Report 2018-115 Recommendation 6 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 #6 To: Health Care Services, Department of

DHCS should develop and issue an All-Plan letter or other binding guidance by March 2020 to the health plans that specifically defines what constitutes reasonable and necessary administrative expenses.

Annual Follow-Up Agency Response From October 2021

The Calendar Year 2020 Rate Development Template (RDT), which will inform rate setting for Calendar Year 2023, was disseminated to Medi-Cal managed care plans on July 14, 2021. The RDT contains a reporting schedule that instructs plans on the expense type detail level at which to report administrative expense data for use in rate development. For an example of this schedule see the attachment "CY2020 RDT Schedule 6b.pdf." An earlier version of this reporting schedule existed in prior iterations of the RDT, and DHCS and its contracted actuary, Mercer, will continue to refine the schedule in future iterations.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Although DHCS developed a rate setting template that allows health plans to report their administrative expenses, it did not provide any evidence demonstrating that it issued binding guidance to health plans that specifically defines what constitutes reasonable and necessary administrative expenses. Until it takes the necessary actions to implement our recommendation, we will continue to report this recommendation as not fully implemented.

Annual Follow-Up Agency Response From November 2020

Work efforts were interrupted due to the COVID-19 pandemic and related reprioritization of workload. As such, DHCS was unable to formalize and issue clarifying guidance to plans on the types of administrative costs able to be reported for purposes of rate development during the rate development cycle beginning in June 2020. The issuance of the appropriate guidance will be pushed out one year to align with the next rate development cycle. The new implementation date is expected to be June 2021.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

1-Year Agency Response

Absent express approval—which has not been provided—DHCS is prohibited by federal law from directing a plan's administrative expenditures. DHCS fundamentally disagrees with the finding and recommendation, and viewing both as based on flawed interpretations of applicable federal law and a misunderstanding of DHCS' rate setting practices related to administration. DHCS sees potential value in issuing clarifying guidance to plans on the types of administrative costs able to be reported for purposes of rate development. DHCS plans to begin work on the clarifying guidance in mid-March of 2020, formal guidance specific to rate development is estimated to be issued early June 2020 to align with the next year's rate development collection timeline. After further internal discussion, we feel the timing of the updated guidance should align more closely with the rate development cycle.

DHCS' oversight of plans is based in, and limited by, its contracts with plans and its role as the Medicaid Agency, which does not confer sweeping regulator-like authority to direct or limit how a plan spends capitation payments received from DHCS for administration. DHCS does not reimburse plans for their actual incurred administrative costs, and does not formulaically base a plan's premiums on that plan's reported administrative costs. Instead, when developing the administrative portion of a plan's premiums, DHCS' actuaries annually evaluate plan reported administrative costs to determine reasonable and appropriate levels of funding. The rate-setting control incentivizes administrative efficiency as plans' administrative costs are not reimbursed on a one-to-one basis. Federal actuaries also annually review and approve the developed premiums, and this mechanism has been demonstrated to be successful as all plans are operating beneath the "reasonable and necessary" 15 percent administrative cost threshold outlined in DHCS-plan contracts and applicable federal and state Medicaid law.

California State Auditor's Assessment of 1-Year Status: No Action Taken

6-Month Agency Response

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 sees potential value in issuing clarifying guidance to plans on the types of administrative costs that may be reported for purposes of rate development, and will work to do so by March 2020.

DHCS' oversight of plans is based in, and limited by, its contracts with plans and its role as the Medicaid Agency, which does not confer sweeping regulator-like authority to direct or limit how a plan spends capitation payments received from DHCS for administration. DHCS does not reimburse plans for their actual incurred administrative costs, and does not formulaically base a plan's premiums on that plan's reported administrative costs. Instead, when developing the administrative portion of a plan's premiums, DHCS's actuaries annually evaluate plan reported administrative costs to determine reasonable and appropriate levels of funding. This rate-setting control incentivizes administrative efficiency as plans' administrative costs are not reimbursed on a one-to-one basis. In addition, federal actuaries annually review and approve the developed premiums, and this mechanism has been demonstrated to be successful as all plans are operating beneath the "reasonable and necessary" 15 percent administrative cost threshold outlined in DHCS-plan contracts and applicable federal and state Medicaid law.

California State Auditor's Assessment of 6-Month Status: Pending

As we explain on page 47 of our report, we disagree that our finding and recommendation is based on a flawed interpretation of federal law and that federal law prohibits DHCS from directing a plan's administrative expenditures. As we describe on page 25, federal regulations, as well as state law and

DHCS' contracts with the health plans, require administrative

expenses to be reasonable. State regulations also require that they be

necessary. Moreover, as we state on page 26, as the oversight entity

that contracts with health plans, DHCS is responsible for ensuring

that the health plans comply with contractual and legal requirements

for administrative expenses to be reasonable and necessary. Thus,

we stand by our recommendation that DHCS develop and issue an

All-Plan letter or binding guidance to the health plans that specifically

defines what constitutes reasonable and necessary administrative

expenses, and perform the necessary oversight to ensure they comply

with this direction. In addition, our finding is not based on DHCS' rate setting practices, including how it develops health plans' premiums. Regardless of its rate setting practices, DHCS still has an obligation to ensure health plans'

administrative expenses are reasonable and necessary. As we state

on page 26, as the oversight entity that contracts with health plans,

DHCS is responsible for ensuring that health plans comply with

contractual and legal requirements that administrative expenses

be reasonable and necessary. Thus, until it develops and issues

guidance to the health plans on what constitutes reasonable and

necessary administrative expenses, we will continue to report the status of this recommendation as not fully implemented.

All Recommendations in 2018-115

Agency responses received are posted verbatim.