Washington State Auditors Office Troy Kelley Independence Respect

Washington State Auditor’s Office Troy Kelley Independence • Respect • Integrity Health Care Authority’s Oversight of the Medicaid Managed Care Program Joint Legislative Audit and Review Committee April 23, 2014 Lou Adams, CPA, Deputy Director of Performance Audit Melissa Wade, CGAP, Senior Performance Auditor Frank Vito, CPA, Member, Myers & Stauffer LC

Medicaid Managed Care is large and growing In fiscal year 2013: § About 1. 2 million Washington residents enrolled in Medicaid q q About 796, 000 enrolled in managed care Washington paid about $1. 4 billion in premiums to five managed care organizations to provide health care services to these Medicaid clients § Because of the Affordable Care Act, Health Care Authority expects 328, 000 new Medicaid clients by 2015. Most will be enrolled in managed care. § Managed care vs. fee-for-service Washington State Auditor’s Office 2

Why we did the audit § Increasing enrollment means more money will be spent on managed care in the future § Earlier reviews of Medicaid did not focus on managed care § Not much known on whether or not overpayments exist in managed care Washington State Auditor’s Office 3

Audit questions 1. Are managed care organizations overpaying for medical expenses? If they are, why did overpayments go undetected, and how do the overpayments affect premium rates? 2. Are policies and procedures in place to ensure costs reported by managed care organizations to the HCA’s actuary: q q q Offset recoveries, rebates and refunds against medical costs Include only allowable administrative expenses and allocate costs on a reasonable basis; and Report costs related to subcontractors properly? Washington State Auditor’s Office 4

Audit approach We hired subject matter experts Myers & Stauffer to perform the audit. § A national professional services organization with more than 30 years experience, specializing in the public health care industry § Performs accounting, consulting, program integrity and operational support services to state and federal agencies § Subcontractor Health Integrity, specialist in program integrity reviews for Medicare and Medicaid, performed data analysis Washington State Auditor’s Office 5

Audit focus § Focused on the Healthy Options program, and reviewed the two largest managed care organizations in Washington § Reviewed claims overpayments and other cost data affecting premiums, such as recoveries, rebates, and administrative expenses § Reviewed 2010 cost data because this impacted FY 2013 premium rates Washington State Auditor’s Office 6

How we audited medical claims value of claims: $660 million 1 value of claims: $130 million value of claims: $90 million 2 7 3 $2. 4 million reviewed 6 Error rate projected to 8 claims groups 4 5 Washington State Auditor’s Office 7

Focus on risk § Audit procedures designed to identify potential overpayment risks § To keep audit costs reasonable, sampling sizes were limited § Overpayments identified are our best estimate based on the work we performed Washington State Auditor’s Office 8

Audit approach – other cost data § Recoveries – Were costs reduced for the recoveries received for overpayments, reinsurance, and third-party liability payments? § Rebates – Were pharmacy rebates properly recorded? § Administrative costs – Were costs allowable and properly allocated from the parent company? Were subcontractor expenses properly categorized? Washington State Auditor’s Office 9

What we found § Inadequate oversight and data analysis led to an estimated $17. 5 million in overpayments. § Undetected overpayments in 2010 resulted in potentially higher premium costs in 2013. § The managed care organizations did not retain data used to set 2013 premium rates. HCA did not verify the accuracy of the data. Washington State Auditor’s Office Every $1 million in overpayments results in an estimated $1. 26 million overpayments paid by the state 10

What we found – other costs § Health Care Authority does not review other costs affecting premium rates, including administrative expenses, recoveries and rebates. § One of the managed care organizations did not report $1. 1 million in third-party recoveries to the actuary. § Health Care Authority does not provide sufficient guidance on administrative costs. Washington State Auditor’s Office 11

Current vs. proposed monitoring process Current process Health Care Authority does not review accuracy of data. Actuary’s rate setting is opaque, so determining the reasonableness of the premium rate is difficult. Managed care organizations Data Actuary Premium rate recommendations Health Care Authority Proposed process Health Care Authority reviews data periodically, seeing the same data the actuary reviews. Actuary’s considerations are clear, so rate setting is more transparent. Managed care organizations Periodic reviews of data Data Health Care Authority Actuary Premium rate recommendations Note: Data includes cost and encounter information Washington State Auditor’s Office 12

Recommendations We recommend the Health Care Authority: 1. Create and implement a comprehensive revenue, cost reporting and monitoring system for the organizations 2. Require the organizations to report detailed claims and administrative costs data to the HCA 3. Update contract language to allow the HCA to recoverpayments identified in state and other audits 4. Provide better guidance and criteria to the organizations for defining and reporting costs and recoveries 5. Review and work with the managed care organizations to improve the controls used to prevent overpayments Washington State Auditor’s Office 13

Contacts Troy Kelley State Auditor (360) 902 -0360 Troy. Kelley@sao. wa. gov Chuck Pfeil, CPA Director of Performance Audit, (360) 902 -0366 Chuck. Pfeil@sao. wa. gov Melissa Wade, CGAP Senior Performance Auditor (360) 725 -9736 Melissa. Wade@sao. wa. gov Website: www. sao. wa. gov Washington State Auditor’s Office 14