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An Audit Report on the HealthSelect Contract at the Employees Retirement System

November 2014

Report Number 15-007

Overall Conclusion

The Employees Retirement System (System) established processes to plan, procure, and form the HealthSelect of Texas third-party administrator (HealthSelect) contract it awarded to United Healthcare Services, Inc. in February 2012. However, those processes did not always ensure compliance with state and System criteria for contracts. The System had weaknesses and inconsistencies in its processes for planning and procuring the HealthSelect contract, including not defining "best value." As a result, it is not possible to determine whether the System selected the contractor that provided the 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.

The HealthSelect contract with United Healthcare Services, Inc. is valid through the end of fiscal year 2016. 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.

Planning. The System established a process for planning and procuring the HealthSelect contract. However, that process did not involve the System’s Purchasing Department, and the System did not assign staff who met state training and certification requirements to the planning and procuring of the HealthSelect contract. Additionally, that process did not ensure that the System prepared and maintained all required planning documentation and that the request for proposals (RFP) complied with statutory requirements and System policies.

Procurement. The System's process for evaluating the HealthSelect contractor proposals did not include many of the required or suggested elements in the State of Texas Contract Management Guide and did not always follow established System policy. The evaluation process the System established did not:

- Result in a scoring tool with criteria that consistently related to the RFP provided to respondents.

- Provide guidelines to ensure that evaluators were consistent in how they scored the proposals.

- Verify the mathematical accuracy of the evaluation documentation.

- Include a methodology for handling additional evaluation factors not anticipated during planning.

Contract Formation. The HealthSelect contract does not contain all essential contract clauses required by statute and the State of Texas Contract Management Guide. While the Office of the Attorney General (Office) reviewed the preliminary HealthSelect contract that the System included in its RFP, the System did not request that the Office review the final HealthSelect contract prior to the signing of the contract. Additionally, the System did not consistently document management approval of contract amendments in accordance with its policies.

Contract Oversight. The System monitored payments to United Healthcare Services, Inc. for administrative fees and established a process to determine whether health care management incentive payments are required. However, the System did not have a process to reconcile its daily reimbursement payments to detailed health care claims. The System performs contract monitoring to ensure that United Healthcare Services, Inc. is providing services in accordance with contract terms; however, the System should strengthen those processes to help ensure that its monitoring is comprehensive and performed in a timely manner.

Auditors communicated other, less significant issues related to the HealthSelect contract procurement separately in writing to the System.

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