Report 2013-602 Recommendation 4 Responses

Report 2013-602: New High Risk Entity: Covered California Appears Ready to Operate California's First Statewide Health Insurance Exchange, but Critical Work and Some Concerns Remain (Release Date: July 2013)

Recommendation #4 To: Covered California

This recommendation has been superseded by a recommendation from a subsequent report. See 2015-605 #1 and #2.

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.

Annual Follow-Up Agency Response From November 2018

Covered California has recently revisited the California State Auditor's February 2016 recommendation that it should monitor its plan for financial sustainability, update it as factors change, and identify contracts that could be eliminated in the event of a shortfall in revenues.

In addition to the annual review and approval of the budget and multi-year forecast by its Board, Covered California has increased its efforts to monitor its financial sustainability and position with monthly updates to its executive team; it has also begun providing its Board with periodic updates. The Fiscal Year 2018-19 budget and multi-year forecast, approved by the Board in June 2018 and which utilizes the Base enrollment scenario, demonstrates financial sustainability over a multi-year period.

Increased levels of review have been accompanied by changes in Covered California's fiscal landscape. The elimination of the individual mandate penalty becomes effective in 2019 and estimates of the impact on enrollment are lower than previously thought. In addition, primarily driven by increasing medical costs, premium growth rates have been higher than anticipated. As a result of the improved revenue outlook, while Covered California continues to carefully manage expenditures, the need to find solutions for revenue declines, that are oriented around identifying expenditure reductions, is not currently necessary.

Even utilizing the most pessimistic enrollment scenario for the Fiscal Year 2018-19 budget, Covered California maintains sustainability through the current fiscal year. A halt, or temporary delay, in its plan to gradually reduce assessment rates, provides additional opportunity to mitigate revenue declines.

California State Auditor's Assessment of Annual Follow-Up Status: See 2015-605 #1 and #2 for the most current assessment

Based on statements made by its Financial Management Division, and our review of its fiscal year 2018-19 adopted budget, Covered California appears to be including multi-year forecasting of enrollment, costs, and revenues in its annual budget process. This financial analysis includes most likely (or base), high, and low enrollment scenarios.


1-Year Agency Response

Covered California updated this 1-year response (originally submitted on July 11, 2014) as designated by the California State Auditor's instructions.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

Covered California provided enrollment data but refused to provide information on costs and revenue. Therefore, we could not conclude that Covered California has fully implemented our recommendation. Given that we designated Covered California as high-risk, we will follow up on the financial sustainability issue in our upcoming update of this high risk issue.


Annual Follow-Up Agency Response From October 2014

Covered California has updated the 1-year response (originally submitted on July 11, 2014) as designated by the California State Auditor's instructions. Covered California will continue with its plans on implementing the enrollment and forecasting model as well as updating the sustainability plan as necessary. Additional supporting documents will be available during March 2015, after the end of the upcoming open enrollment period which runs from November 15, 2014 to February 15, 2015. The results of the second open enrollment will provide a better indication of how far Covered California is progressing toward implementing its sustainability plan.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented


6-Month Agency Response

Covered California's Economic Analysis and Sustainability Assistant Director has defined an analytical approach for developing enrollment and revenue projections, which included defining data needs and identifying subject matter experts who can lend their expertise to the revenue forecasting process. In addition to monitoring enrollment data, the Director is also part of Covered California's Analytics Work Group—an interdisciplinary group focused on evaluating health plan enrollment data from a variety of standpoints throughout the organization. The Director also works closely with Covered California budget staff on many budget issues and has developed a sustainability model that can evaluate the long run impact of enrollment, per member per month assessment rates, and expenditure plans. This model will be used in Covered California's 2014-15 budget development and approval process during which the PMPM fee rates will be established for 2015. Plan enrollment through December 2013 was consistent with the uppermost enrollment trend anticipated, which begins to mitigate to some degree, the risks associated with financial sustainability.

In addition, the Board adopted Financial Guiding Principles to steer its financial management policies and take a flexible financial planning approach which allows both adaptation of operational approaches and cost adjustments to match service demands. This approach includes monthly budget reporting and planning meetings involving all organizational units, monthly reconciliations of expenditures, and regular independent audits. Board meetings will include annual budget presentations, quarterly expenditure reports, midyear budget adjustments as needed, and audit results.

California State Auditor's Assessment of 6-Month Status: Partially Implemented


60-Day Agency Response

Covered California established a position and in July 2013 hired an Assistant Director, Economic Analysis and Sustainability, within Financial Management devoted to developing fiscal models and research methodologies needed to ensure a sound basis for fiscal and financial sustainability. The Director will closely monitor, and develop projections of enrollment, premiums, and expenditures taking into account trends in the health insurance market, changes in Federal and/or State laws, and other regulations or policies impacting Exchange operations. This information will be used in Covered California's budget development and approval process during which changes to PMPM fee rates and program expenditures will be considered.

In addition, the Board adopted Financial Guiding Principles to steer its financial management policies and take a flexible financial planning approach which allows both adaptation of operational approaches and cost adjustments to match service demands. This approach includes monthly budget reporting and planning meetings involving all organizational units, monthly reconciliations of expenditures, and regular independent audits. Board meetings will include annual budget presentations, quarterly expenditure reports, and audit results.

California State Auditor's Assessment of 60-Day Status: Pending


All Recommendations in 2013-602

Agency responses received are posted verbatim.