fundamentally disagrees with the underlying assumptions of the findings and recommendation, and views them to be based on a flawed interpretation of applicable federal law and a misunderstanding of DHCS’s rate setting practices related to administration. DHCS sees potential value in issuing clarifying guidance to plans, as DHCS deems appropriate, on the types of administrative costs that may be reported for purposes of rate development.
Regarding reasonable and necessary costs, DHCS maintains that its oversight of plans is based in, and limited by, its contracts with plans and its role as the Medicaid Agency, which does not confer sweeping regulator-like authority to direct or limit how a plan spends capitation payments received from DHCS for administration. It is important to note that DHCS does not reimburse plans for their actual incurred administrative costs, and does not formulaically base a plan’s premiums on that plan’s reported administrative costs. Instead, when developing the administrative portion of a plan’s premiums, DHCS’s actuaries annually evaluate plan reported administrative costs to determine reasonable and appropriate levels of funding to include in the final premiums. This rate-setting control incentivizes administrative efficiency as plans’ administrative costs are not reimbursed on a one-to-one basis. In addition, federal actuaries annually review and approve the developed premiums, and this mechanism has been demonstrated to be successful as all plans are operating beneath the “reasonable and necessary” 15 percent administrative cost threshold outlined in DHCS-plan contracts and applicable federal and State Medicaid law.
DHCS disagrees with the recommendation to issue guidance specific to plan bonus programs. Due to the diversity of possible compensation arrangements, it would be ineffective to issue guidance on bonus programs without also issuing guidance on other methods of compensation (such as salaries). DHCS believes a single, one-size-fits-all policy regarding reasonable and necessary compensation and bonuses is inherently difficult, if not impossible, to fashion based on the significant differences in local markets faced by plans and structural differences across Medi-Cal plans, which include County Organized Health Systems, Local Initiative plans, and publicly traded commercial plans. Further, pursuant to federal law, DHCS would not have the authority to enforce this guidance. Transparency of CEO compensation and bonuses for locally-governed Medi-Cal plans is publicly available and allows for each board to make determinations for appropriate compensation in a way that balances stewardship of public dollars with ability to attract qualified executives.
| Implementation Status: | ☐ | Fully Implemented:
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| ☒ | Not Fully Implemented:
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| ☐ | Will Not Implement |
Comments
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM DEPARTMENT OF HEALTH CARE SERVICES
To provide clarity and perspective, we are commenting on DHCS’ response to the audit. The numbers below correspond to the numbers we have placed in the margin of DHCS’ response.
We disagree that our finding and recommendation is based on a flawed interpretation of federal law and that federal law prohibits DHCS from directing a plan’s administrative expenditures. As we describe here, federal regulations, as well as state law and DHCS’ contracts with the health plans, require administrative expenses to be reasonable. State regulations also require that they be necessary. Moreover, as we state here, as the oversight entity that contracts with health plans, DHCS is responsible for ensuring that the health plans comply with contractual and legal requirements for administrative expenses to be reasonable and necessary. Thus, we stand by our recommendation that DHCS develop and issue an All‑Plan letter or binding guidance to the health plans that specifically defines what constitutes reasonable and necessary administrative expenses, and perform the necessary oversight to ensure they comply with this direction.
DHCS misunderstands the basis of our finding. Specifically, our finding is not based on DHCS’ rate setting practices, including how it develops health plans’ premiums. Regardless of its rate setting practices, DHCS still has an obligation to ensure health plans’ administrative expenses are reasonable and necessary. As we state here, as the oversight entity that contracts with health plans, DHCS is responsible for ensuring that health plans comply with contractual and legal requirements that administrative expenses be reasonable and necessary. Thus, until it develops and issues guidance to the health plans on what constitutes reasonable and necessary administrative expenses, as we recommend here, DHCS risks that health plans will make questionable administrative expenditures.
We disagree that federal regulations, state law, or DHCS’ contracts with the health plans define “reasonable and necessary” administrative expenses as a 15 percent threshold, as DHCS indicates in its response. As we state here, health plans’ administrative expenses cannot exceed 15 percent of their revenue and must be reasonable and necessary. Moreover, there is nothing precluding DHCS from requiring stricter standards, such as lowering the threshold, with CMS approval. In fact, our recommendation intends to ensure that DHCS provides health plans with direction on what administrative expenses constitute reasonable and necessary, rather than relying on only the 15 percent threshold.
DHCS misunderstands our recommendation that it issue guidance to health plans regarding what constitutes a reasonable bonus program. We do not recommend that DHCS provide a one‑size‑fits‑all policy. As we describe here, state and federal regulations require that bonus programs be reasonable, and DHCS performs no oversight of health plans’ bonus programs. This lack of oversight, as we state here, likely contributed to two of the health plans taking different approaches when determining executive and staff bonuses, and the third health plan not having a bonus program, resulting in amounts that vary widely from one plan to another. Notably, one of the three health plans we reviewed awarded bonuses to its employees and executives when it was performing poorly and while on a quality CAP. In fact, this health plan decided in January 2019 to provide its chief executive officer with a bonus of more than $50,000 even though DHCS had imposed a monetary sanction of $135,000 on it in October 2018 for not meeting the quality CAP requirements. In this instance, the absence of DHCS guidance allowed a health plan to award its CEO a bonus even though the health plan, under her leadership, was failing to meet the quality of care standards for its beneficiaries. Therefore, we stand by our recommendation.
Santa Clara Family Health Plan
March 1, 2019
Ms. Elaine Howle, CPA
California State Auditor
621 Capital Mall, Suite 1200
Sacramento, CA 95814
Dear Ms. Howle:
We thank the California State Auditor for this opportunity to clarify certain comments regarding Santa Clara Family Health Plan (the Plan).
Funding Usage
The Plan receives funding from a variety of sources, including federal,
state and county government funds plus investment and rental income. The
Plan uses funding from all sources to pay its medical and administrative
expenses. The health plan uses its professional judgment and experience
prior to incurring administrative expenses, all of which were considered
reasonable, necessary and in compliance with current regulatory
requirements.
Annual Company Picnics
On an annual basis, the Plan sponsors an employee picnic. These are very
modest events with an average cost of under $30 per person. Attendance of
all employees is encouraged, no alcohol is allowed, and non-employees do
not attend. The purpose of these picnics is to enhance employee morale,
build teamwork and increase employee retention - all of which are necessary
to retain talented employees in the Silicon Valley area. We are unaware of
any state or federal regulations precluding holding employee picnics.
Team Incentive Program
The Plan maintains a program for all employees (other than the Plan’s CEO)
to earn a Team Incentive of up to 5% of base salary. To qualify for any
payment, the Plan must achieve a net operating surplus and achieve certain
annually-determined team incentive goals. The team incentive goals are a
subset of the Plan’s annual goals. The Governing Board reviews plan
performance at fiscal year-end and approves any team incentive payout.
CEO Incentive Bonus
As per the CEO’s employment agreement, the CEO is eligible for an annual
incentive bonus. The amount of the bonus is determined by the Plan’s
Governing Board based on the CEO’s job performance which is largely
contingent on attaining the Plan’s annual goals.
Sincerely,
Christine M. Tomcala
Chief Executive Officer
Comment
CALIFORNIA STATE AUDITOR’S COMMENT ON THE RESPONSE FROM SANTA CLARA FAMILY HEALTH PLAN
To provide clarity and perspective, we are commenting on Santa Clara Family Health Plan’s (Santa Clara) response to the audit. The number below corresponds to the number we have placed in the margin of Santa Clara’s response.
We disagree with Santa Clara that its administrative expenses were reasonable, necessary, and in compliance with regulatory requirements. As we state here, federal and state regulations generally require health plans’ administrative expenses to be reasonable, and state regulations also require administrative expenses to be necessary. Table 1 shows that we identified more than $22,000 in questionable administrative expenses that Santa Clara spent on employee picnics. As we state here, federal regulations specifically disallow spending federal funds for entertainment costs. Further, although Santa Clara correctly states that it has multiple funding sources, as we describe here, more than 90 percent of this funding is Medi‑Cal, with substantially all of the remainder consisting of other federal funds. Therefore, we stand by our conclusions.