Report 2015-605 Recommendation 1 Responses

Report 2015-605: High Risk - Covered California: It Must Ensure Its Financial Sustainability Moving Forward, and Its Use of Sole-Source Contracts Needs Improvement (Release Date: February 2016)

Recommendation #1 To: Covered California

Covered California should continue to monitor its plan for financial sustainability and revise the plan accordingly as factors change. Further, it should complete a formal analysis of the adequacy of its reserve level by December 31, 2016, and update this analysis as needed, so that it is prepared if it does not meet its revenue projections and needs to increase its funding or decrease its expenditures to maintain financial solvency. This formal analysis should identify those contracts it could quickly eliminate, among other actions it would take, in the event of a shortfall in revenues.

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: Fully Implemented

Based on statements made by its Financial Management Division, and our review of Covered California's fiscal year 2018-19 adopted budget, Covered California includes multi-year forecasting of enrollment, costs, and revenues in its annual budget process. This analysis is extensive and includes the most likely (base), high, and low enrollment scenarios. The base enrollment scenario demonstrates financial sustainability over a multi-year period, and calls for no reductions to expenditures at this time. Further, Covered California's analysis of its reserve level shows an ample reserve of roughly 11 months for fiscal year 2018-19. Although Covered California has not identified those contracts it could quickly eliminate, if enrollment were to turn out less than estimated, Covered California has explained that through its budget planning process it would include a multifaceted review of programmatic needs and consideration of revenue and expenditure options, including, but not limited to, contract reductions. For these reasons, we believe this recommendation is fully implemented.

1-Year Agency Response

Covered California prepared the 'Reserve Adequacy Study' that was due by December 31, 2016. This analysis built upon an earlier analysis completed in May 2016 which concluded that Covered California's reserve strategy will allow it to withstand a significant decrease in enrollment when complemented with corrective actions. This final analysis determined that Covered California should implement a reserve strategy that maintains reserves of 9-12 months, in the near term, in order to maintain solvency following potential drops in enrollment.

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

Although Covered California provided us with an analysis related to the adequacy of its reserve level, it could not produce the underlying documentation that supports this analysis. Instead, staff explained that the analysis is a basic plan for what costs it could cut in the event of decreased enrollment and that it had not identified any specific contracts that would be subject to cuts. However, as indicated by our recommendation, we believe its identification of these contracts is critical. Although Covered California could increase revenues by increasing its charges for health plan premiums, it would not experience the financial impact of such an increase for nine to 18 months according to its proposed 2017-18 budget. Without a formal analysis of its planned actions to reduce expenditures, including identifying specific contracts it would eliminate, Covered California may not be able to react quickly to a significant decrease in enrollment to maintain its solvency. As a result, we do not believe Covered California has taken sufficient corrective action to fully address our recommendation.

6-Month Agency Response

Covered California conducted preliminary research (attached) in preparation for the 'Reserve Adequacy Study' that will be completed by December 31, 2016. This research identified potential corrective actions, including reductions in contract and personnel expenditures and increasing assessment rates, that could be taken if faced with a significant decrease in enrollment. This preliminary analysis indicates that such corrective actions enable Covered California to withstand a significant drop in enrollment.

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

Covered California has taken steps in creating a formal analysis on the adequacy of its reserve levels.

60-Day Agency Response

Covered California will continue to monitor its multi-year fiscal plan and make the changes necessary to achieve sustainability.

In addition, Covered California will perform a Reserve Adequacy Analysis, to be completed by December 31, 2016, with the following goals and approach:

a. Establish the reserve level necessary to allow Covered California to remain solvent until funding increases and/or expenditure decreases take effect, in the event that revenue falls short of expectations.

b. Determine and quantify the steps Covered California could take to mitigate the impact of reduced enrollment on its fiscal position. An analysis that will be completed by May 31, 2016, includes the following:

i. Identify contracts that can be cut or reduced, both legally and practically.

ii. Identify components of operating expenditures that are variable.

iii. Identify staffing strategies to reduce personal services expenditures.

iv. Evaluate revenue opportunities.

c. Establish a process for the analysis to be periodically updated, which would include an annual discussion with the Covered California Board.

d. State law and Covered California's multiyear fiscal plan will be reflected in the analysis.

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

All Recommendations in 2015-605

Agency responses received are posted verbatim.