Report 2018-115 All Recommendation Responses

Report 2018-115: 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 (Release Date: April 2019)

Recommendation #1 To: Health Care Services, Department of

To help identify 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.

1-Year Agency Response

DHCS created an Annual Quality Improvement Survey Process Document describing the annual survey development, the procedures to send to the MCPs, the process to compile the results, and the steps to share the results via the Quality Improvement Toolkit and other forums as appropriate. The Process Document includes specific details on what questions require a response to ensure MCPs report annually on the results of projects they plan to continue or expand, and the steps DHCS takes if MCPs fail to respond to the required questions as directed.

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

6-Month Agency Response

DHCS continues to share promising practices through all avenues previously discussed, and continues to identify new ways to share promising practices. DHCS conducted the annual Quality Improvement Survey with the Managed Care Plans (MCP) and incorporated new questions into that survey, requiring the MCPs to provide information on their successful interventions and interventions that they are continuing to spread.

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

DHCS provided evidence demonstrating that it requested the health plans to report the results of those improvement projects they plan to continue or expand to other locations based on the health plans' 2018 activities. However, it did not provide evidence demonstrating that it requires health plans to annually report the results of those projects they plan to continue or expand to other locations.

60-Day Agency Response

DHCS currently compiles information from MCP's PDSA, 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, 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 Meeting.

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 best practices and issue a document summarizing them. DHCS will work with MCPs to identify appropriate best practices to be implemented in their respective geographic areas.

Finally, DHCS is including childhood immunizations as a measure under its Value Based Payment initiative that is being funded by Proposition 56 funds with the intent of driving improvement in reporting and utilization of this metric on a statewide basis.

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

Recommendation #2 To: Health Care Services, Department of

Using the annual reports of successful improvement projects health plans plan to continue or expand to other locations, 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.

1-Year Agency Response

DHCS shared the results of the annual Quality Improvement Survey with the plans through email, through the Quality Improvement Toolkit, and through a PowerPoint presentation at the October 2019 Medical Directors Meeting.

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

Using the annual report of survey results of successful improvement projects health plans plan to continue or expand to other locations, DHCS compiled a list of successful improvement projects to share with other health plans on an annual basis. DHCS shared the first annual list of successful projects in October 2019 and informed the health plans it would be updating and providing this list annually.

6-Month Agency Response

DHCS continues to share promising practices through all avenues previously discussed, and continues to identify new ways to share promising practices. DHCS conducted the annual Quality Improvement Survey as discussed, and DHCS will be compiling the results of the survey to share the information back with all Managed Care Plans (MCP) through a number of forums, including through the Quality Improvement Toolkit as well as through in person meetings. DHCS will continue to engage further with MCPs to share promising practices.

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

Recommendation #3 To: Health Care Services, Department of

To ensure that 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 regarding fraud and abuse programs.

6-Month Agency Response

The DHCS Medical Review Branch revisited the audit review protocols with audit managers to reaffirm the expectation that audit documentation reviews be performed thoroughly to ensure all planned audit program steps are executed as expected. With this update we are including requested substantiation.

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

DHCS provided evidence in its 60-Day response demonstrating that it had a meeting with all Medical Review Branch staff responsible for audits to discuss our audit findings and Yellow Book requirements for supervision. In addition, in its 6-Month response, DHCS provided evidence demonstrating that it reevaluated and revised its audit program for medical audits to ensure that staff follow the audit procedures regarding fraud and abuse programs. Thus, we agree that this recommendation is fully implemented.

60-Day Agency Response

DHCS' Medical Review Branch management revisited the audit review protocols with audit managers to reaffirm the expectation that audit documentation reviews be performed thoroughly to ensure all planned audit program steps are executed as expected.

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

DHCS did not provide evidence that it reevaluated its audit program for medical audits and revised it as necessary to ensure that staff follow the audit procedures regarding fraud and abuse programs. Until it does so, we will assess this recommendation as pending.

Recommendation #4 To: Health Care Services, Department of

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.

Annual Follow-Up Agency Response From December 2023

As stated in the previous response, DHCS conducts a comprehensive annual risk assessment of applicable MCP requirements, which includes conflict of interest requirements. For example, please see Exhibit 1-Audit Guide_Cat 1 (see Attachment 5 in Substantiation folder). Conflict of interest controls would be reviewed under 1.5-Delegation of Utilization Management. If the CSA reconciles with Exhibit 2-Appendix II Macro Guide (supplement to the Risk Assessment Audit Report), 1.5 is designated high-risk, and thus reviewed annually (see Attachment 6 in Substantiation folder).

Please reference Exhibit 3-Audit Guide_Cat 6 for another example (see Attachment 7 in Substantiation folder). Conflict of interest controls are also reviewed under 6.2. If the CSA reconciles with Exhibit 2, 6.2 is designated high risk and also reviewed annually.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

DHCS provided evidence to demonstrate that it conducted a risk assessment and it includes a comprehensive evaluation of which contract areas—including conflicts of interest—it should focus on in its annual medical audits.

Annual Follow-Up Agency Response From October 2021

DHCS has completed its formal risk assessment that incorporates managed care plans' conflict of interest controls review. This was fully implemented in January 2021.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

DHCS conducted a risk assessment that includes a comprehensive evaluation of which contract areas—including conflicts of interest—it should focus on in its annual medical audits. However, it did not provide evidence demonstrating that it plans to periodically conduct such comprehensive risk assessments in the future. Until it does so, we will continue to report the status of this recommendation as not fully implemented.

Annual Follow-Up Agency Response From November 2020

DHCS is well underway in completing a risk assessment and comprehensive evaluation of contract areas pertaining to the annual medical audits. Related activities began in April 2020 and we continue to work towards finalizing the comprehensive review by January 1, 2021.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

1-Year Agency Response

DHCS added additional audit steps for the review of plan policies regarding conflict of interest. DHCS is currently in the process of revisiting contractual requirements and evaluating our plan monitoring procedures and audit tools to identify additional areas of high risk.

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

Although DHCS added two additional audit steps to review plan policies related to conflicts of interest, it has not yet conducted a risk assessment that includes a comprehensive evaluation of which contract areas it should focus on in its annual medical audits.

6-Month Agency Response

The DHCS Medical Review Branch has held internal meetings to discuss modifications to its audit program. The addition of audit tools to review steps taken by the plan to avoid conflict of interest was part of these discussions.

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

60-Day Agency Response

The DHCS Medical Review Branch has held internal meetings to discuss modifications to its audit program. The addition of audit tools to review steps taken by the plan to avoid conflict of interest was part of these discussions.

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

Recommendation #5 To: Health Care Services, Department of

Going forward, DHCS should conduct a comprehensive risk assessment and ensure that it reviews health plans' conflict-of-interest controls at least once every three years.

Annual Follow-Up Agency Response From December 2023

DHCS has implemented this recommendation. DHCS performs an annual risk assessment which includes conflict of interest areas of review. DHCS currently reviews health plans' conflict of interest at least once every three years. See Attachment 8 in the Substantiation folder for the 2023 Medical Risk Assessment Report as well as Exhibits mentioned above for reconciliation.

California State Auditor's Assessment of Annual Follow-Up Status: Fully Implemented

DHCS provided evidence that it conducted a comprehensive risk assessment, including a review of health plans' conflict-of-interest controls, in calendar years 2021 and 2022.

Annual Follow-Up Agency Response From October 2021

DHCS has completed its formal risk assessment which includes conflict of interest areas of review. DHCS currently reviews health plans' conflict of interest controls at least once every three years.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Although DHCS conducted a comprehensive risk assessment, it did not provide evidence demonstrating that it ensures that it reviews health plans' conflict-of-interest controls at least once every three years. Until it does so, we will continue to report this recommendation as not fully implemented.

Annual Follow-Up Agency Response From November 2020

DHCS is well underway in completing a risk assessment and comprehensive evaluation of contract areas. Related activities began in April 2020 and we continue to work towards finalizing the comprehensive review by January 1, 2021. As of July 8, 2020, DHCS will review health plans' conflict-of-interest controls at least once every three years.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

1-Year Agency Response

A review of health plans' conflict-of-interest controls is included in the annual audit program and will be reviewed at least once every three years. DHCS is in the process of performing a comprehensive risk assessment to ensure the audit program and annual audit scopes address global areas of potential risks including conflict-of-interest.

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

DHCS has not conducted a comprehensive risk assessment as we recommended and it has not provided evidence to demonstrate that it will review health plans' conflict-of-interest controls at least once every three years. Until it takes the necessary actions to implement our recommendation, we will assess this as pending.

6-Month Agency Response

DHCS conducts monthly meetings to discuss annual medical audit strategies. As a component of this process, DHCS maintains an "Audit Tool Updates" spreadsheet to determine each plan's associated risks. DHCS also performs a reassessment of risk associated with each respective health plan during its audit planning phase for annual medical audits.

DHCS will also perform a comprehensive risk assessment for health plans as a whole at least once every three years as recommended to ensure the audit program and annual audit scopes address global areas of potential risks, including conflict of interest.

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

Recommendation #6 To: Health Care Services, Department of

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.

Annual Follow-Up Agency Response From December 2023

DHCS fully implemented the data collection of administrative costs and review for reasonability as part of the normal rate setting process. Plans are required to complete the Rate Development Template (RDT) - including Schedule 6b - and to certify all information provided is accurate and appropriate for the Medi-Cal program and to certify the plan has reviewed and followed RDT instructions. The RDT instructions and sample Schedule 6b are attached (Attachment 9 in the Substantiation folder).

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

Although DHCS developed a rate setting template that allows health plans to report their administrative expenses, it did not provide any evidence demonstrating that it issued binding guidance to health plans that specifically defines what constitutes reasonable and necessary administrative expenses. As a result, we will assess the status of this recommendation as will not implement.

Annual Follow-Up Agency Response From October 2021

The Calendar Year 2020 Rate Development Template (RDT), which will inform rate setting for Calendar Year 2023, was disseminated to Medi-Cal managed care plans on July 14, 2021. The RDT contains a reporting schedule that instructs plans on the expense type detail level at which to report administrative expense data for use in rate development. For an example of this schedule see the attachment "CY2020 RDT Schedule 6b.pdf." An earlier version of this reporting schedule existed in prior iterations of the RDT, and DHCS and its contracted actuary, Mercer, will continue to refine the schedule in future iterations.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Although DHCS developed a rate setting template that allows health plans to report their administrative expenses, it did not provide any evidence demonstrating that it issued binding guidance to health plans that specifically defines what constitutes reasonable and necessary administrative expenses. Until it takes the necessary actions to implement our recommendation, we will continue to report this recommendation as not fully implemented.

Annual Follow-Up Agency Response From November 2020

Work efforts were interrupted due to the COVID-19 pandemic and related reprioritization of workload. As such, DHCS was unable to formalize and issue clarifying guidance to plans on the types of administrative costs able to be reported for purposes of rate development during the rate development cycle beginning in June 2020. The issuance of the appropriate guidance will be pushed out one year to align with the next rate development cycle. The new implementation date is expected to be June 2021.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

1-Year Agency Response

Absent express approval—which has not been provided—DHCS is prohibited by federal law from directing a plan's administrative expenditures. DHCS fundamentally disagrees with the finding and recommendation, and viewing both as based on flawed interpretations of applicable federal law and a misunderstanding of DHCS' rate setting practices related to administration. DHCS sees potential value in issuing clarifying guidance to plans on the types of administrative costs able to be reported for purposes of rate development. DHCS plans to begin work on the clarifying guidance in mid-March of 2020, formal guidance specific to rate development is estimated to be issued early June 2020 to align with the next year's rate development collection timeline. After further internal discussion, we feel the timing of the updated guidance should align more closely with the rate development cycle.

DHCS' 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. 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' actuaries annually evaluate plan reported administrative costs to determine reasonable and appropriate levels of funding. The rate-setting control incentivizes administrative efficiency as plans' administrative costs are not reimbursed on a one-to-one basis. Federal actuaries also 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.

California State Auditor's Assessment of 1-Year Status: No Action Taken

6-Month Agency Response

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 finding and recommendation, and views them to be based on a flawed interpretation of applicable federal law and a misunderstanding of DHCS' rate setting practices related to administration. DHCS sees potential value in issuing clarifying guidance to plans on the types of administrative costs that may be reported for purposes of rate development, and will work to do so by March 2020.

DHCS' 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. 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. 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.

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

As we explain on page 47 of our report, 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 on page 25, 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 on page 26, 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. In addition, 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

on page 26, 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, we will continue to report the status of this recommendation as not fully implemented.

Recommendation #7 To: Health Care Services, Department of

DHCS 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.

Annual Follow-Up Agency Response From October 2021

DHCS agrees that employee bonus programs should be reasonable. However, DHCS is prohibited by federal law (Title 42, Code of Federal Regulations, Part 438.6(c)) from directing a plan's expenditures, including administrative expenditures such as employee bonuses, absent express approval which is not available in this context. Therefore, DHCS continues to disagree with this finding and recommendation.

As stated in the previous update, it would be ineffective to issue guidance on bonus programs without also issuing guidance on other methods of compensation (such as salaries). DHCS does not believe employee compensation is an appropriate topic of guidance from DHCS in this broad context, particularly since, 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.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

DHCS states it will not implement because it fundamentally disagrees with the finding and recommendation, and views it to be based on a flawed interpretation of applicable federal law and a misunderstanding of DHCS' rate setting practices related to administration. However, DHCS is incorrect and continues to misunderstand our recommendation. As we state on page 48 in our audit report, 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 on page 27 of our report, state and federal regulations require that bonus programs be reasonable, and DHCS performs no oversight of health plans' bonus programs. Therefore, we stand by our recommendation.

1-Year Agency 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 finding and recommendation, and views them to be based on a flawed interpretation of applicable federal law and a misunderstanding of DHCS' rate setting practices related to administration.

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.

California State Auditor's Assessment of 1-Year Status: Will Not Implement

DHCS states it will not implement because it fundamentally disagrees with the finding and recommendation, and views it to be based on a flawed interpretation of applicable federal law and a misunderstanding of DHCS' rate setting practices related to administration. However, DHCS is incorrect and continues to misunderstand our recommendation. As we state on page 48 in our audit report, 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 on page 27 of our report, state and federal regulations require that bonus programs be reasonable, and DHCS performs no oversight of health plans' bonus programs. Therefore, we stand by our recommendation.

6-Month Agency 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 finding 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 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.

California State Auditor's Assessment of 6-Month Status: Will Not Implement

As we state on page 48 of our report, 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 on page 27, 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 on pages 27 to 29, 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.

All Recommendations in 2018-115

Agency responses received are posted verbatim.