Report 2018-115 Recommendation 7 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 #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.

Response Date: March 2020

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

6-Month Agency Response

Response Date: September 2019

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.