Report 2022-112 All Recommendation Responses

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

Recommendation #1 To: CalOptima Health

To ensure that it uses its existing surplus funds for the benefit of its members and to comply with county ordinance, by June 2024 CalOptima should create and implement a detailed plan to spend its surplus funds for expanding access, improving benefits, or augmenting provider reimbursement, or for a combination of these purposes. This plan should be reviewed by its board and approved in a public board meeting.

6-Month Agency Response

As will be mentioned in response #2, CalOptima Health's (COH) Board of Directors (Board) approved revisions to its Board-Designated Reserve Funds Policy on September 7, 2023. See response #2 for details.

As required by the Board-approved policy, reserve spending decisions are being incorporated into COH's current and future annual budgets, as permitted by CSA's comment #4 on COH's response to the audit report. Additionally, management will continue to give the Board and its Finance & Audit Committee (FAC) updates on net asset levels, reserve funds, and the status of Board-approved initiatives on an ongoing basis to provide decision support as needs arise on current and future initiatives. In addition to CEO updates at regular Board meetings, other recent examples of the Board's review of reserves include:

- At the May 22, 2023, FAC meeting and June 1, 2023, Board meeting, management presented a net asset analysis providing information on reserve levels as of December 31, 2022, resources committed by the Board, a comparison of reserve levels to other California health plans, and a reserve analysis (Attachment A1).

- At the September 7, 2023, Board meeting, the CFO presented a reserve levels update, including additional Board-requested information and a reserve level landscape (Attachment A2).

- At its September 21, 2023, meeting, the FAC received a net asset analysis providing information on reserves levels as of June 30, 2023, resources committed by the Board, and a reserve level landscape (Attachment A3). The CFO will provide this report to the FAC on a quarterly basis.

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

CalOptima has not demonstrated that it is taking action to spend its existing surplus for the benefit of its members. Instead, it's response indicates that it is maintaining the status quo. The reserve analysis CalOptima refers to demonstrates that it continues to hold hundreds of millions of dollars of unallocated funds in excess of its designated reserve. Similarly, CalOptima's comparison of health plan reserve levels demonstrates that the same condition described in our report persists: CalOptima has a high level of funds compared to other plans, and its level of funds exceeds the level established in its reserve policy. As our assessment of CalOptima's response to Recommendation #2 describes, CalOptima has altered its internal reserve policy. However, that reserve policy still states that it is CalOptima's goal to maintain a board designated reserve of no more than two months' consolidated capitation revenues, and according to Orange County Ordinance 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. Thus, CalOptima is not in compliance with the ordinance because it has not yet used the funds in excess of its board designated reserve for one or more of these purposes.

60-Day Agency Response

CalOptima Health senior leadership will continue to report to the Finance and Audit Committee and the Board of Directors on the status of reserves and expenditures, including a written report in the publicly available Board materials. The Board will review levels of total assets and Board-designated reserve funds on an annual basis, at minimum, during the development of the strategic plan and 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. The Board will determine when a spending plan(s) for various initiatives are appropriate.

CalOptima Health has been drastically accelerating our efforts to improve access and quality of health care for the most vulnerable residents in Orange County. These efforts continued with the Board's approval to allocate $182 million in reserves at the June 1, 2023, CalOptima Health Board of Directors Meeting. The Board of Directors has and will continue to take separate actions to allocate available funds, and to do so wisely in a manner that best serves our members.

As communicated previously, 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: No Action Taken

The practices that CalOptima states it will continue to engage in resulted in it accumulating hundreds of millions of dollars of surplus funds. We stand by our recommendation that CalOptima should comply with the county ordinance to spend funds in excess of its established reserve for the benefit of its members, and believe that it would be prudent to create and implement a plan to spend those surplus funds. CalOptima states that it believes that it is not fiscally prudent to spend the unallocated funds in excess of its established reserve requirement. If this is true, we encourage CalOptima to revise the reserve requirement to a level that it considers prudent. We will assess CalOptima's progress toward implementing this recommendation when it provides its next update.

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.

Recommendation #3 To: CalOptima Health

To ensure that it can determine whether funds allocated to initiatives intended to improve the health of CalOptima members experiencing homelessness are accomplishing their intended purpose, by June 2023 CalOptima should develop a policy that requires it to do the following when spending those funds or allocating funds for that purpose in the future:
- Establish one or more goals for the use of the funds.
- Establish one or more metrics signifying the successful accomplishment of its goals.
- Measure progress toward the established metric and provide the board with periodic updates on the effectiveness of its use of funds based on those measurements.

60-Day Agency Response

CalOptima Health developed policy AA.1400: Grant Management (Attachment A1). This policy outlines the criteria and expectations to ensure consistency and accountability in managing discretionary Grant funding disbursed by CalOptima Health. CalOptima Health's Board of Directors approved the implementation of this policy on May 4, 2023.

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

The policy CalOptima established incorporates the concepts described in our recommendation; thus we assess this recommendation as fully implemented.

Recommendation #4 To: CalOptima Health

To ensure that members of CalOptima's board do not violate state law by entering into employment contracts made by the board on which they serve, by June 2023 CalOptima should amend its bylaws to prohibit all CalOptima board members from being employed by CalOptima for a period of one year after their term on the board ends.

6-Month Agency Response

Government Code Section 1090 already prohibits Board members from being financially interested in any contract made by them, such as entering into a CEO contract. CalOptima Health's Bylaws reiterate that prohibition, as of April 6, 2023, (Attachment A1) which addresses the specific past example raised in the audit report. However, no other agency is required to subject its Board members to a blanket employment prohibition for any position that is not appointed by the Board itself.

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

CalOptima has merely reiterated the legal requirements that already apply to it, and that its board previously disregarded when a former board member engaged in the apparent conflict of interest we described in our report. CalOptima's past actions demonstrate that the existing safeguards in its bylaws are insufficient. Thus, we stand by our recommendation that CalOptima should implement stronger safeguards by expanding the prohibition on its board members being employed by CalOptima to apply to all board members, instead of only those who are also members of the Board of Supervisors.

60-Day Agency Response

CalOptima Health's By Laws reference and restrict Board Members' employment with the Agency pursuant to Section 14087.59 W&I and Section 1090 of the Government Code. Neither statutory provision includes a blanket restriction of employment with CalOptima Health for one year for all Board Members.

California State Auditor's Assessment of 60-Day Status: Will Not Implement

CalOptima's response does not address the facts described in the report. Government Code section 1090 generally prohibits state and local officers or employees from being financially interested in any contract made by them in their official capacity or by any boards of which they are members. Nevertheless, a former CalOptima Board member entered into a contract with CalOptima, that appears to have violated state law, to serve as its interim CEO. The prohibition in CalOptima's bylaws related to former board members serving as employees would not have applied to this board member, and enacting a blanket restriction on employment with CalOptima Health for one year for all Board Members could help prevent such situations from occurring in the future. Thus, CalOptima's decision not to implement this recommendation puts it at risk of actual and perceived impropriety. As we describe in the report, CalOptima's decision to hire a member of its board created an appearance that it acted in the interest of that individual, rather than in the interests of those CalOptima serves. Thus, we stand by this recommendation and strongly encourage CalOptima to reconsider its decision not to implement this recommendation.

Recommendation #5 To: CalOptima Health

To better protect itself from criticism about the objectivity, appropriateness, and transparency of its hiring practices and to help ensure that CalOptima attracts and selects the most qualified candidates, by June 2023 CalOptima's board should adopt a policy that governs its hiring processes for all positions, including executive positions. Such a policy should incorporate best practices, including the minimum length of time that CalOptima will advertise job openings, the minimum number of qualified candidates CalOptima will interview for each position, and a requirement that it will use the same interview method for each candidate for a position. These steps should be documented for each recruitment.

60-Day Agency Response

CalOptima Health developed policy GA.8060: Recruitment, Selection, and Hiring (Attachment A1). This policy incorporates best practices, including the minimum length of time that CalOptima Health will advertise job openings, the minimum number of qualified candidates CalOptima Health will interview for each position, and a requirement that it will use the same interview method for each candidate for a position. CalOptima Health's Board of Directors approved the implementation of this policy on May 4, 2023.

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

CalOptima adopted a policy that incorporates the best practices described in our recommendation, and documented that it followed those practices for a recent recruitment. On that basis, we are assessing this recommendation as fully implemented.

However, we do note that CalOptima's policy allows exceptions from these best practices in certain circumstances, such as when the board hires a CEO and when the CEO determines that waiving the requirements is in the best interests of the agency. Because deviating from these best practices invites criticism and increases the risk that CalOptima does not attract and select the best candidates to serve Orange County residents, we strongly encourage CalOptima's board to monitor and limit deviations from this policy.

Recommendation #6 To: CalOptima Health

To reduce the risk that it does not appropriately evaluate allegations of fraud, waste, and abuse and report them to DHCS, by June 2023 the FWA unit should revise its written procedures to clearly specify the types of cases that should be addressed through investigations and the types that should be addressed through monitoring activities. In addition, it should establish written procedures for conducting monitoring activities.

60-Day Agency Response

CalOptima Health updated policy HH.1107: Fraud, Waste, and Abuse Investigation and Reporting (Attachment A1). This policy has been updated to clearly specify that all allegations of suspected FWA shall be preliminarily researched, and all allegations received shall be documented in a FWA tracking log within one (1) business day. Allegations for which sufficient information is initially provided or garnered through preliminary investigation will undergo a full investigation. CalOptima Health's Board of Directors approved the implementation of this policy on June 1, 2023.

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

The policy CalOptima references in its response and the procedures that correspond with the policy provide additional context and definitions for the phases of CalOptima's Fraud, Waste, and Abuse Investigation and Reporting process; and we assess this recommendation as fully implemented.

Recommendation #7 To: CalOptima Health

To help ensure the maintenance of an atmosphere free from fear of retaliation for reporting misconduct, by October 2023 and annually thereafter, CalOptima should conduct or contract for an anonymous survey of staff and contractors to determine whether they understand how to make such reports and feel comfortable doing so.

6-Month Agency Response

CalOptima Health updated policy HH.3012: Non-Retaliation for Reporting Violations (Attachment A5). This policy has been updated to include a requirement for conducting an annual survey for all staff. CalOptima Health's Board of Directors approved the implementation of this policy on September 7, 2023.

In addition to the updated policy, CalOptima Health submits the requested completion analysis for the 2023 Best Places to Work Survey launched in March 2023 (Attachment A6).

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

CalOptima has not addressed key aspects of our recommendation. First, CalOptima's policy requiring an annual survey applies only to employees and does not address contractors, who like employees can and must report misconduct under CalOptima's policies. Second, CalOptima's survey asked employees about their understanding of the mechanisms and requirements for reporting non-compliance, fraud, waste, abuse, or misconduct and the consequences of retaliation, but crucially it did not ask whether they feel comfortable reporting these concerns. Although CalOptima's actions represent an improvement, they do not address all aspects of our recommendation. Absent an evaluation of whether employees feel comfortable reporting these types of concerns, CalOptima lacks information about whether it has established and is maintaining an atmosphere free from fear of retaliation for reporting misconduct.

60-Day Agency Response

CalOptima Health launched a 2023 Best Places to Work Survey in March, 2023. An announcement was sent on March 15, 2023 to "All Email Users" stating that we would be participating in the 2023 Best Places to Work Survey from March 31, 2023 - April 21, 2023 (Attachment A1). This survey included questions developed by CalOptima Health's Compliance and Human Resources departments regarding retaliation (Attachment A2). In the weekly "Week Ahead" emails starting March 27th CalOptima Health's Human Resources sent an email to "All Email Users" encouraging employees to participate in the survey (Attachment A3). As of April 21st, CalOptima Health had a completion rate of 66% (Attachment A4). CalOptima Health will not know the final completion rate of the survey until late July.

CalOptima Health is in the process of updating CalOptima Health policy HH. 3012 Non-retaliation for Reporting Violations to include a requirement for conducting an annual survey for all staff. This policy remains on track for October 2023.

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

We look forward to reviewing the results of CalOptima's survey and its updated policy.

All Recommendations in 2022-112

Agency responses received are posted verbatim.