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California State Auditor Report Number : 2015-605

High Risk—State of California
It Must Ensure Its Financial Sustainability Moving Forward, and Its Use of Sole-Source Contracts Needs Improvement


Results in Brief

Covered California has made progress in implementing key federal and state requirements that pertain to establishing a health insurance exchange (exchange), but certain concerns remain. In our July 2013 report New High Risk Entity: Covered California Appears Ready to Operate California’s First Statewide Health Insurance Exchange, but Critical Work and Some Concerns Remain, Report 2013-602, we noted that Covered California’s financial sustainability depends wholly on enrollment in qualified health plans (QHPs) offered through the exchange. We also pointed out that future enrollment is both unpredictable and based on market factors outside of Covered California’s control. Thus, we concluded that enrollment in the exchange and the financial sustainability of Covered California will need to be monitored. In this current audit we found that Covered California will exhaust available federal funds by September 2016 and, without any federal funds or the State’s General Fund to assist it in its operations, Covered California is required to be self supporting. As a result, it must continue to monitor its revenues from enrollment and its expenditures to ensure its future financial sustainability. For this reason, we believe Covered California should continue to be designated as a high risk state agency under the California State Auditor’s high risk program. In addition, we identified some issues regarding its sole-source contracting practices.

Although Covered California has developed a plan to help ensure its future financial viability, it needs to continue to monitor that plan and conduct a formal analysis of its reserve level. Covered California projects that in fiscal year 2017–18, it will have enough consumers enrolled in QHPs that its revenues will cover its operating expenditures. Until then, if Covered California does not meet its revenue goals, it can increase its plan assessments (the charge it assesses on QHPs), use its reserves, or cut expenditures as necessary to maintain its solvency. However, Covered California has yet to formally analyze whether its goal of maintaining a reserve of three to six months is sufficient. Although Covered California has done some work in this area, we believe that it could benefit from a formal analysis of its reserve level to ensure it maintains financial solvency if enrollment significantly decreases.

Covered California annually updates its enrollment projections. For its Fiscal Year 2015–2016 Budget (2015–16 budget), Covered California based enrollment projections primarily on prior year or other recent data as well as the California Simulation of Insurance Markets.1 However, as with all forecasts, some degree of uncertainty about future enrollment should be anticipated, and Covered California’s short operational history and its uncertainty about the adequacy of its reserves suggest that its financial sustainability remains an area of risk that needs to be closely monitored.

To help meet its enrollment goals, Covered California’s marketing division and its outreach and sales division use strategies that target the populations they need to reach. Under state law, Covered California is required to market and publicize the availability of health care coverage and federal subsidies through the exchange. To satisfy this requirement and to target key populations, the marketing division has adjusted its marketing strategy for each open enrollment period to reach consumers eligible for health insurance. The outreach and sales division generates reports from the California Healthcare Eligibility, Enrollment, and Retention System (CalHEERS), the computerized system that enables consumers to enroll in Covered California’s QHPs, among other functions. The outreach and sales division uses these reports to review the performance of certified enrollment representatives who inform consumers about and help them enroll in QHPs, and to identify new outreach opportunities to increase enrollment during future enrollment periods.

We also found that Covered California's contracting practices must be improved. State law requires Covered California to establish and use a competitive process to award contracts, and the law also gives it broad statutory authority to establish its own procurement and contracting policy. Covered California's board of directors (board) adopted a procurement policy in 2011 that provided Covered California the flexibility to use sole-source contracts when timeliness or unique expertise are required. However, we found that Covered California did not sufficiently justify nine of the 40 sole-source contracts and applicable amendments we reviewed from fiscal years 2012–13 through 2014–15, thereby not consistently following its board-adopted policy to do so. Further, we question the validity of an additional three justifications because, even though Covered California asserted either timeliness or unique expertise as the basis for using the noncompetitive procurement process in these cases, available documentation indicates that Covered California had sufficient time to use a competitive procurement process or that the vendor was not unique. Without competitively bidding such contracts, Covered California cannot be assured that the contractor it chooses is the most qualified or cost-effective.

Further, on June 24, 2015, state law was revised to implement a new requirement that Covered California adopt a contract manual that is substantially similar to the provisions in the State Contracting Manual. The State Contracting Manual permits the use of a noncompetitive process when there is an emergency requiring immediate acquisition for the protection of the public health, welfare, or safety, or when no known competition exists. Our review identified concerns with Covered California's board-adopted policy that was in place during our review which used generic terms such as timeliness and unique expertise as justification for using a noncompetitive process. These terms are overly broad and do not limit the use of sole-source contracts to the conditions under which such contracts are allowed by the State Contracting Manual. In our review of the November 2015 draft procurement manual, we determined that it included criteria allowing for sole-source contracts in circumstances that the State Contracting Manual does not authorize. After bringing this to the attention of Covered California, they made changes to the draft procurement manual to address our concerns, which the board formally adopted in January 2016.

Finally, over the first three full fiscal years of the project, fiscal years 2012–13 through 2014–15, Covered California, the California Department of Health Care Services, and the Centers for Medicare and Medicaid Services together spent about $493 million on CalHEERS, which interfaces, or communicates, with certain state, federal, and private entities. Although CalHEERS is functional, its rapid design, development, and implementation have resulted in some risks to system maintainability, and several changes to systems interfacing with CalHEERS will necessitate continual releases to update the system for several years. Covered California has contracted with consultants for independent oversight of the system, and they have identified various risks, such as risks to the system's maintainability—its ability to isolate and easily correct system issues to maximize the cost-effective productive life of the system—or delays to or partial release of change requests, which could increase project costs. However, the contract with one of these key oversight consultants recently expired and according to the chief of the project management office at CalHEERS, as of January 2016, independent project oversight services have ended. Given the size and technical complexity of the project, as well as the significant number of maintenance items and change orders that remain outstanding, our information technology (IT) expert believes the project should reinstitute the independent verification and validation (IV&V) services. Without this oversight, our IT expert believes certain system issues may go unidentified or unresolved, resulting in long‑term cost and schedule implications for the ongoing maintenance of CalHEERS.


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 Decemberv 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 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.

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

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 in the State Contracting Manual.

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.

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 Comments

Covered California agreed with our recommendations and indicated that it has already taken steps to address them, although it recognizes that its work is not complete.


1 The California Simulation of Insurance Markets model, a joint project of the University of California, Los Angeles Center for Health Policy Research and the University of California, Berkeley Center for Labor Research and Education, is designed to estimate the impacts of elements of the federal Patient Protection and Affordable Care Act on employer decisions to offer insurance coverage and individual decisions to obtain coverage in California. Go back to text

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