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The committee met to hear invited testimony regarding the Audit Report on the HealthSelect Contract at the Employees Retirement System (ERS), SAO Report No. 15-007, which was released on November 7, 2014.
 
Chairman Cook Opening Remarks

  • SAO Report revealed several things including weakness and inconsistencies in processes for planning and procuring HealthSelect contract including not defining best value
  • Requested data from current vendor, previous vendor and ERS
  • Requested copy of administrative service agreement between ERS and United Health Care but committee members signed a confidentiality agreement to obtain the information and Chair is unable to discuss contents
    • Seeing the information only increased concerns
    • Not sure why all information is being held as confidential
    • There is a lawsuit on the matter so cannot be discussed since it is a matter of ongoing litigation
  • Chair remains agnostic as to which vendor holds contract as long as it is in the best interest of the State and participants
  • To date committee has received inconsistent answers so continue to seek straight forward answers
  • Legislators should continue to examine large state contracts to ensure best practice and state guidelines are used
  • Legislators should monitor performance after contracts are awarded

 
Cesar Saldivar, Audit Manager of the State Auditor's Office

  • Audit report was one of several contracting audits conducted over the years
  • Was conducted using contract management guide statutes, Texas Administrative Code and any policy and procedures in place
  • HealthSelect contract overview of contract terms were highlighted
    • The HealthSelect contract with United Healthcare Services is valid through the end of fiscal year 2016 and may be extended for two additional years at discretion of ERS
    • The System estimates that administrative fees for the contract term will be $204.8 million
    • System health care claims payments under the contract for fiscal year 2013 exceeded $1.5 billion
  • Overall conclusion that system has established process but processes did not always ensure compliance with state and System criteria for contracts
  • The System had weakness and inconsistencies including not defining best value, as a result SAO is not able to determine if contactor selected was able to provide best value to the state
  • The System generally managed and monitored the HealthSelect contract to help ensure that the contractor performed according to the terms of the contract
    • However, until July 2014, the System did not have a process to reconcile its daily reimbursement payments to detailed health care claims, and it should improve the timeliness of its monitoring activities.  

 
Kristin Alexander of the State Auditor's Office

  • Alexander began reading on page 3 of the SRO report regarding planning and procurement details
  • Chair interrupted testimony to ask Ann Bishop if she had any response to those initial findings – “why the agency chose not to comply?”

 
Ann Bishop, Executive Director of ERS

  • She is not happy about audit but it was not a surprise – they had an internal audit in 2013 that identified some of the same weakness and inconsistency  
  • Difference between two audits is that SAO is a compliance audit and the ERS internal audit looked at ERS statutes as well
  • Internal audit looked at controls and determined there were mitigating controls in place
  • There are conflicting provisions in place for insurance code and contract management guide and interpretations of general counsel
  • Contract guide is used as a basis and then also look to see if controls are in place to accomplish the intent and then make evaluation of a provision
  • Statutes have changed since this initial procurement was started in 2010 and statutes in place at the time are the ones that are used  
  • Statutes now say state agency shall follow the guide but in of itself – the guide says it is a guide and also says to consult legal counsel which ERS did and then natural conflicts will arise
  • ERS response is that they believe they followed the intent of the provisions, got the best value but will not be able to say “they checked all the boxes” there were a lot of moving parts
  • State Guide says the more complex the procurement the more the executives will be and they were
  • One conflict they have a disagreement on and seeking clarification on would be things like best value
    • Best value v. lowest bidder
    • Not straight best value in the contract guide
  • Mistakes were made and appropriate personnel changes were made but their internal audit found that those mistakes did not change the result of the bid with regard to the contract
  • Cook said it would have been good if ERS had been made aware of internal audit report – could have been brought to attention earlier
  • Bishop noted it could have been brought to attention early and counts it as a lesson learned
  • Cook said that is why they keep having the hearings and would have been nice if addressed in more forthright manner, they have a fiduciary responsibility to go over these details

 
Kristin Alexander of the State Auditor's Office

  • Alexander continued reviewing the SRO report regarding procurement details
  • Cook – asked Bishop why this process was not followed regarding procurement details

 
Ann Bishop, Executive Director of ERS

  • Believes they did have a scoring tool
  • The RFP is very detailed and specific over 100 pages
  • Scoring takes into account responses to all of questions in RFP
  • Does not look for line items but services that can be used for multiple things
    • Capability of total communications plan – score is based on that
    • There is not a 1-to-1 ratio but ERS can clarify this going on in the future
  • Cook – if ERS is generating the RFP it could be matched
    • ERS believes it does match
  • Rep. Giddings – what is auditor saying about there not being a scoring tool
    • There is a crosswalk they have that compares components of RFP
    • ERS believes part of the findings is that they could have better documented how the crosswalk scores
    • A number of the findings were related to poor documentation – doesn’t mean it wasn’t done just poor job of documenting
  • Giddings – if looking at component – component scores are consistent but maybe not every variable is accounted for?
    • Alexander with SAO referred to page 25 & 27 of the report (appendix)
    • SAO compared and was unable to line up criteria consistently
  • Provided example of Disaster Recovery of site visits
    • One place had an extension cord as their disaster recovery (they would use it for backup electricity if needed)
    • So site visits are not independent piece that can get a score for
  • Site visits are validation of other components instead of saying site visit has its own line and ERS can clarify it going forward
  • Giddings – concerned if ERS is measuring what is being asked for in the RFP – score is not being done on what is being asked for
  • Cook – this was a concern of witnesses in previous public hearing on the issue
    • Bishop stated again summary is overview of more detailed spreadsheets
  • Believes ERS has used same process over last 30 years and had never been issue before that it was not known what was being asked for but Bishop noted ERS can better document the relationship between the crosswalk and the scoring 
  • Rep. Smithee – important that we correct things for the future – several reasons why
    • Large amount of public money at play and need to be above reproach
    • Going to be controversial since at least two active bidders and whoever doesn’t get contract will cry foul and newspaper accounts that decision may have been political decision as opposed to being base on criteria
    • Dealing with state employees 
  • Bishop noted that after internal audit there were controls put in place and personnel were changed to help ensure it will not happen again
  • Cook – contract managers were not used in scoring the contracts
    • That is not correct
    • Contract management guide describes things as large quantity of procurements – things purchased through purchasing department
    • ERS has specialized purchasing department that purchases all things relating to benefits and it separate from regular purchasing department
    • Attorney on procurement who specializes in health care and contracts and assistant in legal were certified – people in benefit contracts were in class to be certified
    • At time of procurement, people were in process to be certified and requirement of having certified person was not even in existence but they had one certified and an attorney on it
  • Rep. Frullo – confirmation of costs over four years and possible extension of contract
    • $205 million in yearly administrative expenses
    • ERS has statute that states AG shall review procurements and returns comments on contracts over $250 million, ERS submitted to AG
      • ERS was not given comments back
      • SAO finding was that ERS did not re-submit after the award
      • No significant changes in contracts – there business clarifications but they were NOT contract terms changes 
      • So ERS did not re-submit because no major changes in contract and they did not get comments back from AG in first submission
    • Health care expenditures including pharmacy is about $2.5 billion a year
    • Money for claims goes directly to provider – that is pass through
    • ERS is in charge of plan design, master benefit documents, and it tells vendor what to do
  • Frullo  – who determines whether or not a claim is paid?
    • Claim is processed through United
    • Benefits provided determined through ERS
    • ERS determines what is covered, what is not covered, what is co-pay, what is coinsurance, what is covered, what is excluded
    • ERS has extensive documents and works through with vendor that they understand what is required
    • In self-funded product, the board of trustees has control (ie this is not an insurance product)  
    • This way the Legislature can control what they will pay for and what they will not pay for
  • Frullo – whoever is third party administrator has control over a lot of expenses?
    • ERS is buying medical management
    • Every vendor has a bit different medical management
  • ERS has extensive discussions with a vendor on how they manage something
    • For example a controversial difference discussed was referral – this was a conscious decision on ERS part accepting United referrals management
      • BCBS had referrals that were valid for a year
      • United referrals were good for six months
  • ERS did a stratification and accepted United terms
    • Members were not comfortable with it
    • ERS directed United to change it and as a self-funded plan could direct them to do that
  • Frullo – summarizes there is some control by the third party administrator and there is interaction there
  • In response to a question from Frullo, about findings in audits, Bishop noted there are different kinds of audits and her perception is that the SAO is a compliance audit whereas their internal audit was one of finding of controls
  • Contact management guide says there shall be a force majure clause but ERS does not have that clause because in her opinion their contract requires 24 hr response and vendor is not allowed “to get out of it”
  • Cook asked if there are suggestions ERS has towards the guides, possible changes
    • ERS believes the guide is just that.. a guide
  • ERS believes they not only followed the guide but exceeded it with the exception of the Contract Advisory Team
    • Contract was submitted to AG
    • To the extent there is needed subject matter expertise, they go out and get it
    • But did not document as good as they could have and mistakes have been made but will be corrected going forward
  • Cook wants to make sure it is gotten right

 
Cesar Saldivar, Audit Manager of the State Auditor's Office

  • In regards to Force Majure clause SAO was concerned about protections for the state
  • Bishop said ERS is tough on vendors and can cancel a contract or change it with or without notice
  • Bishop said very controversial from vendor standpoint so vendor assumes risk and why contract terms are listed up front
    • For example if funds are not appropriated this session then according to clause in the contract ERS will wind down services
  • Bishop noted again contract gets to intent but it may not be called that

 
Ann Bishop, Executive Director of ERS

  • Rep. Farrar – if vendors have to deal with impossibilities does state have to pay an additional cost because they write it into their contract?
    • Does not think they do – because it is a competitive bid and would actually ask that
    • When a contract is sought, ERS goes to the marketplace to see what needs to be included and not included; RFIs are developed to find out what is available, then consultants are contracted to get feedback from the marketplace; consultants come back and report on what features need to be changed so there can be competition in the bidding process
    • One of the difficulties is that competitive procurements are desired; it was known in the past that ERS would not change vendors and that has changed so that multiple bidders will submit bids now
  • Farrar asked if ERS is looking to reboot this again if needed
    • Normally the process is that after each session ERS determines what changes have been made and that is incorporated into an RFP for proposals to be submitted
  • Giddings noted one of the reasons the contract has come up is because the legislature wants to ensure state employees are getting the best deal; have been hearing employees say that it was only anecdotal that they were paying higher out-of-network charges but the data shows that out-of-network costs are up 400%
    • Extensive analysis is done to determine if there is a problem; if there is a problem the state will go to the providers doing the most out-of-network and try to get them in the network; also try to determine if there is balance billing or access issues for employees
  • Cook noted there is data showing that the current provider network has actually shrunk a bit when they said it would grow; if the cost is being shifted from the state to the participants the state needs to be forthright and tell them
    • ERS is known to take their members interests seriously and lots of steps are taken to ensure they are taken care of
  • Cook noted in-network participation in FY13 was 88.2%; in FY14 it is 90.1%; both of those numbers were less than in the testimony from 2012
    • The numbers are lower than ERS thought they would be but that number consists of a lot of details that ERS must ensure are considered; network adequacy is more important than in-network participation
  • Giddings asked if there is believed to be an adequate network
    • Yes
  • Giddings asked if ERS is as well off in terms of number of providers in the network and geographic dispersion as ERS has been in the past
    • Yes
  • Huberty asked how the network can be as well off with lower numbers
    • Those numbers show what is paid in-network and out-of-network; BCBS had network providers and United has more than BCBS; we don’t just look at number of provider, must look at where members use providers
  • Huberty noted 95% of the people that used BCBS actually used BCBS doctors versus the 88% for United
    • BCBS had a network of providers that were out-of-network who did not balance bill; United only had in and out-of-network; board members concern was about what happens if a participant goes to an out-of-network provider; United was asked to go get those providers in the network that participants used with BCBS and they did get some of them in the network but could not get all of them; in the RFP, ERS could not ask bidders to meet the exact network that BCBS had
  • Huberty asked if United has been fined or had penalties as a result of non-compliance
    • They have had a $970,000 penalty imposed for not providing timely data
  • Smithee asked if the mediation process is working well right now
    • Yes; it has worked well and was controversial to get the bill passed allowing mediation for balance billing over $1,000; most of the time the cases are settled before full mediation is initiated
  • Smithee asked about a potential change to get the limit to $500
    • Also trying to allow other provider types to go to mediation besides just hospital-based physicians
  • Alexander returned to the discussion of the audit report; found the HealthSelect contract does not contain all of the necessary clauses in the contract management guide and that while the AG reviewed the preliminary contract the system did not have the AG review the final contract; the system also did not have management review of the contract amendments according to their policies; the system monitored payments to United; payments were made daily and were supported by invoices but the system did not have a method to tie the payments to monthly statements to ensure there was not duplication
  • Bishop noted the payment process changed; with BCBS, ERS would reimburse the vendor after the vendor paid the claims not in anticipation of payments; under BCBS, ERS would reimburse the payment when a check was sent to the provider; that process had issues, the claim would come in and be processed then BCBS would pay the provider  then ERS would pay BCBS, those checks would not always be cashed right away; the process improvement with United was that instead of paying claims when the check was submitted, claims would be reimbursed based on when the check cleared the bank; ERS had to develop a system to get timely data from United to reconcile claims with a check number; it took ERS too long to get the processes in place to be able to do that; the benefit is that there is no float
  • Cook asked when the deficiency was identified
    • Right away
  • Huberty asked about the lag time for payments and a potential cost of money provision in the contract
    • Payments are made electronically every day; not sure about the contract provision; it is consistent with their book of business
  • It takes a while to get a claim from a provider that isn’t a pharmacy; payments are not all electronic and not all right away
  • Frullo asked how many disbursements there are every day or week
    • About $7 million per day; not sure how many transactions
  • Alexander noted the system provides contract monitoring however those processes should be strengthened
  • Cook asked about the system not adequately documenting the management of contract amendments; will ERS start to do that
    • Bishop noted there is a process for that
  • Cook asked how this audit would score against other audits
    • Saldivar replied that grades aren’t generally given but every agency is required to report on the status of recommendations made by the SAO; SAO will be looking for the agency response to see what improvements are being made; SAO does normally see issues with monitoring; this audit did show some findings with procurement as well and recommendations were given along those lines
  • Cook noted the witness dodged the question
  • Huberty asked if the audit passed or failed
    • Cannot answer that question
  • Huberty asked if the SAO has a standard in place to tell an agency they passed or failed
    • There is a criteria that every agency should follow and agencies are audited against that; the agency does not have to follow recommendations, they are only to attempt to help improve the agency
  • Cook noted the reality is that there is too much they didn’t follow; need to know whether they are going to learn from the audit and improve or if other steps need to be taken
  • Cook noted the committee would not be holding a hearing if the audit was stellar

 
Brian Ragland, Chairman, Employees Retirement System

  • An elected member from the state employee class
  • Cook noted he hopes ERS will take steps to improve processes based on the audit; the reduction in in-network participation is troubling; can see how that would be in the best interest of the state but cannot see how it is in the best interest of employees; if there is a cost shift to participants they need to be told; the numbers do not indicate that the contract is a winner for the state or its employees; if the network provider discount is going down the state is picking up a bigger tab; concerned that there are a group of participants that are bearing a majority of the additional costs; the committee will keep coming back to this issue until it fully understands what is happening
    • When this procurement occurred, the information at hand was that the decisions made were in line with the fiduciary duty; will continue to evaluate and reevaluate the contract to make sure that stays true; will continue to consider the concerns of the committee and evaluate the processes; agree, for the most part, with the findings of the state auditor but there is no indication or evidence to show the proper decision was not made in relation to best value
  • Huberty asked if Ragland thinks the audit passed or failed
    • From a compliance audit standpoint it is hard to say because we don’t know how many items were audited; only know the audit items that required improvement
  • Cook noted the contract will be coming up pretty quickly and will be rebid; it sounds like there are a lot of lessons learned that will be valuable to whoever bids on the contract; hopes the next one will be a little more seamless
    • Ragland noted early on during the contract there were issues with network providers and billing; within the last year to 18 months those types of issues have been non-existent
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