Report 2013-602 Summary - July 2013

New High Risk Entity: Covered California Appears Ready to Operate California's First Statewide Health Insurance Exchange, but Critical Work and Some Concerns Remain

HIGHLIGHTS

Our review of Covered California's implementation of portions of the federal Patient Protection and Affordable Care Act (Affordable Care Act) highlighted the following:

RESULTS IN BRIEF

Under the federal Patient Protection and Affordable Care Act (Affordable Care Act), the public entity known as Covered California is responsible for creating and operating a health insurance exchange (exchange) for the first time in California. The exchange is a competitive insurance marketplace in which individuals and small businesses will be able to purchase health insurance. According to the Affordable Care Act, the exchange must be ready by October 1, 2013, for consumers to enroll in qualified health plans (QHPs). Faced with this looming deadline, Covered California has made great strides in implementing key federal and state requirements pertaining to the exchange's establishment and operation. However, until Californians actually start enrolling in Covered California's QHPs, the future solvency of the exchange remains uncertain. Because of this potential financial challenge, we are adding Covered California's operations to our list of high-risk issues that the State faces.

Covered California's governance and oversight appear adequate. State law created an independent board to oversee Covered California, and the board has adopted several conflict-of-interest and financial disclosure policies in accordance with federal requirements. To ensure that it appropriately spends $910 million in federally awarded funds, Covered California has developed financial internal controls that an in-depth independent audit will need to analyze further, a task that Covered California is pursuing. In compliance with state law, Covered California has adopted a procurement policy that emphasizes competition, and staff appear to follow this policy when initiating contracts. In addition to establishing its own procurement policy, Covered California has unique authority to keep details of its individual contracts confidential. Despite this authority, it has publicly released many of its contracts, including their associated dollar amounts. Covered California recently developed a draft contract transparency policy that essentially directs staff to follow the Public Records Act—except for QHP contracts and bids—when determining whether to release contracts publicly. However, the policy has not yet been formally adopted by the board.

Covered California is responsible for developing processes for certifying QHPs to ensure that these plans meet, and continue to meet, federal and state requirements. Covered California established a multistep QHP certification process and selected 13 issuers that will offer QHPs through the exchange starting in fall 2013. As it moves forward, Covered California must implement QHP monitoring, recertification, and decertification processes to comply with federal law.

The State's success in implementing the Affordable Care Act will largely depend on the effectiveness of the enrollment processes that Covered California puts in place. To this end, Covered California has worked diligently with the California Department of Health Care Services (Health Care Services), the Managed Risk Medical Insurance Board (insurance board), and other stakeholders to streamline eligibility and enrollment as well as to promote and support enrollment. Specifically, Covered California has collaborated with Health Care Services and the insurance board to develop the California Healthcare Eligibility, Enrollment, and Retention System (CalHEERS), which aims to streamline how individuals and businesses in California will obtain health coverage. Currently, CalHEERS is in the development and testing phase but, as noted above, it must be operational no later than October 1, 2013. In addition to obtaining project management services from the California Health and Human Services Agency's Office of Systems Integration, Covered California is using an independent consultant to review the work of its systems developer. If the CalHEERS project experiences delays or other difficulties, Covered California has created contingency plans. In addition, Covered California's plans to operate service centers in Contra Costa, Fresno, and Sacramento counties seem to meet consumers' needs for assistance; however, it is facing hiring challenges that could delay implementation of these centers.

A successful outreach, marketing, and education effort is also critical to Covered California's success. Recognizing this, Covered California has allocated a significant amount of its federal funds for these activities. In fiscal year 2012-13, Covered California's budget for marketing and outreach was $89 million, representing about 24 percent of its total budget, and the entity estimates that it will spend $106 million, or 28 percent, of its overall budget in fiscal year 2013-14 for these same efforts. In concert with Health Care Services and the insurance board, Covered California established a comprehensive marketing plan that outlines the goals, objectives, and strategies of the statewide marketing, outreach, and education program. Although the effects of Covered California's outreach activities will not be realized until after enrollment begins in October 2013 and continues in subsequent enrollment periods, its outreach plans appear to be more than adequate.

After January 2015, when the federal government will award no additional Affordable Care Act grants, Covered California anticipates that revenues from the participation fees assessed on QHPs offered through the exchange will pay for its operations. Recognizing that its financial condition is dependent on enrollment in the QHPs offered through the exchange, Covered California appears to have engaged in a deliberate and thoughtful financial planning effort to anticipate the contingencies it may face. Despite these efforts, future enrollment is unpredictable and is based on market factors outside of Covered California's control. Hence, financial sustainability will be an area of risk that will need to be monitored.

RECOMMENDATIONS

To provide as much public transparency as possible, Covered California's board should formally adopt a policy to retain confidentiality only for contracts, contract amendments, and payment rates that are necessary to protect Covered California's interests in future contract negotiations.

To comply with federal requirements, Covered California should develop a plan and procedures for monitoring, recertification, and decertification of qualified health plans.

To ensure financial sustainability, Covered California should conduct regular reviews of enrollment, costs, and revenue in order and make prompt adjustments to its financial sustainability plan as necessary.

AGENCY COMMENTS

Covered California concurred with the findings of our report and agreed to implement our recommendations.