CalOptima Leaders Shelved Audit

Janet Nguyen - CalOptima Audit 2
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A comprehensive study of weaknesses at CalOptima, the county’s $1.5-billion health plan for low-income residents, was quietly sidetracked two years ago by Supervisor Janet Nguyen and two of her board of directors allies.

The move killed a chance to fix at least some potential problems as much as a year before federal auditors discovered one of CalOptima’s programs posed a “serious threat to the health and safety” of participants.

According to meeting records and emails, Nguyen and CalOptima board Vice Chairman Lee Penrose, who is president and CEO of St. Jude Hospital in Fullerton, put off making a decision on which firm to hire. County Health Care Agency Director Mark Refowitz, who became board chairman during the process, didn’t act to ensure that the work was done.

It wasn’t until May 2013 — more than a year after CalOptima received seven bids for the project, including proposals from some of the most prominent firms in the field — that the companies were told their bids would receive no action.

At the same time the three public officials were delaying awarding a contract for the operational review, they also shelved efforts to hire an outside general counsel to oversee in-house lawyers, who had been declared inexperienced and disruptive by an earlier investigation.

And in spite of repeated requests, Refowitz and other CalOptima board officials never have explained publicly what happened to an antifraud board of directors ad hoc committee that was in place in 2012 when Refowitz took over as board chairman.

Lack of fraud detection procedures was one of the major issues cited in the November 2013 audit by the Centers for Medicaid & Medicare Services.

Nguyen, Refowitz and Penrose declined to be interviewed.

Nguyen, who is running for the State Senate this year, has raised more than $95,000 in campaign contributions from the health industry since joining the CalOptima board of directors in 2011. Before that, her medical industry political contributions totaled $15,000.

Secrecy Versus Openness

In January 2012, Nguyen became angry during a CalOptima board meeting when then CEO Richard Chambers proposed a thorough, public examination of CalOptima’s operations.

Chambers said he was acting to identify problems that were suggested in portions of a secret report to the CalOptima board of directors that was leaked out-of-context to the Orange County Register a month before, appearing to support Nguyen’s claims that there were serious problems inside CalOptima. In addition, he said he was moving ahead of implementation of the 2014 national Affordable Care Act, known politically as Obamacare, which is adding thousands of new residents to CalOptima’s rolls.

By having public monthly reports on the investigation’s findings, any serious problems would have been out in the open. If Nguyen was wrong and there were no serious existing problems, that also would have been publicly disclosed.

What wasn’t made public until this year, when Voice of OC obtained a copy of the “final report” by the Costa Mesa law firm Theodora Oringher, was that its investigators determined in 2011 that “we uncovered no flagrant misconduct by any CalOptima executive, no gifts of public funds, and no conduct that exposes CalOptima to immediate significant liability to regulators or third parties.”

But at the January 2012 CalOptima board meeting, Nguyen said that she wanted the operational review done behind closed doors and that she wanted to use Theodora Oringher, one of her campaign contributors, to privately advise the CalOptima board on what firm to hire to do the work.

Chambers proposed asking Deloitte & Touche to do the overall assessment and deliver monthly public reports on its findings. Deloitte is one of the nation’s largest auditing and financial advice firms, and the company was then doing an internal audit of CalOptima. It also is one of the seven firms that later bid to do the operational review.

“I don’t know Deloitte,” Nguyen said during the CalOptima board meeting. “Staff is now overstepping their boundaries.”

But after going behind closed doors, the then CalOptima board reconvened and voted unanimously — including Nguyen — to create a special, three-member board committee. That ad hoc committee would select an independent firm to do the comprehensive evaluation of CalOptima and “make it fully public.”

The three-member committee was then CalOptima board Chairman Ed Kacic, Nguyen and Penrose.

What Is an Operational Review?

“Operational reviews” typically examine what sections of an organization should be doing as well as what it is doing to make sure it is carrying out its goals.

Among the areas that were intended to undergo scrutiny were the compliance department, health plan operations, procurement, governance and the troubled in-house legal department.

In a normal operational review, the investigation likely would have included how well vendors hired by CalOptima were working with patients and health professionals.

One serious weakness identified by federal auditors, for example, involved Philadelphia-based PerformRx, which manages all of CalOptima’s prescription drugs. CalOptima is responsible for ensuring the vendor correctly authorizes prescriptions, something that federal auditors said wasn’t being done well by the firm that had just won its contract in 2012.

Other areas spotlighted by federal auditors that likely would have been examined in the shelved operational review included whether appeals of medical and prescription decisions were properly handled. The auditors found numerous ways in which appeals by patients and providers were mishandled, including failure to provide enough information and denying appeals without fully checking the issue.

Mark Nottley, head of Michigan-based Municipal Consulting Services, which conducts operational reviews or audits but has no connection to CalOptima or Orange County government, said the goal of a well-done operational audit is to “look at all of the systems” and “be comprehensive.”

In some cases the review might find duplication of work or other “important things that can save you money.” But, he added, what is “really important” is to examine the work of vendors to ensure they are following contract requirements. “Bottom line: Are they [government agencies] getting what they’re paying for?”

The seven bids to conduct the operation review were received by CalOptima by April 9, 2012, according to CalOptima records and emails, and they were emailed to the three ad hoc committee members. One file was too large to email and was sent on a CD by regular mail.

Kacic, Nguyen and Penrose had scheduled weekly conference calls to discuss the operational review. Kacic emailed Nguyen and Penrose the evening of April 9 to set up a telephone conference call on April 18, in which the three would discuss their evaluations of the bids and prepare a recommendation for the full board on which firm to hire.

He also reminded them the proposals for an outside general counsel would be arriving within a few days.

Regarding the conference call, Nguyen emailed back that same night, “That’s fine with me.” Penrose replied shortly after 6 a.m. the next day: “Works for me too. Thanks. Lee.”

But an hour later, Penrose sent a second email to Nguyen and Kacic: “Just checked my calendar for next week. My day is pretty booked. Not sure that we have a meeting scheduled. Can we find a day/time that will work for all three of us? Lee.”

No meeting could be arranged for April, and at the May 3, 2012, board of directors meeting, the board suddenly went into closed session, and Kacic said he was told by in-house lawyer Gary Crockett that he couldn’t attend the meeting. Crockett was one of the in-house lawyers who was going to be subject to the overall examination of the legal team. Kacic had opposed Nguyen’s restructuring of the CalOptima board the previous fall.

Terry Francke, an expert on California open-meeting laws and general counsel to Californians Aware, said the CalOptima board on May 3, led by Nguyen, probably violated the state’s Brown Act because very little is permitted to be discussed behind closed doors. The public officials who serve on government boards aren’t allowed to discuss leadership positions, such as board chairman or vice chairman.

Even before the CalOptima board went into executive session, there were rumors in the meeting room that the new board would remove Kacic as chairman.

That didn’t happen then, but after the closed session, Kacic and then board Vice Chairman Jim McAleer left the room for a few minutes.

Noting their absence, Nguyen made an apparent joking reference to what happened in executive session.

“Oh, let’s vote them out,” said Nguyen to chuckles from other board members. “Second,” came the male voice of another board member.

Less than a week later on May 8, the board did just that, replacing Kacic as chairman and naming Refowitz in his place.

McAleer resigned from the CalOptima board, sending Board of Supervisors Chairman John Moorlach a letter that stated in part: “I am concerned that the needs of those we serve are no longer our first priority. I have expressed concerns over what I perceive to be Brown Act violations in recent weeks to no avail, and continue to have reservations around that issue.”

Nguyen had been using an anonymous letter that was distributed by the local office of the Hospital Association of Southern California or HASC, a Nguyen political ally, in an attempt to discredit Kacic. The state Fair Political Practices Commission later determined the allegations in the letter weren’t accurate.

But once Kacic was out as board chairman, no further attempts were made to either award a contract for the public operational review, including the work of the in-house legal team, or issues that later were the focus of the federal audit.

A May 23, 2012, email from Kacic to Nguyen and Penrose reads:

We haven’t had any calls lately, and I was curious as to where we stand regarding the RFP [request for proposals] review for interim outside general counsel and operations review. … I still have the standing Wednesday 10:30 AM call on my calendar, although we haven’t had the call in quite some time. Are we going to continue with calls? Are there plans for our ad hoc to discuss this? Bring a recommendation to the Board of Directors? Thank you.

There was no response from Nguyen, but Penrose said he had been busy. He also said he had talked to Refowitz about adding a lawyer to the ad hoc committee that was going to recommend an outside general counsel.

Penrose suggested adding new CalOptima board member Steve Knoblock, a GOP activist and onetime aide to former Supervisor Larry Schmidt. Knoblock briefly was a member of the San Clemente City Council, serving out the remainder of another council member’s term, but he was defeated when he ran for election in 2008. He also served on the Orange County Fire Authority board.

No outside general counsel ever has been hired to oversee the legal department, even though that was a strong recommendation of the Theodora Oringher report, and no outside review was performed of the legal department.

In January 2013, Crockett began reporting directly to the current CalOptima board of directors. Before that, he reported directly to the CEO. Last year the CalOptima board also awarded Crockett a 4-percent raise, increasing his annual base pay to $214,240.

On June 15, 2012, then CalOptima CEO Michael Engelhard sent an email to Nguyen, Penrose and Kacic reminding them the seven bids for the operational review were set to expire in three days on June 18.

“Purchasing will amend the RFP and explain to the vendors that more time is needed to make a decision …” Engelhard wrote. “By June 26, we will advise you of the status of the current proposal, and if any vendors submit a new proposal, it will be sent to you for your consideration.”

Kacic replied that he didn’t think it was a good idea to start over. Refowitz asked whether the bids could be extended.

On June 18, Nguyen sent an email to Engelhard, Penrose and Kacic that reads:

Mike, I just saw this email. I think this is an issue that should be discussed on their next conference call by the committee to see if we should or not go forward with the rfp. Thank you for bringing it to our attention on the expiration date. Supervisor Nguyen.

A year passed.

On May 28, 2013, Mark Finch, the CalOptima purchasing manager, sent a letter to the seven firms that bid in April 2012 on the operational review:

Ladies/Gentlemen: … This letter is official notice that RFP 12‐022 has been cancelled. CalOptima wishes to thank you for replying to the RFP and for agreeing to extend the validity of your bids through January 4, 2013. The CalOptima Board and CalOptima’s executive management team has decided that many of the tasks contemplated in the RFP will be addressed by CalOptima’s internal audit team [Deloitte].

Please contact Tracy Wood directly at twood@voiceofoc.org

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