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Department of Health Care Services
Although Its Oversight of Managed Care Health Plans Is Generally Sufficient, It Needs to Ensure That Their Administrative Expenses Are Reasonable and Necessary

Report Number: 2018-115


The Department of Health Care Services (DHCS) is responsible for administering the California Medical Assistance Program, known as Medi‑Cal. Managed care is one method DHCS uses to provide Medi‑Cal benefits, and to do so, it contracts with Medi‑Cal managed care health plans (health plans) and pays them a monthly premium to provide quality health care services to Medi‑Cal beneficiaries. These contracts require health plans to meet quality of care standards specified in state regulations. When health plans fail to meet the quality of care standards, such as not providing required or timely medical treatments for diabetes and postpartum care, DHCS requires them to engage in an improvement process to correct deficiencies known as a quality corrective action plan (quality CAP). State regulations also generally require DHCS to ensure that a health plan’s overall administrative expenses do not exceed 15 percent of its revenue and are reasonable and necessary. For this audit, we reviewed DHCS’ oversight of the Health Plan of San Joaquin (San Joaquin) and a selection of other health plans as it relates to their quality of care and administrative expenses. This report draws the following conclusions:

DHCS' Processes to Oversee Health Plans’ Quality of Care Are Generally Sufficient

DHCS provides sufficient oversight to ensure that health plans meet state and federal quality of care requirements. DHCS properly placed four poorly performing health plans on quality CAPs between 2013 and 2017, ensured that the health plans’ actions addressed identified deficiencies, and adequately monitored each plan’s progress in implementing its CAP. For example, as part of its quality CAP process, DHCS conducts several monitoring activities—such as holding periodic meetings with health plans to gauge their progress in achieving specified goals—to ensure that health plans address quality of care deficiencies. Although two of the four health plans on quality CAPs successfully fulfilled the respective requirements, and the remaining two health plans did not, we found that DHCS took the appropriate steps—which included imposing financial sanctions—to address these health plans’ shortcomings. However, DHCS is missing an opportunity to identify successful actions taken by health plans to address deficiencies that it can share with all health plans. Specifically, DHCS requires health plans to conduct activities, known as performance improvement projects, as part of their quality CAPs to increase performance in areas in which they are deficient, but it does not follow up to identify successful projects or periodically share these projects with other health plans.

DHCS Does Not Ensure That Health Plans’ Administrative Expenses Are Reasonable and Necessary

Contrary to federal and state regulations, DHCS does not provide health plans with guidance on what types of administrative expenses are reasonable and necessary, and it limits its oversight of health plans’ administrative expenses to generally ensuring that they do not exceed the maximum of 15 percent of the Medi‑Cal funds health plans receive that state regulations typically allow. Our review determined that each of the health plans had questionable expenditures among their administrative expenses, such as events for their employees, that used Medi‑Cal funding. DHCS also does not oversee, or provide guidance on, health plans’ bonus programs to ensure that they are reasonable. Thus, without providing specific direction to the health plans, DHCS risks that health plans are making administrative expenditures that are not reasonable and necessary.

DHCS Properly Recouped Excess Funds From Health Plans

We also reviewed whether DHCS complied with federal requirements in recouping excess funds it paid to health plans during the first three years of expanded coverage resulting from the federal Patient Protection and Affordable Care Act. We determined that DHCS’ actions to recoup nearly $2.6 billion in Medi‑Cal overpayments to health plans complied with the federally approved methodology.

Summary of Recommendations

To help identify successful performance improvement projects, DHCS should identify best practices by December 2019 and follow up on whether health plans implement and expand successful projects.

DHCS should develop and issue 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 the health plans on what is a reasonable bonus program.

Agency Comments

DHCS largely agreed with our recommendations, but did not fully agree to implement our recommendation that it develop and issue guidance to the health plans on what constitutes reasonable and necessary administrative expenses, or that it issue guidance regarding what is a reasonable bonus program. Although we did not make any recommendations to the Santa Clara Family Health Plan, it chose to submit a response in which it disagreed with our conclusion that some of its administrative expenses were questionable.

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