Report 2022-112 Recommendation 2 Responses

Report 2022-112: CalOptima Health: It Has Accumulated Excessive Surplus Funds and Made Questionable Hiring Decisions (Release Date: May 2023)

Recommendation #2 To: CalOptima Health

To comply with county ordinance and to ensure that in the future it does not accumulate surplus funds in excess of its reserve policy, by June 2023 CalOptima should adopt a surplus funds policy or amend its policy for board-designated reserves to provide that if surplus funds accrue, CalOptima will use those funds to expand access, improve member benefits, or augment provider reimbursement, or for a combination of these purposes. The policy should require that the board review the amount of surplus funds each year when it receives CalOptima's audited financial statements and direct staff to create an annual spending plan subject to the board's approval to use those funds within the next 12 months.

6-Month Agency Response

On September 7, 2023, CalOptima Health's (COH) Board of Directors (Board) reviewed and determined the appropriate reserve levels as well as approved revisions to its Board-Designated Reserve Funds Policy (Attachment A1). These revisions clarified the Board's governance and oversight on total net assets as well as a review process of reserve levels, while keeping the range of Board-designated reserve funds unchanged at 1.4 months to 2.0 months of consolidated capitation revenues. The policy revisions included:

- Reaffirming the Board's discretion on the appropriate reserve level above the minimum threshold, accounting for current and future economic conditions;

- Clarifying that the minimum Board-designated reserve fund threshold does not constitute a mandate that the Board draw reserves down to that level; and

- Including a new provision stating the Board will review levels of total assets and reserve funds on an annual basis, at a minimum, including an assessment of resources to be used for the purposes identified in County ordinance.

Recently, there was a relevant example of the need to continually adjust to current and future economic conditions. For August 2023 monthly capitation, COH did not receive payment from the State until September 25, 2023, which was more than a two-week delay from the usual payment schedule.

California State Auditor's Assessment of 6-Month Status: Will Not Implement

CalOptima's actions do not address our recommendation or resolve its failure to comply with Orange County ordinance. In response to our audit CalOptima revised its Board Designated Reserve fund policy. In that revision CalOptima established that its reserve should be considered a minimum threshold and not a mandate to draw reserves down to this level. Notwithstanding this statement in its policy, Orange County ordinance requires CalOptima to implement a financial plan that includes the creation of a prudent reserve and that if additional surplus funds accrue CalOptima's financial plan should provide that additional funds should be used to expand access, improve benefits, or augment provider reimbursement, or for a combination of those purposes. CalOptima did not provide evidence that it has implemented a financial plan that establishes a board designated reserve in excess of two months of consolidated capitation revenues, a level that CalOptima staff indicated to us was sufficient and that appears to have been more than sufficient to absorb the example of an economic condition that CalOptima describes in its response--a two-week delay in state payments. Thus, we stand by our recommendation that CalOptima take steps to spend surplus funds in excess of its board designated reserve, in accordance with Orange County ordinance.

60-Day Agency Response

The CalOptima Health Board of Directors reviewed the current reserve policy at the June 1, 2023, Board of Directors meeting. In addition to the current reserve policy, the Board reviewed CalOptima Health's reserve position in comparison to other Medi-Cal managed care plans, reviewed scenarios for different minimum reserve levels and discussed pending DHCS financial performance guidance in the upcoming 2024 Medi-Cal contract. The Board directed staff to return with additional information on the status of the enacted State Budget and the federal debt ceiling negotiations, and DHCS's financial performance requirement. In light of this additional information, the Board will review and direct staff to formalize the current reserve process into policy at the September Board of Directors meeting.

Given sufficient reserves are needed to provide stability in healthcare delivery, the minimum threshold, pending Board of Directors' adoption, does not mandate that reserves be drawn down to this level. The Board shall have discretion on the appropriate reserve level, above the minimum threshold, taking into account current and future economic conditions.

The Board reviews levels of total assets and Board-designated reserve funds on an annual basis, at minimum, during the annual operating budget. During this review, the Board will assess resources to be used for the purposes of expanding access, improving benefits, and/or augmenting provider reimbursement. CalOptima Health must ensure tactical use of government funds to support our members and providers. It would not be fiscally prudent to spend all unallocated funds above the minimum reserve requirement within a defined period.

California State Auditor's Assessment of 60-Day Status: Pending

CalOptima's response indicates that it is assessing potential changes to its policies. However, if CalOptima believes that it is not fiscally prudent to spend the unallocated funds in excess of its established reserve requirement, we encourage it to revise the reserve requirement to a level it considers prudent.

All Recommendations in 2022-112

Agency responses received are posted verbatim.