Report 2022-112 Recommendation 1 Responses

Report 2022-112: CalOptima Health: It Has Accumulated Excessive Surplus Funds and Made Questionable Hiring Decisions (Release Date: May 2023)

Recommendation #1 To: CalOptima Health

To ensure that it uses its existing surplus funds for the benefit of its members and to comply with county ordinance, by June 2024 CalOptima should create and implement a detailed plan to spend its surplus funds for expanding access, improving benefits, or augmenting provider reimbursement, or for a combination of these purposes. This plan should be reviewed by its board and approved in a public board meeting.

1-Year Agency Response

CalOptima Health is committed to efficiently and responsibly using revenues to serve our members by providing them access to quality care. In light of the projected deficit in the California State Budget, at its May 2, 2024, meeting, the CalOptima Health Board of Directors (Board) will consider approving modifications to Policy GA.3001: Board-Designated Reserve Funds to increase the reserve level from a range of 1.4 to 2.0 months of consolidated capitation revenues to a range of 2.0 to 3.0 months as well as add a separate Tangible Net Equity (TNE) reserve (Attachment A1). Following Board approval, CalOptima Health will implement the Policy updates in June 2024 by reserving additional unallocated resources to ensure CalOptima Health's long term financial stability.

At the same meeting, the Board will consider approving a multi-year plan to commit ~$526 million in existing unallocated resources to a wide range of Medi-Cal provider rate increases (Attachment A2). This commitment represents CalOptima Health's plan to use current surplus funds for the benefit of its members and to comply with county ordinance. As of March 31, 2024, total unallocated resources are ~$588 million. This commitment would represent 90% of that balance — nearly all unallocated resources with only a small contingency balance to address additional needs or new initiatives.

Then, at its June 6, 2024, meeting, the Board will review and consider approving the FY 2024-25 Operating Budget as CalOptima Health's annual spending plan, which will include the formal appropriation of the provider reimbursement augmentations.

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

CalOptima subsequently informed us that it followed through with the actions it identified in its May 2024 response. We verified that its board approved the fiscal year 2024-25 operating budget to allocate $210.5 million from its surplus funds for various provider rate increases. The board also committed up to $315.7 million of additional surplus funds for provider rate increases through December 2026.

6-Month Agency Response

As will be mentioned in response #2, CalOptima Health's (COH) Board of Directors (Board) approved revisions to its Board-Designated Reserve Funds Policy on September 7, 2023. See response #2 for details.

As required by the Board-approved policy, reserve spending decisions are being incorporated into COH's current and future annual budgets, as permitted by CSA's comment #4 on COH's response to the audit report. Additionally, management will continue to give the Board and its Finance & Audit Committee (FAC) updates on net asset levels, reserve funds, and the status of Board-approved initiatives on an ongoing basis to provide decision support as needs arise on current and future initiatives. In addition to CEO updates at regular Board meetings, other recent examples of the Board's review of reserves include:

- At the May 22, 2023, FAC meeting and June 1, 2023, Board meeting, management presented a net asset analysis providing information on reserve levels as of December 31, 2022, resources committed by the Board, a comparison of reserve levels to other California health plans, and a reserve analysis (Attachment A1).

- At the September 7, 2023, Board meeting, the CFO presented a reserve levels update, including additional Board-requested information and a reserve level landscape (Attachment A2).

- At its September 21, 2023, meeting, the FAC received a net asset analysis providing information on reserves levels as of June 30, 2023, resources committed by the Board, and a reserve level landscape (Attachment A3). The CFO will provide this report to the FAC on a quarterly basis.

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

CalOptima has not demonstrated that it is taking action to spend its existing surplus for the benefit of its members. Instead, it's response indicates that it is maintaining the status quo. The reserve analysis CalOptima refers to demonstrates that it continues to hold hundreds of millions of dollars of unallocated funds in excess of its designated reserve. Similarly, CalOptima's comparison of health plan reserve levels demonstrates that the same condition described in our report persists: CalOptima has a high level of funds compared to other plans, and its level of funds exceeds the level established in its reserve policy. As our assessment of CalOptima's response to Recommendation #2 describes, CalOptima has altered its internal reserve policy. However, that reserve policy still states that it is CalOptima's goal to maintain a board designated reserve of no more than two months' consolidated capitation revenues, and according to Orange County Ordinance CalOptima's financial plan should provide that additional funds should be used to expand access, improve benefits, or augment provider reimbursement, or for a combination of those purposes. Thus, CalOptima is not in compliance with the ordinance because it has not yet used the funds in excess of its board designated reserve for one or more of these purposes.

60-Day Agency Response

CalOptima Health senior leadership will continue to report to the Finance and Audit Committee and the Board of Directors on the status of reserves and expenditures, including a written report in the publicly available Board materials. The Board will review levels of total assets and Board-designated reserve funds on an annual basis, at minimum, during the development of the strategic plan and the annual operating budget.

During this review, the Board will assess resources to be used for the purposes of expanding access, improving benefits, and/or augmenting provider reimbursement. The Board will determine when a spending plan(s) for various initiatives are appropriate.

CalOptima Health has been drastically accelerating our efforts to improve access and quality of health care for the most vulnerable residents in Orange County. These efforts continued with the Board's approval to allocate $182 million in reserves at the June 1, 2023, CalOptima Health Board of Directors Meeting. The Board of Directors has and will continue to take separate actions to allocate available funds, and to do so wisely in a manner that best serves our members.

As communicated previously, CalOptima Health must ensure tactical use of government funds to support our members and providers. It would not be fiscally prudent to spend all unallocated funds above the minimum reserve requirement within a defined period.

California State Auditor's Assessment of 60-Day Status: No Action Taken

The practices that CalOptima states it will continue to engage in resulted in it accumulating hundreds of millions of dollars of surplus funds. We stand by our recommendation that CalOptima should comply with the county ordinance to spend funds in excess of its established reserve for the benefit of its members, and believe that it would be prudent to create and implement a plan to spend those surplus funds. CalOptima states that it believes that it is not fiscally prudent to spend the unallocated funds in excess of its established reserve requirement. If this is true, we encourage CalOptima to revise the reserve requirement to a level that it considers prudent. We will assess CalOptima's progress toward implementing this recommendation when it provides its next update.

All Recommendations in 2022-112

Agency responses received are posted verbatim.