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State audit of CalOptima Health raises concerns over accumulated surplus, hiring

May 2, 2023

A state audit of Orange County’s provider of publicly funded health coverage, CalOptima Health, said the public agency accumulated $675 million in excess funds without a clear plan for spending it and did not follow best practices when hiring for some executive positions, according to a report released Tuesday, May 2.

CalOptima officials said in a statement they have already implemented some of the recommendations the state audit makes.

Assemblywoman Sharon Quirk-Silva had requested, a year ago, the Joint Legislative Audit Committee approve the audit of CalOptima’s budget, programs and services, and organizational changes.

One of the audit’s highlighted findings was how much surplus funding CalOptima had banked.

CalOptima is required by county law to implement a financial plan that includes the creation of a reserve. Under its policy, the agency must maintain no less than one to two months of certain revenues.

The audit reported that as of June 30, 2022, CalOptima had accumulated more than $1.2 billion of combined reserves and surplus funds. From 2014 to 2022, CalOptima’s reserves increased from $156 million to $570 million.

However, the $675 million in surplus funds beyond adequate reserves should have been used to improve services, the state audit says.

The auditor reported that CalOptima’s excessive surplus funds resulted, in part, from intergovernmental transfer funds that CalOptima did not spend. Those funds are a transfer that can be used for Medicaid covered services, auditors said.

While auditors said CalOptima had “historically retained a significantly larger percent” of the funds “than other managed care plans we reviewed,” as of August, CalOptima was retaining only 2% of those funds, and it recently reported that its board has allocated all of its remaining intergovernmental transfer funds to various programs addressing the health needs of members experiencing homelessness. However, its efforts to monitor the success of the programs it funded were inconsistent, the state report said.

The state auditor recommends the agency by June 2024 create a detailed plan to spend its surplus funds for expanding access or improving benefits.

The state probe also said there may have been a violation of state law prohibiting public officials from being financially interested in certain contracts when a board member entered into an employment contract with CalOptima to serve as its CEO in 2020.

On top of that, the public health agency has experienced higher executive turnover than the other managed care plans, and it lacks a written policy governing its process for hiring employees, the report said. The auditor also said CalOptima did not follow best practices when it hired three of the six executives reviewed.

“When CalOptima’s board chose to hire one of its own members to be the CEO, it created the appearance that the board was acting in the best interest of the individual involved rather than the best interests of the individuals CalOptima serves,” the state auditor’s report said.

The report recommends that CalOptima amend its bylaws to prohibit all CalOptima board members from being employed by the agency for a period of one year after their term on the board ends.

“As the largest health insurer in Orange County serving our most vulnerable populations, opportunities to increase transparency and improve services provide a major benefit to CalOptima Health and the patients we serve,” CalOptima CEO Michael Hunn, hired in 2021, said in a statement. “CalOptima Health would like to thank the Joint Legislative Audit Committee, as well as Assemblymember Sharon Quirk-Silva, and the California State Auditor’s office for working with CalOptima Health while performing a comprehensive audit covering January 2014 through June 2022. We were pleased to learn that there were very few findings in the Auditor’s report. Actions are already underway to implement all recommendations.”

This is a developing story, please check back for updates.

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