REPORT DIGEST

DEPARTMENT OF HEALTHCARE AND FAMILY SERVICES

FINANCIAL AUDIT
FOR THE YEAR ENDED JUNE 30, 2017

Release Date:  March 20, 2018

FINDINGS THIS AUDIT:  13

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  10 -- 2 -- 12
Category 2:  0 -- 1 -- 1
Category 3:  0 -- 0 -- 0
TOTAL:  10 -- 3 -- 13

FINDINGS LAST AUDIT: 4

Category 1: Findings that are material
weaknesses in internal control and/or a
qualification on compliance with State laws
and regulations (material noncompliance).
Category 2: Findings that are significant
deficiencies in internal control and
noncompliance with State laws and
regulations.
Category 3: Findings that have no internal
control issues but are in noncompliance with
State laws and regulations.

State of Illinois, Office of the Auditor
General
FRANK J. MAUTINO, 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

SYNOPSIS

• (17-01) The Department failed to implement
adequate fiscal-related monitoring controls
over Managed Care Organization (MCO)
contracts. In addition, the Department failed
to exercise or enforce fiscal-related
monitoring controls as provided for in the
various MCO contracts.
• (17-02)  The Department did not calculate
the annual Medical Loss Ratios (MLRs) of the
State’s Medicaid Managed Care Organizations
(MCOs) for mandatory enrollment for Coverage
Years (CY) 2013, 2014, and 2015. As a result,
the Department did not seek and collect an
estimated $65 million in potential refunds
due back from the MCOs to the State.
• (17-03) The Department did not ensure its
annual financial reports were prepared in
conformity with U.S. generally accepted
accounting principles (GAAP).
• (17-06) The Department and the Department
of Human Services did not maintain adequate
controls to ensure applications for human
service programs were reviewed and approved
or denied within the mandated 45-day
timeframe.
• (17-07) The Department and the Department
of Human Services did not conduct timely
redeterminations of eligibility for Medicaid
recipients.

FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

INADEQUATE CONTROLS OVER FISCALLY MONITORING
MANAGED CARE ORGANIZATIONS

The Department of Healthcare and Family
Services (Department) failed to implement
adequate fiscal-related monitoring controls
over Managed Care Organization (MCO)
contracts. In addition, the Department failed
to exercise or enforce fiscal-related
monitoring controls as provided for in the
various MCO contracts. Since 2013, the
Department has paid the 12 MCOs approximately
$22.5 billion.

While testing the contracts the Department
entered into with the 12 MCOs, we noted the
Department did not:
• Have a review process in place to ensure
MCO capitation payments were accurate. As a
result, we noted instances totaling $619,455
for which the Department had a net
underpayment to the MCOs for services paid
during fiscal year 2017.
• Have a review process in place to ensure
the correct percentage of the MCO incentive
payments, manually calculated, were withheld
in accordance with the MCO contracts. As a
result, we noted instances totaling
$10,991,086 for which the Department overpaid
the MCOs during fiscal year 2017 by failing
to withhold at the rate established by the
contract.
• Review or audit self-reported encounter
data (valid claims of services rendered by
medical providers) submitted to the
Department by the MCOs as required by the MCO
contracts and the federally-approved State
Plan.
• Receive all healthcare program encounter
data.
• Review or audit the MCOs denial of claims
data.
• Review MCO actual administrative costs or
other non-benefit costs.
• Calculate and finalize the MCOs’ annual
Medical Loss Ratio calculations for mandatory
enrollment for Coverage Years 2013, 2014, and
2015. This provision of the MCO contracts is
included to determine whether the MCOs met
established benefit levels for the coverage
year and provides a mechanism for the State
to recoup payments that fail to meet the
target.
• Conduct internal audits over the Managed
Care Program for mandatory enrollment since
2013. (Finding 1, pages 46-48)

We recommended the Department take immediate
action to exercise and enforce monitoring and
accountability provisions established in the
contracts with the MCOs. We also recommended
the Department establish and implement
additional internal controls, internal
audits, and on-site reviews to fiscally
monitor the MCOs to ensure the State’s
Medicaid program is carried out in an
effective, efficient, and economical manner.

The Department accepted the recommendation.

DEPARTMENT DID NOT SEEK POTENTIAL REFUNDS
FROM MANAGED CARE ORGANIZATIONS

The Department did not calculate the annual
Medical Loss Ratios (MLRs) of the State’s
Medicaid Managed Care Organizations (MCOs)
for mandatory enrollment for Coverage Years
(CY) 2013, 2014, and 2015. As a result, the
Department did not seek and collect an
estimated $65 million in potential refunds
due back from the MCOs to the State.

The MLR is defined within the MCO contracts
as total plan benefit expense divided by
total capitation revenue. Each of the MCO
contracts contains a provision requiring the
Department to calculate the MLR within 90
days following the six month claims run-out
period following the CY. The MCOs then have
60 days to review the Department’s
calculation. If the MCO did not meet the
Targeted MLR set forth in the applicable
contract, the MCO is required to refund to
the State an amount equal to the difference
between the calculated MLR and the Targeted
MLR (expressed as a percentage) multiplied by
the CY revenue. According to the MCO
contracts, the State requires health plans to
have a Targeted MLR of 85 percent for the
Family Health Population (FHP), Affordable
Care Act (ACA), Medicare-Medicaid Alignment
Initiative (MMAI), and Managed Long-Term
Services and Supports (MLTSS) plans. The
Integrated Care Program (ICP) plan has a
Targeted MLR of 88 percent.

As an example, assume an MCO was paid $100
million in revenue by the Department for its
ICP plan during CY 2013. Since the ICP
contracts have a Targeted MLR of 88 percent,
the Department would expect the MCO to have
spent, at least, $88 million on benefit
expenses (i.e. not administrative costs or
profit) during CY 2013. After the conclusion
of the six month claims run-out period for CY
2013, the Department receives data from the
MCO indicating that its actual benefit
expense for CY 2013 was only $80 million. In
this example, the MCO would refund the
Department $8 million.

As estimated by the Department’s actuary as
of the end of fieldwork, if the Department
had calculated the CY 2013, CY 2014, and CY
2015 MLRs within the required contractual
timeframe, the Department should have
received at least $65 million in refunds from
the MCOs by June 30, 2017.

Finally, the Department receives
reimbursement from the Federal government to
offset the cost of Medicaid assistance at the
applicable federal financial participation
(FFP) rate. By not calculating the MLRs and
receiving the estimated $65 million in
refunds, the Department has also not
calculated and paid the applicable FFP rate
back to the Federal government; thus,
resulting in a potential liability.  (Finding
2, pages 49-50)

We recommended the Department take action to
ensure all MLRs are timely calculated and any
amounts due back to the State are
aggressively pursued.

The Department accepted the recommendation
and stated the Department has taken steps to
calculate the outstanding Medical Loss Ratios
and recoup any refunds due.

FINANCIAL STATEMENT PREPARATION

The Department did not ensure its annual
financial reports were prepared in conformity
with U.S. generally accepted accounting
principles (GAAP).  We noted the Department
did not perform a sufficient review of all
accounts and amounts recorded within its
financial statements, GAAP Package reports
prepared for the Office of the State
Comptroller to prepare the State’s
Comprehensive Annual Financial Report, and
various additional supporting schedules.  The
following are some of the errors in the
Department’s financial statements, GAAP
packages prepared for the Illinois Office of
the Comptroller, and additional supporting
schedules and analysis we noted:

• The Department did not calculate the annual
Medical Loss Ratios (MLRs) for the State’s
Medicaid Managed Care Organizations (MCOs)
with mandatory enrollment since 2013.
Consequently, the Department had not ensured
reasonable estimations of this activity,
including amounts due to the federal
government from its participation in the
Medicaid program, had been prepared for its
financial reports. To correct the error for
prior years, the Department restated its
beginning net position by $29.2 million,
including an increase in its accounts
receivables related to the MCOs by $67.2
million and an increase in liabilities due to
the federal government by $38 million. To
correct the current year’s errors, the
Department recorded a reduction of its
expenses and an increase in its accounts
receivables related to the MCOs by $22.3
million and increased its liabilities due to
the federal government by $13 million.

• The Department did not calculate and record
its liability to the MCOs for certain
incentive payments. In accordance with the
Department’s contracts with the MCOs, the
Department withholds a percentage from each
MCO’s monthly capitation payment and holds
these amounts within an incentive pool. At
the end of the coverage period, the MCO is
entitled to receive the withheld payments if
the MCO met certain performance measures. The
Department did not record an estimated
liability for accounts payable to the MCOs
where the Department and the MCO had not yet
finalized the performance process at either
June 30, 2017 or 2016. To correct this error
for the prior year, the Department restated
its beginning net position by ($14.3)
million. To correct the current year's
errors, the Department recorded an increase
in its accounts payable and expenses by $37
million.

• The Department lacked adequate controls
over its accounts receivable related to drug
manufacturer rebates. Specifically, one of
the errors noted related to the Department
not applying credit balances of $46.5 million
as of June 30, 2016, and $47.3 million as of
June 30, 2017, to the manufacturers’ accounts
or taken this situation into consideration
during the Department’s financial reporting
process.

• During testing of statutory transfers from
the Public Aid Recoveries Trust Fund (Fund
0421) to the Drug Rebate Fund (Fund 0728) at
June 30, 2017, we noted some transfers were
omitted from the Department’s GAAP Packages.
This error resulted in an understatement in
Fund 0421’s due to other funds and transfers
out and an understatement of Fund 0728’s due
from other funds and transfers in by $402.2
million.  (Finding 3, pages 51-55)

We recommended the Department take action to
ensure all of its transactions are properly
recorded and presented in its financial
statements and GAAP Packages in accordance
with GAAP. Further, the Department should
ensure the accuracy and completeness of its
financial and non-financial information used
during the financial reporting process by
reviewing the source for, and manual and
electronic process of, its underlying
transactions.

The Department accepted the recommendation
and stated the Department plans to implement
changes to address the issues contained
within the overall finding.  This will
include a review of the Department’s GAAP
preparation procedures and consultation with
its contracted CPA firm to limit
opportunities for oversight or human error.

BACKLOG OF APPLICATIONS FOR HUMAN SERVICE
PROGRAMS

The Department of Healthcare and Family
Services and the Department of Human Services
(Departments) did not maintain adequate
controls to ensure applications for human
service programs were reviewed and approved
or denied within the mandated 45-day
timeframe.

The Departments’ Integrated Eligibility
System (IES) takes in applications from
individuals in order to determine eligibility
and subsequent payments for the State’s human
service programs.

As of June 30, 2017, the Departments had
incurred a backlog of 74,649 applications
that were more than 45 days old, with the
oldest application dating back to November
19, 2014. As of January 12, 2018, The
Departments had worked 1,714 applications for
medical services resulting in payments
totaling $209,894 and 676 applications for
SNAP (Supplemental Nutrition Assistance
Program) and TANF (Temporary Assistance for
Needy Families) services resulting in
payments totaling $47,568 incurred during
FY2017.   (Finding 6, page 61)

We recommended the Department of Healthcare
and Family Services work with the Department
of Human Services to implement controls to
comply with the requirement that applications
are reviewed and approved or denied within 45
days.

The Departments accepted the recommendation
and stated the Departments continue to strive
to be in compliance with its mandated
application disposition timelines.

UNTIMELY REDETERMINATION OF ELIGIBILITY

The Department of Healthcare and Family
Services and the Department of Human Services
(Departments) did not conduct timely
redeterminations of eligibility for Medicaid
recipients.

In order to determine if redeterminations
were performed timely, we tested all
individuals who received a capitation payment
on their behalf to a managed care
organization during the audit period and
reviewed their redetermination dates. The
testing results indicated 8,187 individuals’
eligibility redeterminations were not
performed within the required 12 month
period.

The Departments made payments on behalf of
these individuals, totaling $71,300,077, for
medical services during FY2017.  (Finding 7,
page 62)

We recommended the Department of Healthcare
and Family Services work with the Department
of Human Services to establish the
appropriate controls to monitor eligibility
redeterminations, and assign the resources
necessary so that redeterminations of
eligibility are performed annually as
required by the Code of Federal Regulations.

The Departments accepted the recommendation
and stated the redetermination process will
be enhanced with the implementation of the
newly updated processing system in IES Phase
II, which went live on October 24, 2017.

OTHER FINDINGS

The remaining findings pertain to inaccurate
rates used to pay MCOs, incorrect claim
payments made to medical providers and MCOs,
inaccurate determinations of eligibility for
human services programs, lack of controls
over changes to the Integrated Eligibility
System, lack of security controls over the
IES computing environment, service provider
controls, inadequate controls over drug rate
changes, and inadequate project management
over the Pharmacy Benefits Management System.
We will review the Department’s progress
towards the implementation of our
recommendations in our next financial audit.

AUDITOR’S OPINION

The auditors stated the financial statements
of the Department of Healthcare and Family
Services as of and for the year ended June
30, 2017 are fairly stated in all material
respects.

This financial audit was performed by Sikich
LLP.

JANE S. CLARK
Division Director

This report is transmitted in accordance with
Section 3-14 of the Illinois State Auditing
Act.

FRANK J. MAUTINO
Auditor General

FJM:jv