Summary of Report 04-042

July 2004

Report Number 04-042

The Health and Human Services Commission (Commission) issued approximately $20 million in unnecessary or excessive payments to Clarendon National Insurance Company (Clarendon), the exclusive provider organization (EPO) for the Children’s Health Insurance Program (CHIP). These payments, combined with the Commission’s serious deficiencies in contracting practices and contract monitoring, constitute an abuse of the Commission’s fiduciary responsibility to appropriately oversee and manage the EPO contract and associated CHIP funds.

After reaching an impasse in negotiating a rate increase with Clarendon, the Commission appeared to make a reasonable decision to self-insure the cost of medical claims effective May 1, 2001. However, after making that decision, the Commission continued to pay Clarendon insurance-related fees that were unnecessary. The Commission also paid Clarendon excessive amounts because it chose to not follow the professional advice it received.

The decision to self-insure the cost of medical claims fundamentally altered the nature of the EPO’s financial obligation; however, the Commission made this change through a contract amendment, rather than through reprocuring the EPO’s services. This resulted in a noncompetitive procurement. In addition, the Commission’s extensive use of retroactive contract amendments to make other changes significantly undercut the competitive nature of its contracting practices.

We also found that:

• Clarendon and its subcontracted claims administrator made $5.5 million in excessive or undocumented payments to Clarendon’s subcontracted program manager.

• The Commission continuously renegotiated Clarendon’s obligations while simultaneously paying Clarendon at least $123.26 million. These payments were not inappropriate given the terms of the original contract. However, the Commission’s practice of retroactively amending its contracts (1) created uncertainty regarding the State’s financial obligation and (2) put the Commission in the potentially disadvantageous position of negotiating payments it had already made.

• Inadequate contract terms did not prohibit Clarendon from inappropriately using $15.96 million of CHIP funds for its corporate use.

• Inadequately defined financial reporting requirements contributed to misreporting on $2.41 million of revenues and expenditures by Clarendon. Misreporting of revenues and expenditures resulted in an $835,739 overstatement in Clarendon’s invoice to the Commission for additional contributions to pay medical claims.

• The Commission failed to detect that Clarendon inappropriately retained $1.79 million of the $3.36 million in CHIP funds it transferred to its accounts pay for reinsurance.

• Despite being aware of problems in Clarendon’s and its subcontractors’ financial controls, the Commission has not audited or obtained an audit of Clarendon.

• The Commission did not ensure that Clarendon had written and executed contracts with its subcontractors, and readiness reviews performed for Clarendon were neither comprehensive nor timely.
  

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