REPORT DIGEST

DEPARTMENT OF INSURANCE

State Compliance Examination
For the Two Years Ended June 30, 2014

Release Date:  March 26, 2015

FINDINGS THIS AUDIT:  9

CATEGORY:  NEW -- REPEAT -- TOTAL
Category 1:  0 -- 0 -- 0
Category 2:  4 -- 5 -- 9
Category 3:  0 -- 0 -- 0
TOTAL:  4 -- 5 -- 9

FINDINGS LAST AUDIT: 10

Category 1:	Findings that are material
weaknesses in internal control and/or a
qualification on compliance with State laws
and regulations (material noncompliance).
Category 2:	Findings that are significant
deficiencies in internal control and
noncompliance with State laws and regulations.
Category 3:	Findings that have no internal
control issues but are in noncompliance with
State laws and regulations.

State of Illinois, Office of the Auditor
General
WILLIAM G. HOLLAND, AUDITOR GENERAL

To obtain a copy of the Report contact:
Office of the Auditor General, Iles Park
Plaza, 740 E. Ash Street, Springfield, IL
62703
(217) 782-6046 or TTY (888) 261-2887

This Report Digest and Full Report are also
available on the worldwide web at
www.auditor.illinois.gov

SYNOPSIS

• (14-1)  The Department did not fully comply
with the requirements of the Workers’
Compensation Act.

• (14-2)  The Department did not fully comply
with the requirements of the Illinois Pension
Code.

• (14-5)  The Department did not have proper
segregation of duties over processing of
insurance privilege tax refunds.

• (14-8)  The procurement of the Illinois
Health Insurance Marketplace marketing and
outreach campaign had several issues during
the scoring of the proposals.

• (14-9)  The Department did not exercise
adequate controls over expenditures for the
contract of the Illinois Health Insurance
Marketplace marketing and outreach campaign.
FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS

NONCOMPLIANCE WITH THE REQUIREMENTS OF THE
WORKERS’ COMPENSATION ACT

The Workers’ Compensation Fraud Unit has not
procured and implemented a system utilizing
advanced analytics inclusive of predictive
modeling, data mining, social network
analysis, and scoring algorithms for the
detection and prevention of fraud, waste, and
abuse.

In addition, the Department has not
established a document retention policy
regarding reports of workers’ compensation
fraud specifically requiring the Department to
destroy any investigations that are not
referred for prosecution upon the expiration
of the statute of limitations for the acts
under investigation.

The Workers’ Compensation Act (Act) requires
the fraud and insurance non-compliance unit to
procure and implement a system utilizing
advanced analytics inclusive of predictive
modeling, data mining, social network
analysis, and scoring algorithms for the
detection and prevention of fraud, waste, and
abuse on or before January 1, 2012.

The Act also requires that investigations that
are not referred for prosecution shall be
destroyed upon the expiration of the statute
of limitations for the acts under
investigation and shall not be disclosed
except that the person making the report shall
be notified that the investigation is being
closed.

Department management stated that no system
for the detection and prevention of fraud
waste and abuse has been procured due to the
following:  (1) no appropriation has been made
specifically for this purpose, (2) the
Department did not have data regarding
individual claims, and (3) the Act did not
contemplate available, accurate data for use
with such a system.  The failure to establish
a document retention policy is due to
oversight.  (Finding 1, pages 11-12)

We recommended the Department (1) either
procure and implement a system utilizing
advanced analytics or seek a legislative
change, and (2) establish procedures and
develop a document retention policy related to
workers’ compensation investigations for
submission with the State Records Commission
to ensure compliance with the Act.

The Department concurred with this finding.
The Department issued a Request for
Information (RFI) regarding a system utilizing
advanced analytics inclusive of predictive
modeling, data mining, social network
analysis, and scoring algorithms for the
detection and prevention of fraud, waste, and
abuse (advanced analytics system) in 2012.
The responses to the RFI did not assist the
Department in procuring the advanced analytics
system.  The Department is again analyzing the
viability of such a system given the near
complete lack of information available to the
Department for analysis by such an advanced
analytics system.  Moreover, the Department
has recommended in the Workers’ Compensation
Fraud Unit’s 2013 and 2014 Annual Reports that
were submitted to the Governor, General
Assembly, Attorney General, and others, that
the advanced analytics system requirement be
removed from Section 25.5(e-5) of the Illinois
Workers’ Compensation Act.

The Department is currently working with the
Secretary of State Archives Division to
establish an approved records retention policy
that complies with Section 25.5(e) of the
Illinois Workers’ Compensation Act.

NONCOMPLIANCE WITH THE REQUIREMENTS OF THE
ILLINOIS PENSION CODE

During testing, auditors noted the Public
Pension Division did not perform required
examinations of the 657 police and
firefighters pension funds that are required
to be examined once every three years.  As a
result of testing auditors noted:
• 128 (19%) have been examined on two
occasions since 2004.  The second examination
occurred between 4 and 10 years after the
first examination.
• 480 (73%) have been examined on one occasion
since 2004.
• 23 (4%) pension funds were currently under
examination as of the audit period.  Twenty-
two of the 23 were second examinations since
2004.
• 18 (3%) pension funds eligible for an
examination have never been examined.  The 18
pension funds were formed between 2007 and
June 30, 2011.

Failure to perform the required examination of
a pension fund every three years results in
the Department not being able to fully monitor
that pension funds are in compliance with the
Code.  (Finding 2, pages 13-14)

We recommended the Department allocate
sufficient resources to perform the pension
fund examinations every three years as
required by the Pension Code.

The Department concurred with the finding and
will continue to seek legislation to either
provide the resources needed to fully
implement the three year compliance audit
cycle or to modify the examination requirement
as contained in 40 ILCS 5/1A-104(b).
LACK OF SEGREGATION OF DUTIES OVER PROCESSING
OF INSURANCE PRIVILEGE TAX REFUNDS

During testing of 23 vouchers representing
insurance privilege tax refunds, auditors
noted there is only one employee who:  1)
receives the requests for insurance privilege
tax refunds, 2) reviews and prepares the
refund authorization memo, and 3) approves the
refund for payment.  The same employee also
maintains and updates the Department records
on insurance privilege taxes.  The individual
amounts of insurance privilege tax refunds
vouchers tested during the current examination
ranged from $6,753 to $250,000.

Department management stated a new staff
person added to process the privilege tax
refunds was not informed of the additional
approval levels during their training for the
position.  (Finding 5, pages 19-20)

We recommended the Department ensure there is
proper segregation of duties by allocating
sufficient staff to process, review, approve
and record tax refunds.

The Department concurred with this finding and
the recommendation regarding the segregation
of duties and has implemented an additional
level of approval authority to the privilege
tax refund process.

ISSUES DURING SCORING OF PROPOSALS

In April 2013, the Department issued a Request
for Proposals for the Illinois Health
Insurance Marketplace marketing and outreach
campaign.  Proposals were opened May 8, 2013
and there were 12 responsive proposers.  A
five-person evaluation team scored the
technical proposals, which included the
written proposals and oral presentations,
while a sixth individual conducted reference
checks.  The $33 million contract was awarded
in July 2013.

During testing of the procurement, auditors
found several issues with the scoring of the
proposals.  Specifically the auditors noted
the following:
• Evaluation committee meetings – The
procurement file did not contain adequate
documentation of who attended evaluation
committee meetings.  The procurement file did
not document attendance.  Documenting
evaluation committee meetings would provide
evidence that committee members complied with
the Department’s requirement that members
attend all evaluation committee meetings.

• Reference checks – Reference checks were not
completed for six of 11 vendors because
references failed to respond when contacted.
(One of the 12 vendors did not provide
references.)  Each vendor was required to
provide four references.

While proposals were opened May 8, 2013,
reference checks did not begin until May 28.
Because of the late start date and the timing
of vendor presentations, reference checks were
only given one week for completion.

In six instances, reference checks for all
four of a vendor’s references were unable to
be completed.  For one vendor, only one of the
vendor’s four reference checks was completed.
There were notes in the file indicating that
contact was attempted for the incomplete
reference checks but the notes were not always
conclusive.  Vendors were penalized when the
Department was unable to complete the
reference checks.
• Scoring tabulation – Five of the 12 scoring
summaries contained minor errors in tabulating
the scoring of technical proposals.  While
none of the errors had a material effect on
the final rankings or on other decisions to
eliminate vendors, the failure to detect the
errors is indicative of a breakdown in the
internal controls over final scoring
tabulation.
• Pricing Component – The points for the media
buying commission portion of the pricing score
were calculated incorrectly.  The Department
averaged the commission rate percentages
instead of the media buying fees.  This
resulted in slightly different scores.

In addition, the points assigned to the two
pricing components in the Request for Proposal
were not reflective of the total cost to the
State represented by each component (i.e. the
component with most cost to the State was
assigned less points than the component that
had the least cost to the State.)  Officials
stated that the media buying commission (155
points) was weighted higher than hourly rates
(95 points) because the media buy was going to
be the bigger part of the contract.  As a
result of the point structure contained in the
Request for Proposals, the vendor with the
highest hourly rates but lowest media buying
commission was awarded the contract.  Based on
the winning vendor’s commission rate, auditors
calculated the cost of commissions to be
approximately $0.6 million.  Comparatively,
the hourly rates section included a total of
39,845 hours for a total cost of $9.1 million
The Department stated it conducted this
procurement under the oversight of the Chief
Procurement Office (CPO) and followed the
policies and procedures outlined by the CPO’s
Office, State Purchasing Officer, and
Procurement Compliance Monitor.  The
Department further stated there was no
violation of the Procurement Code or
procurement rules in awarding the contract to
the awardee.  (Finding 8, pages 25-28)

We recommended the Department and the Chief
Procurement Office for General Services
closely examine and adequately test the
scoring elements in Request for Proposals to
ensure the winning proposal will be the most
advantageous to the State.  We also
recommended the Department and Chief
Procurement Office for General Services
examine their procedures for scoring proposals
and make any needed additions or changes to
improve the controls over the scoring process.

The Department concurred and welcomed the
auditor’s recommendations noted in the
finding.  Department officials stated that
this procurement was conducted under the
oversight of the Chief Procurement Office
(CPO) and followed the policies and procedures
outlined by the CPO’s Office, State Purchasing
Officer and Procurement Compliance Monitor.
There was no violation of the Procurement Code
or procurement rules and the recommendations
noted did not compromise the outcome of the
awarding of this contract.  The Department
will continue to strive to adequately ensure
DOI procurements are conducted with the utmost
integrity.

The CPO agreed the scoring elements in the
Requests for Proposals should be closely
examined and tested to ensure winning
proposals are most advantageous to the State.
The CPO further agreed to examine the
procedures it establishes for scoring
proposals and to determine whether additions
or changes to improve the controls over the
scoring process are necessary.

LACK OF CONTROLS OVER EXPENDITURES

The Department did not exercise adequate
controls over expenditures for the contract of
the Illinois Health Insurance Marketplace
marketing and outreach campaign. The contract
totaled $33.3 million for a one year term
beginning August 16, 2013.  According to the
Department, the total amount expended was
$28.9 million.

Auditors examined expenditures incurred during
fiscal year 2014 related to the contract and
noted the following issues:

• Travel and other expenditures – The
Department allowed the vendor to bill for
travel and other related expenditures even
though the request for proposals (RFP)
specified bills for those expenses were not
allowed.  This point was made clear by the
Department in responding to two different
questions from vendors prior to the submission
of proposals.  Answers to vendor questions
were published as addendums to the RFP.

The resulting contract contained the same
section that was in the RFP.  However, a
different section of the contract conflicted
with the Department’s stated position on
allowing expenses.  Appendix A of the
contract, which contained the pricing
schedule, stated the vendor would be allowed
to bill the State for reasonable out of pocket
and incidental expenses.

According to the Department, the State
reimbursed the vendor for travel and other
related expenses totaling $11,628.

• Direct Costs – Auditors noted there was no
supporting documentation to indicate that all
direct costs were pre-approved as required in
the contract.  Auditors asked the Department
to provide supporting documentation to show
direct costs were pre-approved for nine
specific examples from the expenditure
testing.

The Department was able to provide supporting
documentation showing pre-approval for 1 of
the 9 examples.  For three of the direct
costs, the Department’s response stated that
the approval was done verbally.  For an
additional three items, the Department’s
response stated that the expenses were
included as a subcontractor in the original
contract.  For those six examples, as well as
the remaining two examples, the Department was
unable to provide any supporting
documentation.

• Hourly Rates – The contract lacked controls
over which individuals could charge at the
various hourly rates.  The contract did not
contain a requirement to get formal approval
for team members which would have ensured only
approved individuals could bill at the various
hourly rate levels.  The Department stated
billing rates were based on roles, not
individual’s names.

Auditors identified 19 individuals that billed
at different hourly rates in November 2013
compared to January 2014.  In 15 instances,
the individuals’ titles were the same in both
monthly reports while in 4 instances, the
titles were different.  In 18 of the 19
instances, the individuals charged at a lower
rate in January compared to November.  The
Department stated the 18 individuals noted
were moved to a lower billing category because
their core duties had changed while the
remaining individual took on a more senior
role due to the departure of another employee.

The Department further stated that individuals
were not allowed to bill at multiple rates
unless the Department and the vendor mutually
agreed that an individual’s core duties had
changed significantly enough to warrant his or
her move from one billing category to another
category.  However, the Department did not
provide supporting documentation showing that
the Department and the vendor had mutually
agreed that the core duties had changed.

The Fiscal Control and Internal Auditing Act
(30 ILCS 10/3001) requires all State agencies
to establish and maintain a system or systems,
of internal fiscal and administrative
controls, which shall provide assurance that
funds, property, and other assets and
resources are safeguarded against waste, loss,
unauthorized use and misappropriation.
(Finding 9, pages 29-33)

We recommended the Department exercise
adequate controls over expenditures for the
Illinois Health Insurance Marketplace
marketing and outreach contract to ensure all
expenditures are appropriate.

The Department concurred with the finding and
will continue to closely monitor expenditures
to ensure that they are appropriate and
allowed within the contractual agreement.
The review process for expenditures in Year 2
of the contract has been enhanced and direct
cost forms have been added to the expenditure
review process to ensure the Director of Get
Covered Illinois is aware of and clearly
approves specific items and services ordered
under the Contract.  The Department has also
developed and retained a tracking document to
ensure hourly rates charged by the vendor are
included within the contractual agreement.

OTHER FINDINGS

The remaining findings are reportedly being
given attention by the Department.  Auditors
will review the Department’s progress towards
the implementation of all the recommendations
in the next engagement.

ACCOUNTANTS’ REPORT

The auditors conducted a compliance
attestation examination of the Department for
the two years ended June 30, 2014 as required
by the Illinois State Auditing Act.  The
accountants’ report does not contain any scope
limitations, disclaimers or other significant
non-standard language.

WILLIAM G. HOLLAND
Auditor General

WGH:RPU

AUDITORS

E.C. Ortiz & Co., LLP were the Special
Assistant Auditors for this examination.