Report 2011-104 Summary - December 2011

Medi-Cal Managed Care Program: The Departments of Managed Health Care and Health Care Services Could Improve Their Oversight of Local Initiatives Participating in the Medi-Cal Two-Plan Model


Our review of the State's California Medical Assistance Program (Medi-Cal) managed care two-plan model revealed:


The California Medical Assistance Program (Medi-Cal) is California's Medicaid program, which the Department of Health Care Services (Health Care Services) administers. In 1993 the State began the process of expanding the enrollment of its Medi-Cal population into managed care health plans, which the Legislature intended would reduce the cost of Medi-Cal care and provide beneficiaries with improved quality of services and access to care. One of the managed care models is the Medi-Cal two-plan model (two-plan model) in which both a county entity, known as a local initiative, and a commercial health plan provide services to Medi-Cal beneficiaries. As of October 2011, the 14 counties using the two-plan model, which includes the nine local initiatives, served 4.9 million Medi-Cal beneficiaries.

Health Care Services and the Department of Managed Health Care (Managed Health Care) share oversight responsibility for the local initiatives participating in the two-plan model. Under the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act), Managed Health Care monitors the financial viability of all managed care health plans, including the local initiatives, by reviewing financial reports submitted by the plans, as well as by other measures. Health Care Services contracts with the local initiatives to provide Medi-Cal managed care services and oversees compliance with Medi-Cal requirements. Health Care Services makes monthly payments to the local initiatives based on the number of enrolled beneficiaries.

However, both departments have inconsistencies in the financial reviews they conduct of local initiatives. Managed Health Care has been chronically late in completing its financial report reviews, missing its internal 30-day goal for completing 15 of the 16 reviews we tested and taking an average of more than 200 days to complete each of the 16 reviews, thus seriously lessening their value as an oversight tool. Because it did not track this information until May 2011, Managed Health Care had no way to easily determine which financial reports were still pending a review. After our inquiry, Managed Health Care developed a report that shows all financial reviews that are late.

Managed Health Care also failed to detect that two of the four local initiatives we reviewed incorrectly categorized administrative expenses as medical expenses. Specifically, Contra Costa Health Plan improperly categorized as medical expenses payments totaling $1 million to an external contractor for claims processing related to entities other than Medi-Cal beneficiaries. Kern Health Systems (Kern) also improperly categorized $5.3 million in claims processing costs as medical expenses rather than administrative expenses. Managed Health Care's failure to identify these errors in its financial reviews is troubling and suggests that it may be overlooking other errors as well.

For its part, Health Care Services has been inconsistent in performing financial reviews and has not always ensured that all financial requirements are reviewed. Our testing of its reviews of 16 quarterly financial reports from four local initiatives identified seven instances in which Health Care Services did not analyze all four financial soundness elements, such as working capital and administrative costs, that local initiatives are required to maintain under the Medi-Cal managed care contract. Health Care Services also has not reviewed financial reports within two weeks of receipt, as outlined in the internal policies of its fiscal monitoring unit.

Further, Health Care Services' efforts to review local initiatives' financial reports overlap the financial viability analysis that Managed Health Care performs on these reports. Health Care Services requires local initiatives to demonstrate fiscal soundness and to maintain adequate resources to carry out their contractual obligations to provide health services to Medi-Cal beneficiaries. The Knox-Keene Act also requires local initiatives to submit their financial reporting forms to Managed Health Care. However, Health Care Services could be more efficient if it obtained and relied on the financial trends and ratios of the consolidated financial statements that Managed Health Care automatically generates.

We also found that Managed Health Care does not have an effective process to monitor local initiatives' responses to corrective action plans that result from the financial examinations it performs. Our testing of 12 financial examinations occurring during fiscal years 2005-06 to 2009-10 revealed that Managed Health Care did not adequately follow up on six of the 19 corrective action plans arising from those examinations. Ineffective monitoring of corrective action plans may be due to Managed Health Care not fully using the features of the computer database it uses to communicate and exchange documents with the local initiatives. Its inadequate follow-up on local initiatives' compliance weakens Managed Health Care's ability to provide effective oversight of the local initiatives' financial viability.

In addition, both Managed Health Care and Health Care Services have failed to conduct medical audits of the health delivery system of each health plan, including the local initiatives, within the frequency required by law. Medical audits are intended to review the quality of health care services, the effectiveness of peer review, procedures for regulating utilization and assuring quality of care, and the overall performance in providing care and meeting the needs of beneficiaries.

Under the Knox-Keene Act, the main measure of a managed care health plan's financial viability is known as tangible net equity (TNE).1 Managed Health Care has adopted regulations that establish the required TNE minimum balance a health plan must maintain to demonstrate its financial viability. Further, Health Care Services has established a required TNE minimum in its Medi-Cal managed care contracts with local initiatives. However, no upper limit for TNE is established in law or in the contracts between health plans and Health Care Services. Therefore, neither oversight entity reviews the local initiatives' TNE actual balances that are greater than the required minimums or determines whether a local initiative has valid reasons for accumulating TNE actual balances that are above the minimum. Although each local initiative's required TNE minimum balance varied due to its business practices during a given fiscal year, all eight of the local initiatives reviewed for this report2 had TNE actual balances that exceeded their required minimum balances during fiscal years 2005-06 through 2009-10. For example, during fiscal year 2009-10, the TNE actual balances for the local initiatives ranged from 176 percent to 1,180 percent of the required minimums.

Five of the eight local initiatives have established formal policies setting a goal for the amount of TNE and/or specifying uses of those funds. The majority of local initiatives stated that the main reason for maintaining TNE beyond the required minimum is to ensure continuity of service to Medi-Cal beneficiaries and to maintain a strong provider network, especially during periods when state funding is delayed. Although the TNE actual amounts vary by local initiative, each local initiative appears to have valid reasons for the level it sets. In addition, over the past five fiscal years all of the local initiatives met or exceeded Health Care Services' minimum performance indicators, showing that they generally provide a satisfactory level of care to beneficiaries while maintaining their varying TNE actual balances.

Another area we tested was the nature of local initiatives' administrative expenses. State regulations require that administrative expenses be "reasonable and necessary." Also if, during any period, administrative costs exceed 15 percent of the total revenues received from providing services to beneficiaries, Managed Health Care may ask a local initiative to demonstrate that its administrative costs are not excessive. The four local initiatives we visited generally had adequate fiscal processes and internal controls to monitor their administrative expenses to ensure that they were reasonable and necessary, although weak policies at Kern allowed it to enter into two contracts for medical claims reviews that were not cost-effective. In one of these contracts, Kern paid a contractor nearly $8 million to investigate excessive charges estimated at $1 million related to a lawsuit. Our review also found that the local initiatives use similar methods to set and approve salaries, although the salaries and retirement benefits of their top executives vary significantly. The types of compensation chief executive officers received included bonuses, car allowances, and vacation cash-out options. In addition, the contracts for the local initiatives' chief executive officers include varying levels of severance packages, ranging from no payments if the chief executive officer voluntarily resigns to ones specifying that the chief executive officer will receive up to 18 months of additional compensation if terminated without cause.


To monitor local initiatives' financial viability and compliance with the Knox-Keene Act requirements, Managed Health Care should develop a formal policy to ensure that it reviews financial reports in a timely manner, and that administrative expenses are correctly categorized.

To ensure that all four financial soundness elements included in Health Care Services' contract are being reviewed, it should conduct financial reviews consistently and update its reviewing tool to include working capital. In addition, Health Care Services should develop a formal policy to ensure that it conducts financial reviews in a timely manner.

To make its financial viability reviews more efficient and reduce the risk of errors, Health Care Services should coordinate with Managed Health Care when analyzing local initiatives' consolidated financial reports.

To ensure that local initiatives implement corrective action plans, Managed Health Care should devise a more effective process to track, monitor, and review the status of local initiatives' corrective actions as they relate to financial examination requirements.

Health Care Services should ensure that it performs annual medical audits of local initiatives as required by law. Managed Health Care should ensure that it obtains timely medical audits from Health Care Services. If it is unable to obtain timely medical audits from Health Care Services, it should conduct them itself.


Managed Health Care agreed with our recommendations, but disagreed with our conclusion that it is chronically late completing reviews of local initiatives' financial reports. Health Care Services agreed with our conclusions and recommendations.

1 TNE is the value of net equity (excess of total assets over total liabilities as defined in regulation) reduced by the value assigned to intangible assets, including goodwill, organizational expense, and start-up costs.

2 One local initiative, CalViva Health, began accepting beneficiaries in March 2011 and is outside the scope of our review, which was fiscal years 2005-06 through 2009-10.