Medicaid Managed Care is large and growing

1. Health Care Authority’s Oversight of the Medicaid Managed Care ProgramJoint Legislative Audit and Review CommitteeApril 23, 2014Lou Adams, CPA, Deputy Director of Performance AuditMelissa Wade, CGAP, Senior Performance AuditorFrank Vito, CPA, Member, Myers & Stauffer LC

2. Medicaid Managed Care is large and growing In fiscal year 2013: • About 1.2 million Washington residents enrolled in Medicaid • 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

3. 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

4. Audit questions • Are managed care organizations overpaying for medical expenses? If they are, why did overpayments go undetected, and how do the overpayments affect premium rates? • Are policies and procedures in place to ensure costs reported by managed care organizations to the HCA’s actuary: • 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?

5. 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

6. 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 FY2013 premium rates

7. How we audited medical claims value of claims: $660 million 1 value of claims: $130 million 2 value of claims: $90 million 7 3 $2.4 million reviewed 4 6 Error rate projected to 8 claims groups 5

8. 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

9. 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?

10. What we found Every $1 million in overpayments results in an estimated $1.26 million overpayments paid by the state • 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.

11. 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.

12. 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. Premium rate recommendations Data Health Care Authority Managed care organizations Actuary 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. Actuary Managed care organizations Data Data Health Care Authority Periodic reviews of data Premium rate recommendations Note: Data includes cost and encounter information

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

14. 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