REPORT DIGEST DEPARTMENT OF HEALTHCARE AND FAMILY SERVICES FINANCIAL AUDIT For the Year Ended: June 30, 2012 Release Date: April 25, 2013 Summary of Findings: Total this audit: 2 Total last audit: 4 Repeated from last audit: 2 State of Illinois, Office of the Auditor General WILLIAM G. HOLLAND, AUDITOR GENERAL To obtain a copy of the Report contact: Office of the Auditor General, Iles Park Plaza, 740 E. Ash Street, Springfield, IL 62703 (217) 782-6046 or TTY (888) 261-2887 This Report Digest and Full Report are also available on the worldwide web at www.auditor.illinois.gov INTRODUCTION This report covers our financial audit of the Department of Healthcare and Family Services (Department) for the year ended June 30, 2012. A State compliance examination covering the two years ended June 30, 2013 will be performed next year. SYNOPSIS • The Department’s year-end financial reporting contained weaknesses and inaccuracies. • The Department failed to have a documented written rate-setting methodology for the calculation of the Teachers’ Retirement Insurance Program premiums. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS NEED TO IMPROVE FINANCIAL STATEMENT PREPARATION The Department’s year-end reporting in accordance with generally accepted accounting principles (GAAP) submitted to the Illinois Office of the Comptroller (Comptroller) contained weaknesses and inaccuracies. Several errors were identified during the audit of the Department’s draft financial statements. The Department’s financial statements were adjusted for the following reporting errors: • An adjustment identified by management totaling $102.332 million was made to restate the Net Other Postemployment Benefit Obligation as of June 30, 2011 due to an error in the calculation of “Benefits paid during the year” for the year ended June 30, 2011. • The Department did not recognize revenues and expenditures for the Department’s May and June 2011 Medicare A and B Premiums that were processed in Fiscal Year 2012, totaling $67.443 million. In regard to Medicare A and B Premiums, the Federal Government reduces the Department’s federal draws instead of having the Department submit an actual payment, as a result, these premiums must be recognized as an increase to federal revenues and expenditures in the financial statements. As a result, federal government revenues and health and social services expenditures were understated by $67.443 million. • The Department incorrectly calculated the prompt pay interest due from the Health Insurance Reserve Fund. The prompt pay liability was understated by $16.051 million. Also, during our review, we noted other errors in the preparation of the Department’s financial statements. The errors included calculating and classifying liabilities incorrectly, understating revenues and expenditures, double counting liabilities, misclassifying revenues and calculating receivables incorrectly. While the Department’s internal control process did not identify all of the errors noted, the errors were not material to the Department’s financial statements taken as a whole. (Finding 1, pages 57-58) This finding was first reported in 2009. We recommended the Department implement additional internal control procedures to ensure GAAP Reporting Packages are prepared in an accurate manner. Department officials accepted the recommendation and stated that they have and will continue to assess the financial reporting process and related procedures and implement necessary internal control changes to improve the accuracy of the financial statements. (For the previous Department response, see Digest Footnote #1.) LACK OF WRITTEN RATE-SETTING METHODOLOGY The Department did not have a documented written rate- setting methodology to calculate the insurance rates that are used to determine the premium rates charged to participants for the Teachers’ Retirement Insurance Program (TRIP). We noted that only one individual was involved in calculating the insurance rates and there was no written rate-setting methodology of how this individual calculates the TRIP insurance rates. This individual left the agency near the end of the fiscal year and the Department did not have any other employees aware of how the previous individual calculated the rates. Additionally, there was no formal process for a documented review of the insurance rate calculation. Further, auditors noted that during fiscal year 2012, the Department did provide information used to determine health care premiums; however, there was no rate-setting methodology provided to the Teachers’ Retirement System of the State of Illinois explaining where the information was obtained from and how the information was used to determine the premium rates. (Finding 2, pages 59-60) This finding was first reported in 2010. We recommended a formal written rate-setting methodology be developed as required by the State Employees Group Insurance Act. We also recommended all submission requirements of the State Employees Group Insurance Act be complied with. Department officials stated that Executive Order 12-01 transferred the Office of Healthcare Purchasing from HFS back to CMS effective July 1, 2012. The functions associated with State Healthcare Purchasing and the development of a formal written rate-setting methodology are now the responsibility of CMS. (For the previous Department response, see Digest Footnote #2.) AUDITORS’ OPINION Our auditors stated the Department’s financial statements as of and for the year ended June 30, 2012 are fairly presented in all material respects. WILLIAM G. HOLLAND Auditor General WGH:tld AUDITORS ASSIGNED This audit was performed by the Office of the Auditor General’s staff. DIGEST FOOTNOTES #1 - NEED TO IMPROVE FINANCIAL STATEMENT PREPARATION – Previous Department Response 2011: The Department accepts the recommendation. The Department is continually assessing the financial reporting process and implementing procedures to improve upon timeliness and accuracy. #2 - LACK OF WRITTEN RATE-SETTING METHODOLOGY – Previous Department Response 2011: The Department accepts the recommendation. The Department will develop a formal written rate-setting methodology and comply with all submission requirements as required by the State Employees Group Insurance Act.