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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

Response to the Audit

Covered California

January 27, 2016

Elaine M. Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Subject: Covered California Response to State Draft Audit Report 2015-605

Dear Ms. Howle:

As Covered California nears the end of its third open enrollment period, it continues to expand on its efforts to improve the health of all Californians by ensuring their access to affordable, high quality care. While we have made great strides in our efforts to implement the Affordable Care Act, we also recognize that work remains to be done.

The California State Auditor's (CSA) report entitled High Risk-Covered California It Must. Ensure Its Financial Sustainability Moving Forward, and Its Use of Sole-Source Contracts Needs Improvement offers Covered California recommendations on areas for improvement. We agree that these areas are important and have taken them seriously since the establishment of Covered California. With regard to the specific recommendations, we have already undertaken efforts to address. For example, in the area of financial management, Covered California has conducted informal analyses and stress-testing of expenditures, revenue and reserve requirements. With respect to CalHEERS, in addition to utilizing an Independent Verification and Validation vendor during our critical, formative years, we have established a quality assurance team, a user acceptance testing program and engaged an independent expert in cost analysis. We recognize that our work in these areas is not complete and we appreciate CSA's suggested recommendation for further refinement.

Covered California would like to thank the CSA staff for their hard work and for their assistance during this audit. Similar to the oversight of Covered California by its contracted, independent auditors and by federal agencies such as the Office of Inspector General and the Centers for Medicare and Medicaid Services, we find the additional input from our State Auditor to be critical to the future success of California's Health Benefit Exchange. If you have any questions, please contact Jennifer Lum, Audit Coordinator at (916) 228-8276.


Original signed by Peter V. Lee

Peter V. Lee
Executive Director

CC: Board of Directors, Covered California

Chapter 1
Recommendation No. 1
Covered California should continue to monitor its plan for financial sustainability and revise it accordingly as factors change. Further, it should complete a formal analysis of the adequacy of its reserve level by December 31, 2016, and update this analysis as needed, so that it is prepared in the event that it does not meet its revenue projections and needs to increase its funding or decrease its expenditures to maintain its financial solvency. This formal analysis should include an identification of those contracts it could quickly eliminate, among other actions it would take, in the event of a shortfall in revenues.

Covered California agrees with this recommendation. It has built budget planning, expenditure and revenue monitoring into its day-to-day activities and will continue to perform these functions. We will conduct a formal analysis of the reserve and will incorporate the results into our existing forecasting and stress testing.

Recommendation No. 2
Covered California should continue to conduct regular reviews of its enrollment projections and update the projections as needed to help ensure its financial sustainability.

Covered California agrees with this recommendation.  Covered California currently reviews enrollment projections on a monthly basis and revisits the forecast on a quarterly basis and will continue to do so.

Chapter 2
Recommendation No. 3
To comply with state law, by April 2016, Covered California’s board should adopt a procurement manual incorporating contracting policies and procedures that are substantially similar to the provisions contained in the State Contracting Manual. Specifically, it should expressly limit its use of sole-source contracts to only those situations authorized by the State Contracting Manual.



The California Health Benefit Exchange Board adopted the Covered California Procurement and Contract Manual during the Board meeting on January 21, 2016. The contracting policies and procedures contained in the Covered California Procurement and Contract Manual, including those pertaining to non-competitive bidding, are substantially similar to those contained in the State Contracting Manual.

Recommendation No. 4
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.



The Covered California Procurement and Contract Manual adopted by the California Health Benefit Exchange Board on January 21, 2016 requires a written justification for all non-competitively bid contracts of $25,000 and above. Covered California has developed a noncompetitive bid justification form which was further refined in April 2015 to provide more specific guidance for staff to use when preparing a justification supporting a sole-source contract. 

Recommendation No. 5
Covered California should improve its project management of contracts to ensure it allows adequate time to use the competitive bidding process as appropriate.



Covered California implemented a process in 2015 where program staff receive advance notice of contracts which are set to expire within the next six months. This notice affords staff sufficient time to consult with contract management staff on the appropriate contracting method necessary to continue or procure the services needed. Covered California will continue to improve on this process.

Recommendation No. 6
Covered California needs to develop a process by June 2016 to ensure it accurately enters information regarding its contracts into its database.

Covered California agrees that it should implement a quality assurance process to ensure the database is accurate. Although the contract database is primarily an internal tool for the contracts unit, because it is used for other purposes, Covered California, as a result of this audit, has developed a process to ensure inaccurate information is corrected and accurate information is entered into the database moving forward.

Recommendation No. 7
To ensure that CalHEERS does not face delays and cost overruns in the implementation of the planned releases, Covered California should immediately contract with an independent party for IV&V services to highlight and address potential risks going forward.



We concur with the recommendation that Covered California perform IV&V services. However, we believe that such services can adequately and competently be performed by a mix of both civil service staff and independent contractors. In 2012, Covered California issued a competitive solicitation and awarded a contract to an independent vendor to perform IV&V services. This independent contractor performed the IV&V services from 2012 until 2015.  Effective 2015, Covered California began transitioning the performance of IV&V services to a combination of internal staff and external entities. For example, Covered California established a quality assurance team that includes both external quality assurance consultants and state staff. In 2015/2016, Covered California also entered into a contract with an expert in cost estimation to perform independent verification of costs for change requests. Further, the CalHEERS project will formally transition to the Office of Systems Integration on July 1, 2016, pending approval of the Governor's Budget, which will allow independent oversight by a separate state agency.


California State Auditor’s Comments on the Response From Covered California

To provide clarity and perspective, we are commenting on Covered California’s response to our audit. The numbers below correspond to the numbers we have placed in the margin of Covered California’s response.


During the course of our audit work, Covered California informed us that it anticipated that its draft procurement manual would be presented to its board of directors (board) for approval in February 2016. However, as indicated in Covered California’s response, the board adopted the draft procurement manual at its meeting on January 21, 2016, which was the first day of Covered California’s official review of our draft report. As a result, we modified the text in our report here, here, and there to reflect the board’s action. Additionally, we revised our recommendation here, and there to clarify that Covered California should ensure that its staff comply with the changes to its board’s recently-adopted procurement manual.


Although Covered California’s recent board-adopted procurement manual requires a written justification for all noncompetitively bid contracts of $25,000 and above, it will be important for Covered California to ensure that its staff adequately document the necessity for using a noncompetitive process in its written justification. Further, here we acknowledge that Covered California implemented a noncompetitive bid justification form, as it indicates in its response, to provide more specific guidance on the information that staff requesting a sole-source contract need to include in their justifications. Also, we conclude that our review of the form found that using it could contribute to adequately justifying the need for sole-source contracts.


Despite our numerous discussions with Covered California, it never informed us of the process described in its response that it asserts was implemented in 2015 by which staff receive advance notice of contracts which are set to expire within the next six months. We look forward to Covered California’s 60-day response to further explain and provide evidence of this process.


We are concerned about Covered California’s belief that it can adequately and competently perform independent verification & validation (IV&V) services by using a mix of both its civil service staff and independent contractors. Specifically, industry standards require the responsibility for the IV&V effort to be vested in an organization that is separate from the development and program management organizations. However, as stated here, Covered  California contracted with the Office of Systems Integration (OSI) for project management and quality assurance services. Further, this is the first time Covered California has mentioned the potential transition of the California Healthcare Eligibility, Enrollment, and Retention System project to the OSI, and it is unclear to us how this transition will address our recommendation. Nevertheless, we stand by our recommendation that IV&V services are still needed and should be contracted for immediately.

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