On December 27, the U.S. Department of Health and Human Services’ Office of Inspector General (OIG) released an audit report (the full report is here) regarding Connect for Health Colorado’s use of federal start-up funding. This funding was provided for state-run exchanges to get their operations up and running in 2013 and 2014.
To make a long story short, the OIG report summary states that Connect for Health Colorado “did not expend $9.7 million of Federal establishment grant funds in accordance with Federal requirements.” For the last week, the report has been making the rounds of all the major news outlets in Colorado.
If you do an internet search for news about Connect for Health Colorado right now, the top stories have headlines stating that the exchange “misspent,” “misused,” or “improperly spent” $10 million in federal funds. Many of them also indicate that Connect for Health Colorado must now repay that money to the feds (in reality, this is still under consideration, although repayment is the OIG’s recommendation). The Denver Post headline says “Colorado’s Obamacare exchange misspent $9.7 million in federal grants, audit alleges“. Unfortunately, the part about “audit alleges” gets cut off in the view that appears in search results.
The exchange’s official response to the audit report is due by January 27, and the exchange is currently involved in discussions with the Centers for Medicare and Medicaid Services (CMS) about the content of the report and whether the funds will actually have to be returned to CMS. But the exchange has already responded to the audit draft report (see page iii of the executive summary at the beginning of the audit report, page 25 of the audit report, and in detail in Appendix I). However, the OIG reiterated their belief that $9.7 million had been either misallocated, improperly spent, or inadequately documented, and recommended that the money be repaid to the federal government.
The OIG audit pertains to money that was appropriated for 2013 and 2014. At that point, I was not yet on the Connect for Health Colorado Board of Directors, so my knowledge of how funding was allocated was minimal at best. I joined the Board of Directors in 2015, and if you’ve watched my interactions with the exchange since then, you know that I have never shied away from leveling criticism towards the exchange if I felt that it was warranted.
But after reading the OIG report, I want to share several thoughts about this situation:
That’s a lot of money!
$10 million is a boatload of money to the average person. But Connect for Health Colorado’s federal start-up grant was $183.7 million, so $9.7 million is about 5 percent of the total. That means 95 percent of the total start-up grant was used in full compliance with HHS’ exacting standards.
Nobody embezzled anything
Headlines describing a public-facing organization (a “quazi-governmental agency,” as the OIG report describes the exchange) improperly spending $10 million probably conjures up Bernie Madoff-style images in people’s minds. But the money in question was not funneled into someone’s personal account or used to buy BMWs for exchange executives. Here’s the breakdown of what went on, according to the OIG report:
- $4.4 million: The exchange “did not adequately document costs that it charged to the establishment grants”
- $4.5 million: The exchange “charged costs to the establishment grants for unallowable contract costs (prepaid hardware and software operational support and maintenance) whose periods of benefit occurred after December 31, 2014.”
- $312,000: The exchange “improperly transferred costs from one establishment grant to another without demonstrating that the transfers were performed to correct bookkeeping or clerical errors “
- $463,000: The exchange “did not efficiently and effectively administer establishment grant funds including improperly awarded bonuses [this was mostly performance bonuses for which the exchange could not provide adequately documented performance reviews associated with the bonuses], overpayments to subgrantees, unallowable promotional giveaway items, excessive and unreasonable tips [this is because the exchange paid $350 in tips to four movers in 2013, for a move that involved one truck and six hours of work. OIG says a tip of $15 per mover, or $60 total, would have been reasonable, so $290 of the tip is considered unreasonable], vendor rebates that were not credited to the establishment grants, and unallowable social activities [$279 in total party costs, including a baby shower and a Christmas party]”
So what did they actually do wrong?
The vast majority of the problem ($8.9 million) stems from documentation that wasn’t done in the manner that HHS required, or from contracts with vendors that continued past the end of 2014, when start-up funding was supposed to be exhausted.
In Connect for Health Colorado’s response to the audit draft, they note that they did have documentation, although the OIG auditors contend that it wasn’t adequate.
In regards to the prepaid contracts, the exchange prepaid some of their hardware and software vendors prior to the end of 2014, using start-up funding, for services that continued to be provided after the end of 2014; two of the contracts were scheduled to continue until 2018, and one was a full ten years, scheduled to continue until 2023. In response to the audit draft, the exchange noted that “The Marketplace identified the prepaid support and maintenance costs benefiting the period subsequent to December 31, 2014 and credited the amounts back against future payment requests of federal funds.” In other words, they have already worked to remediate this issue.
The report also notes that Connect for Health Colorado:
(1) required the use of personal credit cards to purchase equipment, supplies, and services for the marketplace,
(2) permitted self-approval of purchases on behalf of the previous executive staff,
(3) permitted incomplete and inadequate disclosure of possible conflicts Colorado
(4) did not properly document inventory of equipment, and
(5) allowed the use of establishment grant funds to purchase equipment for a previous Chief Executive Officer (CEO) who kept it for personal use when the CEO left the organization.”
In an email to stakeholders, Connect for Health Colorado CEO, Kevin Patterson, noted that the exchange’s “processes and procedures have improved as our organization matures and they are better developed than they were for the period covered in this audit.” I think that’s a key point.
In reading through the specific details of the OIG report, many of the instances of inadequate documentation and “improper” use of funds seem like the sort of thing that might be commonplace at a fledgling organization that’s still finding its wings. Things like employees using their personal credit cards and seeking reimbursement is certainly commonplace in the corporate world, even among well-established organizations. Although this apparently was not in line with the procedural guidelines that accompanied the start-up grant, it’s not the sort of thing that the general public would consider improper use of company funds. And yet, the general public does now have the impression that the exchange flagrantly misused federal funds.
Is at least some of this much ado about nothing?
The fifth point listed above, referring to a CEO keeping equipment for personal use after leaving the exchange, certainly stands out as possible impropriety. But when you read the specifics of the situation (see page 23 of the report), it seems much less nefarious. The CEO at the time (Patty Fontneau), received two iPads, paid for by the exchange. The second one was purchased when the CEO reported that the first one had been damaged, although she didn’t physically bring the broken iPad back to the exchange for repair or disposal. A few months after the second iPad was purchased, Fontneau left Connect for Health Colorado to go work for Cigna. She took the second iPad with her, but she paid the exchange for it, and according to the OIG report, the amount she paid “appeared to be in line with prices [auditors] found when checking online resale sites for this model of iPad.“ Then why did they word it like she stole it, in the summary that appears in the list of transgressions?
The report then goes on to say that there’s a possible security risk in allowing a former employee to continue to use an exchange-purchased iPad for personal use, as the exchange couldn’t document that the device had its memory cleared, or that the broken iPad was properly disposed of in a manner that safeguarded the information on it. Fair enough, but that’s not at all the same thing as what’s detailed in point number 5 above. Any reasonable person skimming through the numbered points above (all of which are directly quoted from the report) would assume that an unscrupulous former CEO absconded into the night with exchange-purchased equipment. But in reality, she purchased the iPad from the exchange, at an admittedly fair resale market value.
There are certainly some points in the report that will raise eyebrows (for example, the former CFO who owned a private business that had a contractual relationship with the exchange, and who purchased postage stamps and had them sent to said private business — all while the CFO’s conflict-of-interest form may have been factually-lacking regarding ownership of the private business). But on the whole, it sounds like the exchange was making a good-faith effort to get things up and running in a dynamic situation involving uncharted territory, and with a very small window in which to get everything completed.
During that time, they spent $279 for “cake, punch, holiday cards, and decorations” for a baby shower and a Christmas party, and documented that under “employee morale, health, and welfare costs.” The OIG audit determined that the exchange was using “an inapplicable provision of Federal regulations to support its assertion that the costs for social activities that [the auditors were] questioning ($279) were allowable.” Seriously? I know there has to be oversight and good stewardship of government funds. But that’s a level of nitpicking that seems excessive.
All in all, after reading through the OIG report, I’m struck by the fact that the cover of the report seems poorly worded and excessively damning, which would obviously lead the casual observer to picture all sorts of unscrupulous financial goings-on at Connect for Health Colorado. See a screenshot of the HHS report headline to the right. I find this headline to be extremely clumsy and irresponsible on the part of HHS.
The vast majority of the contested $10 million was spent on things the exchange needed in order to get up and running. There were apparently some documentation and timing errors, but it wasn’t what people think of when they hear of organizations mishandling funds. Unfortunately, media coverage of this audit report has probably led many Colorado residents to believe that the issue — to the extent that it exists or existed in the past — is bigger than it is/was.
I understand that the federal government has an obligation to keep track of federal grants and ensure that they’re spent wisely and within the guidelines that apply to the grant. But a lot of this stuff seems like honest mistakes on the part of a new organization, and perhaps some overzealous auditing. Maybe HHS could have just coached them along the way, rather than issuing a hard-hitting audit that makes people assume the exchange has been fiscally irresponsible?
It does sound like that was part of the audit process, as the exchange has noted that a lot of these issues have been long-since corrected.
Maybe the title of the OIG report should have been worded more like this:
Colorado correctly expended 95 percent of its establishment grant funds for establishing a health insurance marketplace. Some discrepancies exist for the other 5 percent.
In all caps if that’s the preference.