Report 2015-605 Recommendation 1 Responses

Report 2015-605: High Risk - Covered California: It Must Ensure Its Financial Sustainability Moving Forward, and Its Use of Sole-Source Contracts Needs Improvement (Release Date: February 2016)

Recommendation #1 To: Covered California

Covered California should continue to monitor its plan for financial sustainability and revise the plan 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 if it does not meet its revenue projections and needs to increase its funding or decrease its expenditures to maintain financial solvency. This formal analysis should identify those contracts it could quickly eliminate, among other actions it would take, in the event of a shortfall in revenues.

Agency Response*

Covered California prepared the 'Reserve Adequacy Study' that was due by December 31, 2016. This analysis built upon an earlier analysis completed in May 2016 which concluded that Covered California's reserve strategy will allow it to withstand a significant decrease in enrollment when complemented with corrective actions. This final analysis determined that Covered California should implement a reserve strategy that maintains reserves of 9-12 months, in the near term, in order to maintain solvency following potential drops in enrollment.

  • Response Type†: 1-Year
  • Completion Date: December 2016
  • Response Date: February 2017

California State Auditor's Assessment of Status: Partially Implemented

Although Covered California provided us with an analysis related to the adequacy of its reserve level, it could not produce the underlying documentation that supports this analysis. Instead, staff explained that the analysis is a basic plan for what costs it could cut in the event of decreased enrollment and that it had not identified any specific contracts that would be subject to cuts. However, as indicated by our recommendation, we believe its identification of these contracts is critical. Although Covered California could increase revenues by increasing its charges for health plan premiums, it would not experience the financial impact of such an increase for nine to 18 months according to its proposed 2017-18 budget. Without a formal analysis of its planned actions to reduce expenditures, including identifying specific contracts it would eliminate, Covered California may not be able to react quickly to a significant decrease in enrollment to maintain its solvency. As a result, we do not believe Covered California has taken sufficient corrective action to fully address our recommendation.


Agency Response*

Covered California conducted preliminary research (attached) in preparation for the 'Reserve Adequacy Study' that will be completed by December 31, 2016. This research identified potential corrective actions, including reductions in contract and personnel expenditures and increasing assessment rates, that could be taken if faced with a significant decrease in enrollment. This preliminary analysis indicates that such corrective actions enable Covered California to withstand a significant drop in enrollment.

  • Response Type†: 6-Month
  • Estimated Completion Date: 12/31/2016
  • Response Date: August 2016

California State Auditor's Assessment of Status: Partially Implemented

Covered California has taken steps in creating a formal analysis on the adequacy of its reserve levels.


Agency Response*

Covered California will continue to monitor its multi-year fiscal plan and make the changes necessary to achieve sustainability.

In addition, Covered California will perform a Reserve Adequacy Analysis, to be completed by December 31, 2016, with the following goals and approach:

a. Establish the reserve level necessary to allow Covered California to remain solvent until funding increases and/or expenditure decreases take effect, in the event that revenue falls short of expectations.

b. Determine and quantify the steps Covered California could take to mitigate the impact of reduced enrollment on its fiscal position. An analysis that will be completed by May 31, 2016, includes the following:

i. Identify contracts that can be cut or reduced, both legally and practically.

ii. Identify components of operating expenditures that are variable.

iii. Identify staffing strategies to reduce personal services expenditures.

iv. Evaluate revenue opportunities.

c. Establish a process for the analysis to be periodically updated, which would include an annual discussion with the Covered California Board.

d. State law and Covered California's multiyear fiscal plan will be reflected in the analysis.

  • Response Type†: 60-Day
  • Estimated Completion Date: 12/31/2016
  • Response Date: April 2016

California State Auditor's Assessment of Status: Pending


All Recommendations in 2015-605

†Response Type refers to the interval in which the auditee is providing the State Auditor with their status in implementing recommendations made in an audit report. Auditees must submit a response regarding their progress in implementing recommendations from our reports at three intervals from the release of the report: 60 days, six months, and one year or subsequent to one year.

*Agency responses received after June 2013 are posted verbatim.


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