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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



The federal Medicaid program, overseen by the Centers for Medicare & Medicaid Services (CMS), provides health coverage to certain low‑income individuals and families who meet federal and state eligibility requirements. California participates in the federal Medicaid program through its California Medical Assistance Program, known as Medi‑Cal. The Department of Health Care Services (DHCS) is the single state agency responsible for administering Medi‑Cal. As of October 2018, the Medi‑Cal program provided services to nearly 12 million beneficiaries—nearly one‑third of Californians. DHCS received more than $110 billion in federal and state funds during fiscal year 2017–18 to administer the Medi‑Cal program, with $19 billion of that total coming from California’s General Fund.

The State provides Medi‑Cal benefits through two delivery systems: fee‑for‑service and managed care. Under fee‑for‑service, medical providers bill DHCS directly for approved services they provide to Medi‑Cal beneficiaries. In Medi‑Cal managed care, DHCS contracts with Medi‑Cal managed care health plans (health plans) and pays each a monthly capitation payment (premium)—an amount per person covered—to provide health care to Medi‑Cal beneficiaries. During the entire period covering fiscal years 2013–14 through 2017–18, DHCS contracted with 22 health plans. These contracts require health plans to meet quality of care and financial operating standards specified in state regulations. Each health plan uses the premium to fund both health care services and its administrative expenses, such as salaries and facility maintenance. Additionally, DHCS issues guidance to health plans, such as that related to contract or legal requirements, in the form of All‑Plan Letters. These letters undergo a similar review and approval process as state regulations in that DHCS is required to solicit feedback from the health plans and the public before issuing the guidance.

DHCS Is Responsible for Overseeing Health Plans’ Quality of Care

Federal and state regulations require DHCS to measure and report on the quality of care that the health plans provide to Medi‑Cal beneficiaries. To fulfill this requirement, DHCS contracts with an external quality review organization (EQRO) to perform annual independent reviews of the services health plans provide. For these external quality reviews, the EQRO evaluates the health plans annually using a subset of the performance measures from the Healthcare Effectiveness Data and Information Set (HEDIS).1 HEDIS is a nationally recognized set of more than 90 performance measures used to evaluate health plans’ performance on providing important health care services, such as the type and frequency of medical exams for diabetes care. In its evaluation, the EQRO determines the health plan’s performance for each of the HEDIS measures it reviews. More than 90 percent of U.S. health plans use these performance measures. By using this standardized national measure of quality of care that is independently evaluated, DHCS can compare a health plan’s performance against other health plans in California as well as those in other states.

Additionally, state regulations require DHCS to conduct its own review to assess the quality of care that each health plan provides. In its annual quality review, DHCS selects roughly 20 of the more than 90 HEDIS performance measures and uses them to evaluate the quality of care that health plans deliver to beneficiaries.

DHCS Places Health Plans on Quality CAPs if One or More of the Following Situations Occur:

Source: DHCS’ policies and procedures for its quality CAP process.

DHCS updates its selection of HEDIS performance measures to use in quality of care assessments each year after consulting with the health plans, the EQRO, and various stakeholders. These performance measures include what are known as quality indicators to evaluate a health plan’s performance on each measure. Some examples of quality indicators include assessing whether beneficiaries with diabetes receive required eye exams and blood tests, or evaluating whether beneficiaries who have recently given birth receive timely postpartum care. To create a standard for assessing health plans’ quality performance, DHCS creates a minimum performance level (MPL), which is based on how health plans nationally are performing, for each of the quality indicators it selects. DHCS considers health plans that score higher on a quality indicator than at least 25 percent of health plans nationwide to be performing above the MPL on the performance measure. If the health plan demonstrates one or more of the deficiencies shown in the text box, DHCS requires the health plan to engage in a process known as a corrective action plan (CAP), referred to as a quality CAP, to improve the quality of care it provides.

As part of the quality CAP process, DHCS requires the health plan to describe key staff, resources, and initiatives it will use to improve its performance for each quality indicator identified in the quality CAP. Additionally, the quality CAP process includes the health plan meeting with DHCS management periodically to discuss the plan’s progress on implementing the quality CAP to ensure compliance. The EQRO approves and provides technical assistance on certain quality improvement activities—including performance improvement projects—the health plans undertake as part of their quality CAPs. Performance improvement projects consist of a health plan evaluating the effectiveness of small changes to improve quality of care. In addition to DHCS requiring a health plan to implement performance improvement projects as part of the quality CAP, it also requires the health plan to meet annual quality improvement milestones. DHCS may extend the duration of the quality CAP and also may impose consequences that include monetary sanctions if a health plan fails to meet one or more of the yearly quality improvement milestones it agreed to as part of the quality CAP.

As part of this audit, we reviewed DHCS’ oversight of the four health plans that were on quality CAPs between 2013 and 2017: Anthem Blue Cross Partnership Plan (Anthem), Health Net Community Solutions, Inc. (Health Net), Health Plan of San Joaquin (San Joaquin), and Molina Healthcare of California Partnership Plan, Inc. (Molina). In addition, we selected two health plans—Kern Health Systems (Kern) and Santa Clara Family Health Plan (Santa Clara)—that were not on quality CAPs but have organizational structures similar to that of San Joaquin. We visited these two health plans as well as San Joaquin to review whether their administrative expenses were reasonable and necessary. Figure 1 shows all six health plans we reviewed and the counties they serve throughout California.

Figure 1
The Health Plans We Reviewed Serve Counties Throughout California

A map of California that shows the six health plans we reviewed and the counties they serve along with information on their fiscal year 2016-17 revenue, number of beneficiaries, and number of counties served.

Source: DHCS’ September 2018 health plan data.

Note: The health plans we reviewed do not serve the counties shaded in gray.

DHCS Reviews Seven Categories as Part of Its Annual Medical Audits

Source: DHCS.

State law requires DHCS to perform annual medical audits of prepaid health plans, which include the Medi‑Cal managed care health plans we reviewed, for compliance with requirements of the Knox‑Keene Health Care Service Plan Act of 1975 (Knox‑Keene Act), which sets operating standards for the licensing of most California managed care plans. The text box identifies the seven audit categories that DHCS uses to evaluate the health plans’ compliance with key requirements during its annual medical audits. For example, the category of “administrative and organizational capacity” includes steps to review a health plan’s fraud detection procedures—a Knox‑Keene Act requirement. Deficiencies discovered in an audit can also result in health plans being placed on a CAP, which for the purposes of this report we refer to as an audit CAP. Similar to its requirements for the quality reviews, DHCS requires a health plan to submit an audit CAP detailing how it will address the deficiencies identified through the audit. DHCS requires health plans to either correct audit deficiencies within 30 calendar days from completion of the audit report or specify the intended date of completion in the audit CAP. DHCS may impose administrative or financial sanctions on health plans that fail to address the deficiencies listed in the audit CAP. Further, DHCS indicated that it monitors a health plan’s compliance with an audit CAP through regular communication and by verifying supporting documentation the health plan supplies to show how it is addressing the audit deficiencies.

Health Plans Must Meet Certain Requirements Related to Their Administrative Expenses

State regulations generally require DHCS to ensure that a health plan’s overall administrative expenses do not exceed 15 percent of the Medi‑Cal funds it receives. Administrative expenses are generally considered to be any costs not directly related to providing health care services to beneficiaries. Although state regulations require that administrative expenses be reasonable and necessary, and define some general categories of administrative expenses—such as salaries and bonuses, marketing, and legal expenses—state regulations do not provide specific guidance on what constitutes a reasonable and necessary administrative expense. This leaves health plans to rely on their own judgment to determine whether their administrative expenses are “reasonable and necessary.


1 The National Committee for Quality Assurance, an independent nonprofit organization, develops the HEDIS measures and conducts accreditation assessments of health plans. Go back to text

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