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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

Report Number: 2018-115

April 4, 2019

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814

Dear Governor and Legislative Leaders:

As requested by the Joint Legislative Audit Committee, the California State Auditor presents this report detailing our audit of the Department of Health Care Services’ (DHCS) oversight of the Health Plan of San Joaquin (San Joaquin) and other similar Medi‑Cal managed care health plans (health plans) with which DHCS contracts for the provision of quality health care to Medi‑Cal beneficiaries. This report concludes that DHCS provides sufficient oversight to ensure that health plans meet state and federal quality of care requirements. However, DHCS does not provide some important oversight and guidance to health plans, such as guidance concerning which administrative expenses are reasonable and necessary.

We found that DHCS’ processes for ensuring that health plans provide quality of care at a level consistent with state and federal requirements are appropriate. DHCS requires health plans to engage in an improvement process known as a quality corrective action plan (quality CAP) when they fail to meet quality of care standards specified in state regulations. DHCS properly identified those health plans that met its criteria to be placed on a quality CAP, required them to conduct activities aimed at improving quality, conducted appropriate monitoring activities to ensure that the health plans’ actions addressed the identified deficiencies, and took appropriate steps when they did not achieve the goals of the quality CAPs.

However, we did find several aspects of DHCS’ oversight that it could improve. It does not consistently ensure that health plans have proper processes in place to prevent, identify, and address fraud, and it does not evaluate whether health plans have controls in place to prevent conflicts of interest. Additionally, DHCS does not provide health plans with guidance on what types of administrative expenses are reasonable and necessary, which likely contributed to the health plans we reviewed making some questionable expenditures. Finally, we reviewed the employee bonuses paid by three health plans and found that, although health plans are allowed to use Medi‑Cal funds to pay reasonable employee bonuses, DHCS does not oversee whether such bonuses are reasonable.

Respectfully submitted,

California State Auditor

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