Regulatory
An Audit Report on The Contracting Practices of the Texas Life, Accident,
Health,
and Hospital Service Insurance Guaranty Association
August 2000
Report Number 00-041
Overall Conclusion
When it selected a management firm (Management Firm) to run its operations, the Texas Life, Accident, Health, and Hospital Service Insurance Guaranty Association (Association) did not ensure that it received the best value for its contract. Because the Association used insufficient contracting practices, it received only one proposal from a firm composed of former Association employees and signed a $1.1 million contract in 1998. Without requiring further proposals, the Association renewed its contract with the Management Firm for three years with an annual fee of $1.2 million in 1999. Since it established the contract, the Association has not sufficiently monitored the Management Firm to make sure that it provides quality services at a reasonable price. Furthermore, the Association's Board contracted with a principal of the Management Firm to be the executive director and supervise the Association's operations.
The Management Firm administered $205 million in assets and $43 million in expenditures in 1999. The Association is a non-profit entity responsible for paying claims and continuing policy coverage, as limited by law, of insolvent life, accident, and health insurance companies.
Key Facts and Findings
- The selection process the Association used to hire a management firm to
run its operations lacked fairness and objectivity. The process was compromised
by a short time line for the procurement, limited solicitation, and a lack
of detailed evaluation criteria. Furthermore, the final contract lacks specific
provisions to ensure that the Management Firm provides quality services.
- The contractor was reimbursed $43,382 in unallowable expenses. The contract
does not contain a provision that requires the Management Firm to reimburse
the Association for these expenses. Consequently, the Association may have
to negotiate or seek legal remedies to collect the overpayments it made.
- The Association needs to improve its contracting practices for third-party
administrators (TPA). We identified two instances in which the Association
and the contractors providing TPA services did not comply with laws related
to contract establishment and licensure.
- The Department of Insurance (Department) needs to improve its oversight of the Association so that it can ensure that its recommendations are implemented. Without sufficient oversight, the Department cannot determine if the Association is acting in the best interest of Texas' life, accident, and health policyholders.
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