Report 2015-605 All Recommendation Responses

Report 2015-605: High Risk - Covered California: It Must Ensure Its Financial Sustainability Moving Forward, and Its Use of Sole-Source Contracts Needs Improvement (Release Date: February 2016)

Recommendation #1 To: Covered California

Covered California should continue to monitor its plan for financial sustainability and revise the plan accordingly as factors change. Further, it should complete a formal analysis of the adequacy of its reserve level by December 31, 2016, and update this analysis as needed, so that it is prepared if it does not meet its revenue projections and needs to increase its funding or decrease its expenditures to maintain financial solvency. This formal analysis should identify those contracts it could quickly eliminate, among other actions it would take, in the event of a shortfall in revenues.

Agency Response*

Covered California prepared the 'Reserve Adequacy Study' that was due by December 31, 2016. This analysis built upon an earlier analysis completed in May 2016 which concluded that Covered California's reserve strategy will allow it to withstand a significant decrease in enrollment when complemented with corrective actions. This final analysis determined that Covered California should implement a reserve strategy that maintains reserves of 9-12 months, in the near term, in order to maintain solvency following potential drops in enrollment.

  • Response Type†: 1-Year
  • Completion Date: December 2016
  • Response Date: February 2017

California State Auditor's Assessment of Status: Partially Implemented

Although Covered California provided us with an analysis related to the adequacy of its reserve level, it could not produce the underlying documentation that supports this analysis. Instead, staff explained that the analysis is a basic plan for what costs it could cut in the event of decreased enrollment and that it had not identified any specific contracts that would be subject to cuts. However, as indicated by our recommendation, we believe its identification of these contracts is critical. Although Covered California could increase revenues by increasing its charges for health plan premiums, it would not experience the financial impact of such an increase for nine to 18 months according to its proposed 2017-18 budget. Without a formal analysis of its planned actions to reduce expenditures, including identifying specific contracts it would eliminate, Covered California may not be able to react quickly to a significant decrease in enrollment to maintain its solvency. As a result, we do not believe Covered California has taken sufficient corrective action to fully address our recommendation.


Agency Response*

Covered California conducted preliminary research (attached) in preparation for the 'Reserve Adequacy Study' that will be completed by December 31, 2016. This research identified potential corrective actions, including reductions in contract and personnel expenditures and increasing assessment rates, that could be taken if faced with a significant decrease in enrollment. This preliminary analysis indicates that such corrective actions enable Covered California to withstand a significant drop in enrollment.

  • Response Type†: 6-Month
  • Estimated Completion Date: 12/31/2016
  • Response Date: August 2016

California State Auditor's Assessment of Status: Partially Implemented

Covered California has taken steps in creating a formal analysis on the adequacy of its reserve levels.


Agency Response*

Covered California will continue to monitor its multi-year fiscal plan and make the changes necessary to achieve sustainability.

In addition, Covered California will perform a Reserve Adequacy Analysis, to be completed by December 31, 2016, with the following goals and approach:

a. Establish the reserve level necessary to allow Covered California to remain solvent until funding increases and/or expenditure decreases take effect, in the event that revenue falls short of expectations.

b. Determine and quantify the steps Covered California could take to mitigate the impact of reduced enrollment on its fiscal position. An analysis that will be completed by May 31, 2016, includes the following:

i. Identify contracts that can be cut or reduced, both legally and practically.

ii. Identify components of operating expenditures that are variable.

iii. Identify staffing strategies to reduce personal services expenditures.

iv. Evaluate revenue opportunities.

c. Establish a process for the analysis to be periodically updated, which would include an annual discussion with the Covered California Board.

d. State law and Covered California's multiyear fiscal plan will be reflected in the analysis.

  • Response Type†: 60-Day
  • Estimated Completion Date: 12/31/2016
  • Response Date: April 2016

California State Auditor's Assessment of Status: Pending


Recommendation #2 To: Covered California

Covered California should continue to regularly review its enrollment projections and update the projections as needed to help ensure its financial sustainability.

Agency Response*

Covered California reviews its enrollment projections on a quarterly basis and updates the projections, as needed, in order to help make the appropriate fiscal decisions to ensure its financial sustainability.

  • Response Type†: 60-Day
  • Completion Date: November 2015
  • Response Date: April 2016

California State Auditor's Assessment of Status: Fully Implemented


Recommendation #3 To: Covered California

To comply with state law, Covered California should ensure that its staff comply with the changes to its recently-adopted procurement manual that incorporate contracting policies and procedures that are substantially similar to the provisions contained in the State Contracting Manual.

Agency Response*

The Procurement and Contract Manual was adopted by the Covered California Board in January 2016. Additionally, a Program Contract Management Handbook was issued to all Covered California employees, program areas, and Program Contract Managers along with training for Program Contract Managers in March 2014. A recent refresher training was completed at the end of 2015. Supporting documents will be submitted via the California State Auditor's secure email system.

  • Response Type†: 60-Day
  • Completion Date: January 2016
  • Response Date: April 2016

California State Auditor's Assessment of Status: Fully Implemented


Recommendation #4 To: Covered California

Before executing any sole-source contracts, Covered California should adequately document the necessity for using a noncompetitive process in its written justifications and, in doing so, demonstrate valid reasons for not competitively bidding the services.

Agency Response*

The Non-Competitive Bid form (HBEX 029) was implemented in April 2015, which requires written justification for using the non-competitive bid process. In order to consider using a non-competitive bid process, Covered California must clearly demonstrate and fully justify why a competitive process is not being pursued. The justification must then be reviewed independently by the Executive Director and/or his designee. Supporting documents will be submitted via the California State Auditor's secure email system.

  • Response Type†: 60-Day
  • Completion Date: April 2015
  • Response Date: April 2016

California State Auditor's Assessment of Status: Fully Implemented

As part of our assessment of Covered California's implementation of this recommendation, we reviewed supporting documentation and determined that Covered California is following its new process implemented in April 2015.


Recommendation #5 To: Covered California

Covered California should improve its project management of contracts to ensure that it allows adequate time so it can use the competitive bidding process as appropriate.

Agency Response*

Covered California implemented a process in 2015, to notify and provide program staff advance notice of contracts, which are set to expire in the next six months. This notice allows staff sufficient time to consult with the contract management staff on the appropriate contracting method necessary to continue or procure the services needed. Additionally, a Program Contract Management Handbook was issued to all Covered California employees, program areas, and Program Contract Managers, along with training for Program Contract Managers in March 2014. A recent refresher training was completed at the end of 2015. Supporting documents will be submitted via the California State Auditor's secure email system.

  • Response Type†: 60-Day
  • Completion Date: December 2015
  • Response Date: April 2016

California State Auditor's Assessment of Status: Fully Implemented


Recommendation #6 To: Covered California

Covered California needs to develop a process by June 2016 to ensure that it accurately enters information regarding its contracts into its contract database.

Agency Response*

Covered California agrees it should implement a quality assurance (QA) process to ensure the contract database is accurate. The contract database is primarily an internal tool used by the Contracts Unit to track contracts in the review process and for reporting purposes. Covered California has developed a QA process to correct inaccurate information and ensure accurate information is entered into the database moving forward. Supporting documents will be submitted via the California State Auditor's secure email system.

  • Response Type†: 60-Day
  • Completion Date: January 2016
  • Response Date: April 2016

California State Auditor's Assessment of Status: Fully Implemented

As part of its 60-day response, Covered California provided us with a document titled "Contract Manager Desk Procedures -- Quality Assurance" that describes the process it will take to ensure information is accurately entered into the contracts database. If followed, this process will fully implement our recommendation.


Recommendation #7 To: Covered California

To ensure that CalHEERS does not face delays and cost overruns in the implementation of planned releases, Covered California should immediately contract with an independent party for IV&V services to highlight and address potential risks going forward.

Agency Response*

The IV&V contract was awarded to Infinity Consulting Group. The IV&V services commenced on July 1, 2016 and will continue for 12 months with an additional two (1) year optional extensions.

  • Response Type†: 6-Month
  • Completion Date: July 2016
  • Response Date: August 2016

California State Auditor's Assessment of Status: Fully Implemented


Agency Response*

The CalHEERS project released a Request for Offer in late March 2016, to procure Quality Assurance and IV&V services. The contract is expected to be in place for the start of the new Fiscal Year on July 1, 2016.

  • Response Type†: 60-Day
  • Estimated Completion Date: 7/1/2016
  • Response Date: April 2016

California State Auditor's Assessment of Status: Partially Implemented

Once the contract with an independent party for IV&V services is executed, we will report this recommendation as fully implemented.


All Recommendations in 2015-605

Response Type refers to the interval in which the auditee is providing the State Auditor with their status in implementing recommendations made in an audit report. Auditees must submit a response regarding their progress in implementing recommendations from our reports at three intervals from the release of the report: 60 days, six months, and one year or subsequent to one year.

*Agency responses received after June 2013 are posted verbatim.


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