Internal Control and Compliance Issues Applicable
to the Financial Statements and State Requirements
to the Financial Statements and State Requirements
Department of Health Care Services
Reference Number: 2015-001
The Department of Health Care Services (DHCS) overstated Medi-Cal expenditures for fiscal year 2014–15 in the General Fund by $1.149 billion. Additionally, DHCS overstated Medi-Cal expenditures and revenues for fiscal year 2014–15 in the Federal Trust Fund by $1.023 billion. Lastly, in various funds within the Non Major Governmental Funds, DHCS understated expenditures and revenues by $237 million and $16 million, respectively. For budgetary purposes, DHCS reports Medi‑Cal expenditures on a cash-basis. Generally accepted accounting principles (GAAP), however, require governmental funds to be accounted for on a modified accrual basis. Specifically, expenditures must be recognized in the accounting period in which they are incurred. Additionally, the related federal funding should be recognized when all applicable eligibility requirements, including time requirements, are met. As a result, DHCS must prepare GAAP adjustments to convert its budgetary reports to the modified accrual basis for proper presentation in the State’s Comprehensive Annual Financial Report. The following sections provide more detail about DHCS’ misstatements by program.
Overstated Accruals for Managed Care and Other Shared Programs
DHCS overstated expenditures and related revenues by $602.3 million in the Federal Trust Fund, and overstated expenditures by $325.7 million in the General Fund, for the Medi-Cal Managed Care (Managed Care) Program. Managed Care health plan providers help Medi-Cal beneficiaries find doctors, pharmacies and health education programs. These providers are paid a monthly rate for each individual enrolled with them. DHCS validates provider information and generates invoices for payment to Managed Care Plans. DHCS uses its Capitation Management (CAPMAN) system to generate the validated invoices. To prepare its accrual, DHCS must identify any unpaid invoices for services provided by June 30, 2015. DHCS relied upon a query of the CAPMAN data to obtain this information. However, the CAPMAN data included paid invoices and these invoices were erroneously accrued. DHCS indicated this error occurred because the staff preparing the accrual were unfamiliar with the data.
Additionally, DHCS overstated expenditures and revenues in the Federal Trust Fund by $480.6 million and overstated expenditures in the General Fund by $432.4 million when preparing accruals for all the program services it coordinates with the Department of Social Services (DSS), including a new Managed Care program. Beginning in April 2014, DHCS began transitioning care for certain recipients of the In Home Supportive Services (IHSS) program from Fee-for-Service to Managed Care. The IHSS program provides an in home alternative to other traditional out-of-home settings such as nursing homes. Because DSS is involved in the administration of this and other programs it is important for DHCS to effectively coordinate with DSS when preparing the necessary accruals. However, we found there was an ineffective reliance on email communication and little formal guidance available for staff to use when preparing the GAAP accruals.
Overstated DHCS Medi-Cal Expenditure and Revenue Accruals
DHCS overstated expenditures and revenues by $409 million in both the Low Income Health Program Fund within the Non Major Governmental Funds and the Federal Trust Fund. The Low Income Health Program Fund finances the cost of providing certain health care services to a defined population of uninsured adults who are not otherwise eligible for Medicare or Medi-Cal. DHCS prepared accruals related to its request for additional federal funding from the Centers for Medicare and Medicaid Services (CMS). Staff at DHCS prepared this accrual based on the inclusion of the anticipated funding in certain budget documents. However, CMS denied the request for additional funding and so the accruals for both the Low Income Health Program Fund and the Federal Trust Fund are not valid. DHCS failed to provide sufficient guidance to those staff preparing this GAAP accrual. Insufficient guidance also contributed to two additional overstatements. Specifically, DHCS overstated expenditures and related revenues by $135.9 million in the Federal Trust Fund and overstated expenditures by $137.8 million in the General Fund for the Fee-For-Service Health Care Delivery System. It also overstated expenditures and related revenues by $171 million in the Federal Trust Fund for the Health Care Support program.
Understated DHCS Medi-cal Expenditure and Revenue Accruals
DHCS understated expenditures and related revenues by $393 million in the Federal Trust Fund and the Public Hospital Investment, Improvement, and Incentive Fund within the Non Major Governmental Funds for the Delivery System Reform Incentive Pool (DSRIP) program. DSRIP provides funding to create financial incentives for certain Designated Public Hospitals’ to pursue delivery-system reforms. Those reforms involve infrastructure development, system redesign, and clinical-outcome and population-focused improvements. DHCS failed to accrue expenditures for services provided by June 30, 2015 that were scheduled for payment in the following fiscal year. This understatement occurred because DHCS relied heavily on email communication between accounting and program staff preparing the accrual, and as a result, there was a miscommunication regarding the level of unpaid services.
DHCS also understated expenditures and related revenues by $383.1 million in the Federal Trust Fund for the Specialty Mental Health Consolidation program, which provides specialty mental health services to qualifying Medi-Cal recipients. This error occurred primarily because DHCS failed to update its accrual methodology to include the additional federal funding available through the Affordable Care Act. DHCS indicated this oversight was the result of a recent change in how it accounts for the Affordable Care Act in certain budget documents and staff did not carry forward this change into the accrual methodology for the Specialty Mental Health Consolidation program.
Misstated Reimbursement Accruals
DHCS understated expenditures by $253.3 million in the Children’s Health and Human Services Fund (Children’s Health Fund) within the Non Major Governmental Funds and overstated expenditures by $253.3 million in the General Fund. The Children’s Health Fund receives a tax imposed on the sellers of Medi-Cal Managed Care plans. A portion of this tax reimburses the General Fund for certain Medi‑Cal related costs. DHCS’ accrual methodology directs staff to accrue this reimbursement; however, staff failed to do so for a portion of tax revenues received prior to June 30, 2015. In this instance, staff preparing the accrual did not have a sufficient understanding of the underlying flow of program funding to prepare an accurate accrual.
California Government Code Section 12461 requires the State Controller’s Office (Controller’s Office) to issue an annual financial report that is prepared in accordance with GAAP. The Controller’s Office provides guidance to departments on the preparation of their year‑end financial statements in its Year‑End Financial Reports Information GAAP Basis manual (GAAP manual). To prepare its financial report, the Controller’s Office annually requests that departments submit GAAP‑related adjustments for the funds they manage.
Codification of Governmental Accounting and Financial Reporting Standards Section 1600 states that financial statements for governmental funds should be presented using the current financial resources measurement focus and the modified accrual basis of accounting. The current financial resources measurement focus and modified accrual basis of accounting require expenditures to be reported when the related liability has been incurred except in certain limited circumstances.
Codification of Governmental Accounting and Financial Reporting Standards Section N50 states that for government-mandated non-exchange transactions recipients should recognize revenues when all applicable eligibility requirements, including time requirements, are met. When the modified accrual basis of accounting is used, revenues resulting from non-exchange transactions should also be available.
Codification of Governmental Accounting and Financial Reporting Standards Section 1800 defines reimbursements as repayments from the fund responsible for a particular expenditure to the fund that initially paid for them. Reimbursements should not be displayed in the financial statements. The GAAP manual instructs agencies to record a reduction in expenditures for the reimbursed fund and to record an increase in expenditures for the reimbursing fund.
To ensure its financial statements are properly presented at fiscal year-end, DHCS should:
- Improve internal communications among program and accounting staff who prepare the GAAP accruals.
- Update existing accrual methodologies as needed and create new methodologies for those programs for which none exist.
- Provide additional guidance and training to program and accounting staff on the requirements of GAAP.
Department’s View and Corrective Action:
DHCS agrees with the recommendations. DHCS has already begun efforts to address the issues described within this report for the fiscal year 2015–16 GAAP accruals. Specifically, the DHCS Accounting Section has prepared a GAAP Accrual Enhancement Plan (plan) to improve the GAAP accrual process. The plan calls for existing Accounting Section staff to be reassigned from other duties for a period of six to eight weeks to a temporary GAAP accrual focus team. These individuals will be selected based on their experience in working with more complex accounting tasks to work collaboratively with other existing staff in developing written GAAP accrual guidelines, methodologies, and training materials. The plan calls for the selection of the team members by March 2016 and the outlined accrual methodologies completed by June 2016 with the updated finalized methodologies to be in place by August 2016. Training for program level staff who participates in the GAAP accrual process is planned for June 2016. The DHCS Accounting Section plans to improve its communication among all staff by developing these standard written procedures and by providing each program division with a single point of contact within the Accounting Section.
March 18, 2016
Deputy State Auditor:
John F. Collins II, CPA
Theresa Farmer, CPA
Nicholas Kolitsos, CPA, MBA, Audit Principal
Michael Tilden, CPA, Audit Principal
Norm Calloway, CPA (inactive)
Nasir Ahmadi, CPA
Lisa Ayrapetyan, CPA, CIA
Angela Dickison, CPA, CIA
Tim Jones, CPA
Joseph R. Meyer, CPA, CIA
Dan Motta, CPA
Reed Adam, MPAc
Laurence Ardi, CFE
Brandon A. Clift, CPA, CFE
Brigid Drury, MPAc
Brian Dunn, CPA, CFE
Andrew Esterson, CFE
Martin T. Lee, CPA
Richard Marsh, MST
Charles H. Meadows III, CPA
Marshall Miller, MPAc
Ryan J. Mooney
Michelle O’Connor, CPA
John Slusser, CPA, CGMA
Joseph L. Porche, Staff Counsel