The Department of Developmental Services Cannot Verify That the Rates It Pays Vendors for In‑Home Respite Services Are Reasonable and Appropriate
The Department of Developmental Services (DDS) has not assessed the appropriateness of the hourly rates it pays to vendors for the in‑home respite services program (in‑home respite services) in more than a decade. DDS pointed to specific changes in state law, which impose certain limits on its payment rates, as its reason for no longer obtaining and reviewing vendors’ cost statements to ensure that the rates it pays to vendors are reasonable and appropriate. However, we question DDS’s interpretation of two key pieces of legislation, which went into effect in 1998 and 2003, and we believe it is missing a critical opportunity to collect vendors’ cost statements and ensure that the hourly rates vendors receive are appropriate. Without this information, which includes vendors’ actual costs for salary and wages, staff benefits, and operating and administrative expenses, DDS is hindered from determining the appropriateness of hourly rates paid to vendors. Specifically, in the past years, increases to vendors’ hourly payment rates have notably outpaced increases to respite workers’ hourly wages. DDS is responsible for setting in‑home respite rates; however, because of its questionable interpretation of law, which warrants clarification from the Legislature, coupled with its less than proactive approach to managing the program, the public has little assurance that vendors’ hourly payment rates are appropriate.
DDS Has Not Reviewed the Appropriateness of Hourly Rates Paid for In‑Home Respite Services in More Than 10 Years
DDS has chosen not to obtain and review critical information that can verify whether its hourly payment rates for in‑home respite services are appropriate. As described in the Introduction, depending on when vendors began providing services, DDS currently pays them using one of two types of rates: a temporary hourly payment rate (temporary rate) or a permanent hourly payment rate (permanent rate). Historically, DDS paid vendors new to providing in‑home respite services a temporary rate, which was based on the average of the permanent rates paid to all vendors in California. Once these vendors had provided services and generated the necessary cost information for these services, DDS would convert their temporary rate to a permanent rate based on the vendors’ cost statements, which detailed their costs and income. Thereafter, on a biennial basis, DDS required authorized vendors to submit cost statements, which it used to adjust their permanent rates as necessary. However, because of changes in state law that took effect in 1998 and in 2003, DDS changed its approach to calculating payment rates and no longer requires vendors to submit cost statements. Rather, DDS currently adjusts the hourly rates—whether they are temporary or permanent—based on legislatively approved rate adjustments and changes to minimum wage or labor laws. However, we question DDS’s interpretation of these statutes and believe that clarifying legislation is needed.
Effective September 1, 1998, the Legislature froze in‑home respite service rates. In doing so, the Legislature specified that the rates would remain frozen until DDS adopted a performance‑based consumer outcome rate system for in‑home respite services or until funds were appropriated for rate adjustments. Since that time, DDS has not adopted a new rate system, for reasons that it could not explain, and despite several appropriations for legislated rate adjustments for in‑home respite services, it continues to believe this 1998 rate freeze is still in effect. The effect of such a freeze is that vendors’ hourly payment rates can neither increase nor decrease, even if the rates are not appropriate. We question this position because we believe that various appropriations over the last 15 years, each of which adjusted vendors’ hourly rates, may well have constituted an appropriation for rate adjustments as contemplated by the Legislature in 1998. For example, in fiscal year 2000–01, the Legislature provided a rate increase for in‑home respite service vendors to be used to increase salaries and benefits, representing a 10 percent wage increase for in‑home respite workers and a 5 percent rate increase for vendors for their associated administrative costs. We believe that this rate increase may well have constituted the kind of appropriation for rate adjustment the 1998 legislation intended. If this is the case, then the rate freeze ended in fiscal year 2000–01. Further, according to DDS, between fiscal years 2001–02 and 2015–16, the Legislature made a number of additional rate adjustments to cover vendors’ costs associated with increases in the minimum wage and certain overtime and sick leave benefits. Additionally, in 2006, all in‑home respite rate schedules were given an across‑the‑board rate increase of 3 percent. To the extent any of these adjustments constitutes an appropriation for rate adjustments as contemplated by the 1998 legislation, we believe the 1998 rate freeze would no longer be in effect.
We also question DDS’s interpretation of legislation effective on July 1, 2003. This legislation essentially capped—or placed a ceiling on—the temporary and permanent rates vendors can receive. DDS’s chief counsel explained that it believes the purpose of this legislation was only to enable DDS to increase rates if needed to protect a consumer’s health or safety and that the 2003 legislation was not intended to allow DDS to reset any rates. Although this legislation limited increases in hourly payment rates, it did not prohibit decreases in rates where appropriate. Thus, DDS could have still used cost statements to determine the appropriateness of vendors’ hourly rates. However, DDS stopped collecting vendors’ cost statements at that time. We believe DDS should have continued to collect vendors’ cost statements to determine whether any vendors’ hourly payment rates were too high and to reassign them lower permanent rates if appropriate. As a result, DDS could be missing the opportunity for cost savings for the State if any vendors’ payment rates were found to be too high and should be decreased. Further, because DDS ceased requiring vendors to submit cost statements in fiscal year 2003–04, as reported to us by its assistant deputy director of the Office of Federal Programs and Fiscal Support (assistant deputy director), it cannot know whether vendors’ hourly payment rates are appropriate in any event.
In our review of certain vendors at five selected regional centers, we found that the majority of vendors are receiving a temporary rate and that this rate is generally less than the permanent rate that other vendors receive. Some stakeholders have raised concerns that the temporary rates newer vendors receive, which are not established using cost statements, are typically higher than the permanent rates of older vendors, whose rates were established using cost statements. However, for the vendors we reviewed, the permanent rates, on average, were higher than the temporary rates. As shown in Table 2, 19 of the 25 vendors we selected for review received temporary rates because they were authorized to provide in‑home respite services after the cap on permanent rates became effective July 1, 2003. The remaining six vendors received permanent rates that averaged $23.45, exceeding the average temporary rate of $21.97 by nearly $1.50. These differences highlight the importance of DDS obtaining and reviewing cost statements to ensure that a reduction in the permanent rates it pays vendors is not warranted. Until DDS reviews current cost statements, the public lacks assurance as to whether the differences in temporary and permanent rates are appropriate and reasonably reflect vendors’ costs.
Source: California State Auditor’s analysis of salary decisions for employees at Fresno, Los Angeles, Orange, and Santa Clara counties who are paid under a salary-step schedule.
* As of July 1, 2003, the Legislature revised state law and, as a result, the Department of Developmental Services (DDS) stopped converting temporary hourly payment rates (temporary rate) to permanent hourly payment rates (permanent rate), except under certain circumstances. Because this vendor’s temporary hourly rate would have expired on May 31, 2004, after the legislative change, DDS did not convert this vendor's temporary rate to a permanent rate.
† A regional center may use services from a vendor that was vendorized by another regional center, as was the case with this vendor. Westside Regional Center used this vendor to provide services to consumers.
When we asked the DDS assistant deputy director about DDS’s perspective on obtaining cost statements and evaluating the reasonableness of the rates it pays for in‑home respite services, he stated that while cost may be one consideration in establishing rates, it is not the sole factor in determining their appropriateness. He cited, as an example, that Medicaid, known as Medi‑Cal in California, requires states to ensure that payments are consistent with efficiency, economy, and quality of care, and that they are sufficient to enlist enough providers. However, we question this explanation because obtaining and evaluating cost statements is the first step in assessing whether in‑home respite hourly rates are appropriate, particularly as related to economy and whether they are sufficient to enlist enough providers. In fact, because DDS performs no assessment of the appropriateness of vendors’ in‑home respite hourly payment rates, it cannot demonstrate that it has satisfied the Medicaid requirement referenced by the assistant deputy director. This underscores the importance of DDS not delaying its assessment of vendors’ payment rates for in‑home respite services.
Further, the assistant deputy director explained that since DDS is already required to conduct a comprehensive analysis of rates, described below, obtaining cost statements to evaluate in‑home respite rates does not seem like a productive use of time. However, DDS could not provide any documentation of the methodology it used before the 2003 cap when calculating in‑home respite rates. Thus, it is unclear what information the assistant deputy director is using to confirm that obtaining and evaluating cost statements would be overly time‑consuming.
Although DDS does plan to conduct a required comprehensive rate study, which it states will include in‑home respite rates, the results of this study will not be known for nearly three years. Effective June 9, 2016, state law requires DDS to submit by March 1, 2019, a rate study to the appropriate fiscal and policy committees of the Legislature addressing the sustainability, quality, and transparency of its community‑based services for individuals with developmental disabilities. The assistant deputy director explained that DDS plans to contract with a consultant to conduct this rate study. He reported that DDS worked with the National Association of State Directors of Developmental Disabilities Services in developing a Request for Proposals, which is currently under review by DDS management. When we asked the assistant deputy director to provide details on how DDS plans to meet the deadline for the study, he did not offer additional information.
Rather than wait nearly three years for the results of this study, we believe the Legislature should require DDS to take action sooner to assess whether the in‑home hourly respite rates it pays to vendors are appropriate. For instance, the Legislature should require DDS to resume collecting vendors' cost statements; DDS could then evaluate these statements and determine whether it should seek changes to state law. If its assessment demonstrated that a vendor’s hourly payment rates needed to be increased, it could proactively request that the cap on permanent rates be lifted. Until these changes are made, DDS will continue to not know whether its hourly payment rates to vendors are appropriate.
A Difference Exists Between the In‑Home Respite Hourly Rates Vendors Receive and the Hourly Wages Vendors Pay to Respite Workers
In the recent past, vendors’ rates have increased primarily from legislatively approved rate adjustments due in large part to changes in minimum wage or labor laws. However, the hourly wage that vendors reported they pay their respite workers has not seen the same percentage increase. As shown in the table in Appendix B, on average, from June 30, 2014, through March 1, 2016, the vendors’ Full Service hourly payment rate increased from $17.76 to $21.21, or by more than 19 percent, while the respite workers’ hourly wage increased from $9.89 to $11.14, or by nearly 13 percent.4 In addition, Table 3 shows the Full Service hourly rate and hourly wages paid to respite workers for the five regional centers we reviewed. Because the increases in vendors’ hourly rates are largely due to statutory changes in minimum wage and labor laws, we expected that the hourly wages paid to respite workers would increase at a similar rate. According to the assistant deputy director, one explanation for the difference we observed is that vendors could be facing increased payroll costs from the increase in respite workers’ hourly wages. For example, he explained that a $1 increase in the hourly wage requires an investment of approximately $1.25 due to increased taxes, social security, and other costs. Notably, state law specifies that the increase in vendors’ hourly rates due to minimum wage increases shall be specific to payroll costs needed to bring respite worker hourly pay into compliance with increases in minimum wage and shall not constitute a general wage enhancement for employees paid above the minimum wage. However, DDS has not undertaken a study to ascertain whether vendors are retaining reasonable amounts of their hourly payment rates for their costs and profit margins. Until such a study is performed, it is unknown whether vendors are retaining a larger proportion of their payments than necessary. This uncertainty highlights the importance of DDS obtaining vendors’ cost statements to ensure that vendors are retaining a reasonable profit and administrative costs are reasonable.
|JUNE 30, 2014
|JUNE 30, 2015
|MARCH 1, 2016
|Full Service Rate
|Employer of Record* Rate
|Average Worker Hourly Wage
|Full Service Rate
|Employer of Record* Rate
|Average Worker Hourly Wage
|Full Service Rate
|Employer of Record* Rate
|Average Worker Hourly Wage
|Alta California Regional Center
|Inland Regional Center
|North Los Angeles Regional Center
Source: Information provided by the five selected regional centers and vendors for the period of June 30, 2014, through March 1, 2016.
NA = Not applicable as the regional center did not provide services under this model.
* Throughout the report we use the term Employer of Record model to indicate the process used when the family selects the individual who will provide the in‑home respite service. Certain vendors we reviewed refer to this model using other terms, such as the parent conversion rate.
Further, we found in our review of selected vendors at the five regional centers we visited that vendors retained a large portion of their payment rates compared to the hourly rate paid to their respite workers, depending on the type of service model. Specifically, as shown in Table 4, the majority of vendors we reviewed offer services under both the Employer of Record model and the Full Service model; they receive a lower hourly payment rate from DDS for the Employer of Record model because they have lower operating costs. As described in the Introduction, some families select an individual, such as a family member, to provide respite services to the consumer. A third model, the financial management service (FMS) model, is used under the same circumstances as the Employer of Record model; however, for reasons, some of which we describe later in this section, it is not as commonly used by the regional centers. The Employer of Record rates are negotiated between the regional center and the vendor. For example, Table 4 shows that as of March 1, 2016, the vendor—Inland Respite, Inc. (Inland Respite)—reported that it retained more than $7 per hour under the Employer of Record model; it received a payment rate of $17.27 per hour and paid its respite workers an hourly wage of $10. The disparity is even greater under the Full Service model, under which, for example, Inland Respite received $25.26 per hour, paid respite workers an hourly wage of $10, and retained more than $15 per hour for its operations and any costs associated with the respite worker, such as payroll taxes and benefits. These notable differences raise questions about the appropriateness of the hourly rate paid to vendors.
Source: California State Auditor’s analysis of information received from the five selected regional centers.
NA = Not applicable as vendor does not provide services under this model.
* Throughout the report we use the term Employer of Record model to indicate the process used when the family selects the individual who will provide the in‑home respite service. Certain vendors we reviewed refer to this model using other terms, such as the parent conversion rate.
† Westside Regional Center (Westside) predominately uses four vendors for in‑home respite services. We selected those four vendors for review. In addition, we selected BrightStar as our fifth vendor. However, BrightStar only provides services to one consumer. BrightStar did not respond to requests from Westside to provide us with the hourly wage it paid to the respite worker for the one consumer.
Based on our review of four high‑earning vendors, vendors may be retaining more funds than reasonable to cover their administrative costs and remain profitable. To identify whether the differences between the vendor hourly rates and the hourly wages paid to respite workers appear reasonable, we requested information from the four vendors that each earned more than $7 million in revenue from providing in‑home respite services during our audit period. Table 5 presents the proportion of the vendors’ payment rates that each reported spending on hourly wages, payroll taxes, training, administrative costs, and net profit. For example, Accredited Respite Services, Inc. (Accredited) reported retaining nearly 5 percent of its Full Service payment rate as net profit and reportedly spent 30 percent of the payment rate on administrative costs. Similarly, Inland Respite also reported spending about 30 percent of the payment rate on administrative costs and retaining roughly 12 percent as net profit. Premier Healthcare Services, Inc. (Premier Healthcare) reported administrative costs of roughly 39 percent. In the following section, we discuss in more detail these vendors’ administrative costs as they relate to each entity as a whole.
|ACCREDITED RESPITE SERVICES, INC.
|INLAND RESPITE, INC.
|IN-ROADS CREATIVE PROGRAMS, INC.
|PREMIER HEALTHCARE SERVICES
|NORTH LOS ANGELES COUNTY REGIONAL CENTER
|INLAND REGIONAL CENTER
|INLAND REGIONAL CENTER
|WESTSIDE REGIONAL CENTER
|Rate received as of January 2016
|Category of Expenditure
|Respite worker hourly wage
|Respite worker payroll taxes
|Respite worker benefits
|Respite worker training
Source: Unaudited information reported by vendors earning greater than $7 million in revenue by providing in‑home respite services.
* In-Roads Creative Programs, Inc. provided some detail on its administrative costs; however, it was unable to provide all administrative costs, and therefore, its net profit is most likely overstated.
† Premier Healthcare did not specify separate amounts for respite worker wages and benefits and respite worker payroll taxes. Therefore, the amounts are combined in this table.
‡ For the purposes of this table, we have included all costs not directly related to the respite worker in this category of expenditure.
We asked the DDS assistant deputy director whether DDS knew what the appropriate level of net profit and administrative costs should be for in‑home respite vendors. He stated that DDS does not have information regarding the profit margins that in‑home respite vendors are making, and it has not undertaken a study of whether vendors are retaining reasonable amounts of their payment rates for their costs and profit. Further, he explained that DDS has not developed guidance or conducted any analysis on an appropriate or reasonable amount that vendors should be retaining for net profit or spending on administrative costs specifically for in‑home respite services. DDS does have guidance on appropriate administrative cost thresholds for other services—those that are subject to a 15 percent administrative cost cap. However, according to the assistant deputy director, this guidance is not specific to net profit. Services that are negotiated and obtained through a contract between vendors and regional centers are subject to the 15 percent administrative cost cap. However, services provided through a vendorization process, such as in‑home respite services, are not subject to any administrative cap. Obtaining and reviewing vendors’ cost statements would allow DDS to conduct such a study, and until it does so, there is risk that vendor rates are not appropriate.
Some of the regional centers use the FMS model, which is less costly than the Employer of Record and Full Service models. Specifically, DDS issued emergency regulations effective October 1, 2011, based on a federal requirement from the Centers for Medicare and Medicaid Services (CMS) that every state, including California, use a vendor when funding voucher services for in‑home respite care, among other services.5 Consumers choosing their own individual respite worker have the option of choosing how their respite services are coordinated, such as by selecting a vendor that uses the Employer of Record or the FMS model. One key difference, however, is that the rates paid to FMS vendors and their respite workers are defined in regulation unlike Employer of Record rates, which are negotiated. Therefore, under the FMS model, either the adult consumer or family member is vendorized and then hires the respite worker. The FMS vendor acts as the adult consumer's, or family member's, agent in performing payroll duties. Because the adult consumer or family member is vendorized under the FMS model, they are responsible for recruiting and scheduling the respite worker. As a result, the in‑home respite vendor sponsoring the respite worker has fewer responsibilities and thus lower operating expenditures. Based on information we received from one regional center, Eastern Los Angeles Regional Center, as of March 1, 2016, the highest hourly rate it paid an FMS vendor was $13.10. This rate was nearly $3.60 an hour less than the average statewide payment rate under the Employer of Record model shown in the table in Appendix B.
Vendors’ rates under the FMS service model are considerably lower than under the other models. Three of the five regional centers we reviewed use this approach, and each has done so on a limited basis. According to the resource district manager at San Andreas Regional Center, the FMS model is its preferred model. However, it is not always a viable option because some cities’ minimum wage laws are above the pay rate identified in statute; therefore, the Employer of Record model has to be used. Nevertheless, DDS has not taken steps to fully inform or encourage regional centers to use FMS vendors when feasible. The DDS assistant deputy director stated that the FMS model offers consumers and their families another choice as to how respite care is coordinated. He explained that the choice of how service is coordinated—and therefore which mode of service delivery to use—is determined based on the unique needs of the consumer and family and is part of the individual program plan process; therefore, DDS does not suggest one method over the other. Nonetheless, DDS is not precluded from informing regional centers about the cost savings to the State that can be realized by using an FMS model to provide in‑home respite services. Thus, DDS has likely missed an opportunity for additional regional centers to use FMS vendors, which might result in cost savings for the State.
Vendors Earning More Than $7 Million in Revenue for In‑Home Respite Services Reported High Administrative Costs
Of the more than 250 vendors that provided in‑home respite services in fiscal year 2014–15, four received more than $7 million in revenue specifically for these services. For vendors earning this level of revenue, we were asked to determine specific financial information, including the revenue they received from public funds, categorized by service model; their annual net income; and the amount and percentage of their administrative costs. Table 6 presents this information, as reported by the vendors as of June 30, 2015.6 Two of the vendors, Premier Healthcare and Accredited, have several locations in the State and provide additional services to in‑home respite care. In addition, both Premier Healthcare and Accredited are vendorized by different regional centers. DDS provides funding to each vendorized company, treating each one as a separate vendor. Therefore, the financial information presented in Table 6 for Premier Healthcare and Accredited represents only the revenues and expenditures for in‑home respite care services for the vendors authorized by Westside Regional Center (Westside) and North Los Angeles County Regional Center (North Los Angeles), respectively.
|Vendor and Its Respective Regional Center
|Accredited Respite Services, Inc.*†
|Inland Respite, Inc.
|In-Roads Creative Programs, Inc.
|Premier Healthcare Services*
|North Los Angeles County Regional Center
|Inland Regional Center
|Inland Regional Center
|Westside Regional Center
|Employer of Record
|DIRECT SERVICE EXPENDITURES
|Respite Worker Wages and Benefits
|Recruitment and Screening
|Training and Travel
|Percentage of Total Revenue
|Wages and Benefits
|Other Operating Expenditures
|Provision for Income Taxes
|Percentage of Total Revenue
|Percentage of Total Revenue
Source: Unaudited information reported by the specified vendors.
* Accredited Respite Services, Inc. (Accredited) and Premier Healthcare Services (Premier Healthcare) provide other services in addition to in‑home respite. The information presented in this table is specific to revenue and expenditures for in‑home respite services.
† Information provided by Accredited is for the period April 1, 2014, to March 31, 2015.
‡ In-Roads Creative Programs, Inc. did not provide a breakdown of its revenue by type of service model.
§ Premier Healthcare did not specify separate amounts for respite worker wages and benefits and respite worker payroll taxes. Therefore, the amounts are combined in the table.
ll According to Inland Respite, Inc., a small percentage of wages, benefits, and other operating expenditures under the Administrative Cost category are direct service expenditures.
State law in effect during the audit period required all vendors that received $500,000 or more in annual revenue from DDS to submit audited financial statements to the regional center that vendorized them. 7 However, our review determined that not all vendors had been complying with this requirement. For example, of the four vendors that received more than $7 million in revenue during fiscal year 2014–15, only Accredited and Premier Healthcare submitted the required audited financial statements to North Los Angeles and Westside, respectively. Officials from In‑Roads Creative Programs, Inc. (In‑Roads) explained in September 2016 that they anticipate the audit of their most recent financial statements to be completed by October 2016. In‑Roads also told us that it has not obtained an audit of its financial statements for the years ending December 31, 2013, and December 31, 2014, and its chief executive officer stated that it plans to contract for these audits after it completes the audit of its most recent financial statements for the year ending December 31, 2015. The remaining vendor, Inland Respite, recently obtained an audit of its financial statements for the year ending December 31, 2013.
In an attempt to obtain current financial information for these vendors, we requested that they provide information regarding their revenues and expenditures specific to in‑home respite services as of the fiscal year ending June 30, 2015. Table 6 presents information they reported and is specific to the regional center by which the vendor is authorized. Table 6 also shows the varying amounts that vendors reported spending on direct service expenditures or those related to their respite workers, such as wages, payroll taxes, and recruitment costs. For example, Premier Healthcare reported that it spent nearly 86 percent of its in‑home respite revenue on costs related to the respite workers. This is markedly higher than the 63 percent spent on the same expenditure category by Inland Respite.
Unlike certain other services that DDS provides, in‑home respite services currently has no cap on vendors’ administrative costs, which could explain some of the variance seen in Table 6. Specifically, effective March 2011, state law required all contracts between service providers and regional centers to specify that the service provider must not spend more than 15 percent of program funds on administrative costs. Regional centers may purchase services by way of vendorization, which is the process used to authorize vendors to provide in‑home respite services, or by entering into a contract with a service provider. Because there is no corresponding cap on administrative costs for services provided through the vendorization process, the 15 percent cap does not apply to vendors providing in‑home respite services. Table 6 shows that only one vendor, Premier Healthcare, reported administrative costs, which include wages and benefits of administrative staff and other operating expenditures, that were less than 15 percent. Yet, the portion of its full service rate spent on administrative costs shown previously in Table 5 was 39.4 percent—significantly higher than the 12.2 percent shown in Table 6. The vendor did not fully explain why its administrative costs in Table 5 are higher, but one reason it did provide is that these costs include amounts such as program coordinator pay that Premier Healthcare believes are direct service costs. However, we included these costs as administrative costs because they were not specific to the cost of the respite worker. As previously discussed, Table 6 presents the revenues and expenditures for in‑home respite services for vendors as of June 30, 2015. Table 5 presents the breakdown of the Full Service hourly rate received by the vendor.
When we followed up with Accredited, it provided us with a reasonable explanation for the difference in the administrative costs it reported and that we presented in Table 5 and Table 6. Specifically, Accredited stated that the 30 percent in administrative costs it reported, which we present in Table 5, reflects costs under the Full Service model, which is inherently more costly due to vendor responsibilities that include scheduling services and recruiting respite workers. In contrast, Accredited indicated that the roughly 19 percent it reported as administrative costs that we present in Table 6 includes costs for both the Full Service and Employer of Record models, and the Employer of Record model is less costly to operate. Accredited stated that most of its reported administrative costs that are presented in Table 6 relate to services provided under the Employer of Record model, which is why its administrative costs we present in this table are less than those we present in Table 5. Although the other three vendors did not cite this as a reason for their differences, this explanation could reasonably apply given they also offer services under the Employer of Record model. Further, Table 6 shows that In‑Roads reported the highest administrative cost, at almost 30 percent. Although the wages and benefits it reportedly paid to its administrative staff are significantly lower than the amounts the three other vendors reported, the amount reported by In‑Roads in the other operating expenditures category is substantially higher than two of the vendors. When we requested additional information about these expenditures, In‑Roads could not provide an exact breakdown of the costs that make up this category, but did explain various reasons for the high costs, including the use of attorneys to understand labor laws and rent for many outlying offices that its staff and consumers use.
Inland Respite reported administrative costs at more than 28 percent and indicated that a substantial portion of its other operating expenditures were from mileage for respite workers. Accredited reported administrative costs of roughly 19 percent, which includes an amount for the provision for income taxes and a large amount dedicated to wages and benefits of administrative employees. Without a cap on administrative costs, the State runs the risk that vendors are spending unreasonable amounts on these types of expenditures. Further, without obtaining cost statements from vendors and ensuring that they are promptly submitting audited financial statements, DDS remains unaware of the financial condition of these vendors or whether their rates are appropriate.
The information provided by the four vendors in Table 6 also indicates that their reported net income ranged from nearly 2 percent to almost 8 percent. However, DDS officials explained that it does not have information regarding the profit margins in‑home respite vendors are earning. DDS also has not developed guidance or conducted any analysis on an appropriate or reasonable amount vendors should be retaining for net income or spending on administrative costs as it relates specifically to in‑home respite services. Although DDS has issued some guidance on what constitutes appropriate administrative costs for service providers subject to the 15 percent administrative cost cap, this guidance is not specific to net profit.
Vendors Providing In‑Home Respite Services Receive Minimal Monitoring Once They Are Authorized by the Regional Centers
The five regional centers we reviewed have adequate processes for initially authorizing vendors to provide in‑home respite services. The vendorization process requires regional centers to verify—before a vendor is allowed to provide services to consumers—that the vendor’s application meets the requirements specified in regulations. Specifically, regulations state that a vendor’s application must contain a proposed or existing service design, a service provider agreement, and a disclosure statement form, among other things. The five regional centers we visited used varying approaches to review vendors’ applications. For example, the regional centers have checklists, guidelines, or policies and procedures to assist with their review. These types of documents can help staff identify the items that regulations require as well as additional information or documents that the regional center may require. For example, North Los Angeles explained that it has a detailed technical assistance process that includes conducting orientations to ensure that vendors are aware of the requirements to become authorized and to encourage each vendor to determine whether it has a sound business plan. Further, some regional centers have additional requirements, such as carrying workers’ compensation or abuse and molestation liability insurance, and they require vendors to certify that they will comply with various requirements, including those applicable to in‑home respite services.
Once a regional center has authorized the vendor, the vendor sends the necessary information to DDS so that it can establish an hourly rate of pay that the vendor will receive for its service. DDS is required to perform another review of the program design to ensure that it satisfies applicable requirements, and if satisfied, it issues the vendor a temporary hourly rate. Regulations also require that regional centers at least biennially review all vendor files they maintain to determine whether the vendorization information is current, accurate, and complete. In addition, regional centers have the authority to terminate vendorization for noncompliance with vendorization requirements.
Our review found that regional centers could not demonstrate adequately, if at all, that they conduct reviews of vendor files at least every two years as required to ensure that vendors continue to comply with the vendorization requirements. In fact, although three regional centers indicated they review the files to ensure they are current, none could fully demonstrate that this review is conducted. For example, North Los Angeles’s community services director explained that the regional center requires staff to use a checklist during its review of the files, but does not require staff to document or retain the completed checklist; she further explained that she will require the checklist to be documented and retained going forward. Westside’s director of community services stated that although the regional center does not have a formal policy to review vendor files, staff job duties require staff members to routinely review the files. She provided us with a job description for these staff members, which indicates they are to maintain accurate vendor records; however, there is no evidence to verify whether the staff members actually perform those duties. Inland Regional Center indicated that in accordance with regulations, it conducts a review of the vendors’ files at least biennially, but it could not provide any documentation of the review. The remaining two regional centers acknowledged that they do not review the files as required by regulations. Because the regional centers could not provide sufficient evidence demonstrating that they consistently perform a review of the vendor files, the regional centers risk that some vendors may not comply with vendorization requirements after initially being authorized to provide in‑home respite services.
Nonetheless, we did observe that North Los Angeles takes steps to help ensure vendors comply with certain requirements. State law in effect during our audit period required that a vendor receiving $500,000 or more from one or more regional centers during the respective vendor’s fiscal year obtain an independent audit of its financial statements for the period. North Los Angeles includes information on its website regarding this requirement and emphasizes the need for vendors to submit the required audits. As part of this information, North Los Angeles states that regional centers are required by state law to take appropriate action, up to termination of vendorization, for the vendor’s failure to provide an independent audit report as well as adequate resolution of issues identified in the report. In addition, North Los Angeles sends notices to those vendors that fail to submit the independent audit report as required and informs the vendor that failure to meet this requirement will result in termination of its vendorization. As mentioned previously, Accredited, which is vendorized by North Los Angeles, was one of only two vendors that received more than $7 million in revenue during fiscal year 2014–15 that obtained a current audit of its financial statements. Further, North Los Angeles decided to terminate one of its vendors that consistently failed to satisfy this requirement, a decision that DDS upheld in May 2016. Without obtaining those reports, the regional centers are hindered in their ability to monitor a vendor’s financial condition and identify issues that could have an impact on regional center services.
Moreover, although all regional centers we reviewed informed us that they have a process to review information, such as billing and payment authorizations, regarding vendors’ services provided to consumers, none have procedures that include ensuring vendors provide sufficient training to respite workers, that respite workers obtain the required certifications, and that the quality of services provided by the vendor for in‑home respite care is adequate and consistent across consumers. Although regional centers generally ensure that vendors have updated business licenses and insurance certificates, we did not identify any other actions that the regional centers are taking to monitor the vendors’ compliance with their program design and service outcomes. In addition, regulations require each vendor to perform certain activities, such as submitting to the regional center an annual self‑review of the vendor’s effectiveness in relation to its service design. This review includes a self‑assessment of the vendor’s ability to meet the in‑home respite needs of consumers served, the number of consumers served, and the degree to which family members were satisfied with the service the vendor provided. However, in our review of vendor files, none of the regional centers consistently ensured that vendors submitted these self‑reviews as required. Vendors’ submission of these reviews was notably infrequent; in fact, at the time we conducted our audit, only two of the 25 vendor files we reviewed included an annual self‑review for the vendor’s most recent fiscal year. One of the regional centers whose vendor files we reviewed that did not contain the self‑reviews stated that if it does receive them from the vendor, it places the self‑reviews in the vendor file; however, the regional center stated that the review is not something that it requires because the regional center believes it has limited value. The remaining four regional centers explained that they have not required vendors to submit self‑reviews or that they lacked the staff resources during the period of our review to ensure that they were collected. Nevertheless, ensuring that these self‑reviews are submitted and evaluated provides regional centers with an opportunity to gauge the vendors’ performance, evaluate consumer satisfaction, and identify any areas of needed improvement in their quality of service.
Although there are no requirements that regional centers monitor vendors, they are not precluded from doing so, and we found that two regional centers had previously performed reviews of vendors but chose to stop doing so because of funding constraints. For example, in 2011 the Inland Regional Center formally conducted quality assurance audits of the program, employee, and consumer records for two of the five vendors we selected for review. One of these audits concluded that the respective vendor should require all routine respite workers to have ongoing training on developmental disability topics, among other things, and recommended conducting such trainings twice a year. The audit also found that not all of the employee files contained all of the required documentation, including CPR and first aid certifications. In the audit of the other vendor, Inland Regional Center had a similar finding related to training and noted that regular respite workers should be offered trainings on developmental disability topics. The conclusions reached in these quality assurance audits highlight the value of conducting such reviews, since Inland Regional Center identified key areas for needed vendor improvement in respite service delivery.
Nevertheless, when we asked Inland Regional Center why it no longer conducts these audits, the director of community services stated that the auditing requirement is not mandated or funded; as a result, he cut funding for the auditing program about five years ago and shifted the resources toward other business needs. Similarly, the community services director of North Los Angeles, which conducted its last quality assurance review in 2004 for one of the five vendors we selected for review, explained that it no longer evaluates in‑home respite vendors annually because there is no requirement to do so and no funding to conduct such evaluations. The remaining three regional centers we reviewed had similar responses as to why they do not monitor vendors regularly.
Finally, although in‑home respite workers provide direct services and care to individuals with developmental disabilities, these workers are not required to undergo criminal background checks. In contrast, a program implemented in 2016 that was established by state law to create a home care aide registry, overseen by the California Department of Social Services, does require certain home care aides to undergo a criminal background check with the California Department of Justice to demonstrate they are of reputable and responsible character. Previous analysis related to similar proposed legislation indicates that services provided under the Lanterman Developmental Disabilities Services Act (Lanterman Act), which includes in‑home respite services, were excluded from this recent program because these services are provided in accordance with individual program plans that are developed, implemented, and monitored by regional centers, which in turn, are overseen by DDS. The analysis concluded that workers, including in‑home respite workers, providing services under the Lanterman Act are already subject to oversight, quality assurance, and training requirements that, for the most part, far exceed the requirements of the proposed legislation. Although we acknowledge this oversight framework exists, there is no requirement that in‑home respite workers undergo criminal background checks. Also, as noted in this report, we found the oversight exerted over the provision of in‑home respite services by the regional centers and DDS to be very limited. Further, in‑home respite services—the focus of this audit—is just one of many services offered under the Lanterman Act, and workers providing other services under the act may also not be required to undergo criminal background checks. Such a requirement could help ensure the health and safety of individuals with developmental disabilities that receive these services.
DDS Should Increase Its Oversight of Regional Centers’ Compliance With State and Federal Requirements
DDS performs limited monitoring of regional centers’ compliance with the state and federal requirements applicable to in‑home respite services. In fact, its current monitoring efforts in this area consist entirely of the fiscal audits of regional centers it is required to conduct at least every two years. However, these audits generally do not include a review of in‑home respite services. We are not alone in our concern with DDS’s limited monitoring. Several years ago CMS reported that, among other findings, DDS needed to do more to ensure that regional centers had methods for identifying, investigating, and referring vendor fraud cases, and to ensure that vendors’ owners and key management disclose all required criminal conviction information. DDS needed to take these actions in order for the State to continue receiving federal funding. Although at that time DDS took some steps to address these concerns, we found that regional centers continue to not ensure their vendors’ compliance with these requirements. Without increased oversight from DDS to ensure that regional centers are complying with requirements related to in‑home respite services, DDS lacks assurance that services are being provided as intended.
For certain eligible consumers, including those receiving in‑home respite services, the regional centers can purchase services from vendors using Medicaid funds made available to them through DDS. Medicaid, known as Medi‑Cal in California, is a jointly funded, federal‑state health insurance program that includes long‑term care benefits for certain low‑income persons and people in financial need. To ensure that regional centers implement the requirements of the Medicaid Home and Community‑Based Services Waiver (Medicaid Waiver), DDS conducts, among other activities, fiscal audits of the regional centers. In its Medicaid Waiver policy manual, DDS commits to conducting fiscal audits of each regional center at least every two years with follow‑up audits in alternate years. Further, the Lanterman Act requires DDS to audit state funds provided to the regional centers, which DDS can accomplish through the biennial fiscal audits it is supposed to conduct. DDS’s standard audit program directs its auditors to test a sample of the regional centers’ expenditures for services, which may include in‑home respite services, that are provided to consumers to ensure that the expenditures are allowable.
However, DDS has not audited regional centers every two years as required, and for those audits it has conducted, its review of in‑home respite services has been minimal or nonexistent. Specifically, we found that DDS completed 14 of the 21 fiscal audits required for fiscal years 2013–14 and 2014–15. According to DDS’s deputy director of administration, the delays in completing its audit reports are due to audit staffing shortages and a lengthy internal review process for the audit report and the evaluation of information the regional centers submit. She stated that DDS is working with its personnel section on improving recruitment efforts for auditors and is moving toward a more streamlined internal review process. Even so, DDS’s fiscal audits are a key monitoring mechanism that, if not completed every two years, could allow any fiscal problems at an unaudited regional center to continue undetected. Further, these audits do not always include a review of vendor files maintained by the regional center or a review of expenditures related to vendors that provide in‑home respite services. Specifically, according to the deputy director of administration, in‑home respite vendors are part of the universe of vendors from which DDS selects a sample to review. A sample may not include any in‑home respite vendors because the audits cover all service types, and in‑home respite services is just a small percentage of regional centers’ expenditures.
Further, DDS performs no other monitoring activities specific to in‑home respite services. When we requested information on its monitoring efforts of this program, DDS provided us with a list of various monitoring and oversight activities that it stated it performs on all its services. However, when we asked the assistant deputy director which of these activities were specific to in‑home respite services, he confirmed that only the biennial fiscal audits might include a review of in‑home respite services. Without effective monitoring of regional centers, DDS has little assurance regional centers are complying with applicable laws and regulations and whether consumers are receiving the intended in‑home respite services.
As an example of the need for additional oversight by DDS, in January 2011 CMS published a comprehensive program integrity review of Medi‑Cal that identified concerns that regional centers were not always ensuring that vendors were eligible providers and were regardless allowed to receive federal funds. Specifically, CMS reported that the State does not capture all required ownership, control, and relationship information from vendors. In response to this finding, in December 2011 DDS adopted emergency regulations requiring all vendors to complete a disclosure form identifying certain individuals, such as their business owners and key managers. Further, biennially, the regulations require the regional centers to ensure that vendors disclose all required criminal conviction information for fraud involving government programs and are otherwise eligible for vendorization. Any such unqualified vendors are ineligible to receive federal funds.
Nevertheless, although DDS has taken some steps to address these concerns, it can increase its oversight to ensure regional centers’ compliance with requirements regarding vendors’ disclosure forms. Specifically, in our review of the five regional centers and a selection of five vendor files at each center, for a total of 25 vendor files, we found that only one regional center—North Los Angeles—fully complied with this requirement. At the remaining four regional centers, we found problems in eight of the 20 vendor files we reviewed. In some cases, the regional centers could not demonstrate that they had collected the disclosure forms at all, and in other cases the regional centers could not demonstrate that they had verified that the individuals on the forms were not excluded from receiving federal funds. Three of the regional centers acknowledged that the issues we identified were caused by a lack of oversight on their part in ensuring that the forms were collected and verified in a timely manner. The remaining regional center, Inland Regional Center, could not explain why it did not collect the vendor disclosure form or verify whether the individuals were eligible to receive federal funds.
Although the responsibility for collecting and verifying these disclosure forms resides with the regional centers, DDS has a responsibility to ensure that regional centers are complying with applicable requirements. State law requires regional centers to review the disclosure information. According to the deputy director of administration, as part of its audit procedures, DDS reviews the disclosure forms and supporting documentation of the regional center’s verification that vendors are eligible to receive federal funding. However, we question how effective these reviews are, given that, as described previously, DDS has not conducted these audits in a timely manner as required, and we identified several problems with regional centers’ compliance with the requirements regarding vendors’ disclosure forms. Thus, until DDS implements appropriate oversight measures to ensure that regional centers are adhering to these requirements, it runs the risk that some vendors may not be eligible to receive federal funding.
To ensure that DDS is paying reasonable and appropriate hourly rates to vendors for in‑home respite services, the Legislature should clarify whether the rate freeze imposed by the 1998 legislation is still in effect despite the numerous legislative rate adjustments made since then. Further, the Legislature should clarify whether the 2003 legislation that imposed a cap on vendors’ hourly payment rates constitutes only a ceiling on increases of in‑home respite rates and require DDS to resume collecting cost statements and adjust the rates if appropriate.
To ensure that vendors’ in‑home respite hourly payment rates are reasonable and appropriate, particularly when compared to their administrative costs and the hourly wages they pay to respite workers, the Legislature should require DDS to conduct an in‑depth review of its in‑home respite rates by November 1, 2017. In conducting this review, the Legislature should require DDS to perform the following:
- Obtain and analyze all vendors’ cost statements to determine their costs of providing services and whether vendors’ administrative costs are reasonable.
- Obtain information from vendors on the hourly wages they pay to respite workers and analyze this information to determine whether vendors’ hourly rates are reasonable.
- Using information from the cost statements, identify whether vendors’ temporary hourly rates should be converted to permanent rates.
- Submit a report to the Legislature on the results of its review, including a proposal on the extent to which legislative changes are needed to ensure that in‑home hourly respite rates are appropriate.
To ensure the health and safety of individuals with developmental disabilities, the Legislature should require workers who provide in‑home respite services to consumers to undergo a criminal background check. For the other services that fall under the Lanterman Act, the Legislature should require DDS to conduct a review of the types of services provided directly to consumers and whether any oversight mechanisms are in place to ensure that workers providing these services do not have criminal backgrounds. The Legislature should require DDS to report the results of this review no later than December 31, 2017, and, using the results of this review, determine whether legislation requiring such workers to undergo criminal background checks is necessary to protect the health and safety of individuals with developmental disabilities.
To ensure that regional centers are aware of the benefits, including cost savings to the State that can be realized by using FMS vendors, DDS should formally communicate to regional centers regarding the model.
To ensure that in‑home respite vendors are providing quality services and that vendors are adhering to state requirements, DDS should issue regulations requiring regional centers to conduct periodic and ongoing reviews of vendors’ programs, employees, and consumer records.
To ensure that in‑home respite vendors comply with vendor requirements on an ongoing basis, DDS should require the regional centers to develop a process to conduct biennial reviews of the vendor files the regional centers maintain and document the outcome of the review in the files. DDS should require the regional centers to take appropriate action to ensure that vendors comply, up to and including terminating the vendorization, if necessary.
To ensure that it is providing oversight in accordance with state law and federal requirements, DDS should ensure that it performs audits of each regional center every two years as required. In conducting these audits, DDS should consistently include a review of in‑home respite services.
We conducted this audit under the authority vested in the California State Auditor by section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
ELAINE M. HOWLE, CPA
October 25, 2016
Laura G. Kearney, Audit Principal
Rosa I. Reyes
Ryan T. Canady
Veronica Perez, MPPA, CFE
Heather Kendrick, Sr. Staff Counsel
For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255.
4 The average hourly wage paid to the respite worker at the statewide level and for each regional center is a weighted average. This average takes into consideration the numbers of consumers served by each vendor as a proportion of the total number of consumers served by the respective regional center. Go back to text
5 Respite services can be obtained from a respite vendor by use of a voucher, which is a means by which a family may choose their own service provider directly through a payment, coupon, or other type of authorization. Go back to text
6 Accredited provided information for the period of April 1, 2014, through March 31, 2015. Go back to text
7 State law effective June 9, 2016, requires vendors that receive at least $500,000 but less than $2 million in state funds to obtain an independent review of their financial statements for the most recent reporting period. Vendors that receive $2 million or more in state funds must obtain an independent audit of their financial statements. Go back to text