The Illinois Department of Public Aid (Public Aid) paid $89.5 million to the Delta Dental Plan of Illinois (Delta) to administer the Medicaid dental program for fiscal years 1996-98. In fiscal year 1998, on average there were 1,309,340 persons eligible for dental services. The Department’s most recent contract with Delta, for the period May 1, 1996 through February 28, 1999, contained adequate controls to effectively manage the contractor’s performance.

While the contract with Delta contained adequate controls, Public Aid did not effectively monitor Delta’s performance. We found that:

• The Department did not track whether required reports were submitted;
• The Department did not monitor denied claims or the timeliness of claims processing. Specifically, regarding denied claims, we questioned 17 of 68 denied claims tested that were initially denied by Delta because the client was ineligible. However, Public Aid records indicated that all 17 clients were indeed eligible on the date of service. Public Aid provided information that showed providers in 11 of the 17 claims eventually received payment, in some cases almost a year after the submission of the initial claim;
• The Department did not use enforcement provisions in the contract that could have resulted in over $3 million in liquidated damages for contract violations related to the submission of excess surplus reports;
• Reviews of Delta’s compliance with contract provisions were not timely and were limited in scope; and
• The Department was slow in making decisions related to managing the contract; contract amendments and cost allocation plans were signed and approved after the effective date in many cases.

The amount of Delta’s excess surplus has not been adequately monitored. In some cases, surplus reports were submitted almost a year late. The Department also did not collect excess surplus funds due to the State with these reports. We also identified $2.2 million in questionable expenses reported to Public Aid by Delta. These expenses were questionable because either there was a lack of supporting documentation or the expenses were inappropriately applied to the Public Aid program. Public Aid has agreed that it will examine these expenses in the Department’s audit of this period.

Administrative expenses charged by Delta were excessive when compared to typical programs and exceeded the anticipated amount for administration in the contract. In 1998, Delta spent a total of $29.2 million related to the Public Aid dental program ($17.7 million for claims expense and $11.5 million for administration of the program). For every dollar spent on the program in 1998, about 60 cents was spent for claims while 40 cents was spent for administration. According to a 1990 Coopers and Lybrand study commissioned by Public Aid, reasonable administrative costs for a typical dental program range from 15 to 20 percent of benefits. The contract anticipated that 27 percent of the capitation rate be spent for administrative expenses. In 1998, Delta’s administrative expenses charged to the program were 36 percent of total premiums. Also, while the amount of Public Aid claims paid by Delta has decreased from $31.71 million in 1994 to $17.73 million in 1998, administrative costs over the same period remained fairly constant between $9.26 million and $11.52 million. Public Aid officials stated they will review these costs and take action to disallow inappropriate costs in the Department’s audit of this period.

During this audit, Public Aid awarded a new contract for dental services to a different company. A three year contract was awarded to Doral Dental Services of Illinois (Doral) and went into effect March 1, 1999. The new contract with Doral is different from previous contracts with Delta. The risk for the cost of providing services has been transferred back to Public Aid. Doral is at risk only for its administrative expenses. Many of the issues discussed in this audit related to Public Aid’s contract management and controls are still relevant to the new contract with Doral.

Public Aid’s manner of soliciting and evaluating proposals for the new dental contract, effective March 1, 1999, generally conformed with applicable legal requirements and prudent business practices. However, there are practices that could be improved such as date stamping proposals and keeping an official record of the proposal opening. The Department should also document evaluation committee meetings, discussions with proposers, oral presentations by proposers, and negotiations after the best and final offer.

Public Aid fully or partially implemented 20 of 26 recommendations from our 1990 audit of Public Aid’s contract with Delta Dental. Many of these recommendations are applicable to Public Aid’s new contract for dental services with Doral.

The Department of Public Aid (Public Aid) provides dental care through the Medical Assistance Program, the jointly funded federal-State public assistance program which implements Title XIX and Title XXI of the Social Security Act (Medicaid). Under federal Medicaid guidelines, dental services are optional. Each state can determine the range of services offered as well as the fee level. An exception is the Early and Periodic Screening, Diagnosis and Treatment Program (EPSDT) which was added in a 1983 amendment to the Social Security Act. The EPSDT program mandates the inclusion of dental services for children and adolescents through age twenty. From August 1, 1984 to February 28, 1999, the Department contracted with Delta to manage a pre-paid dental program. The Department paid a capitated rate for these services.

Several groups of clients are eligible for differing levels of services under the Department’s dental program, including children (ages 0-20), adults (ages 21 & over), and Department of Children and Family Services (DCFS) wards. Digest Exhibit 1 shows that there were on average 1,309,340 eligible clients per month in fiscal year 1998.

Digest Exhibit 3 shows the number of dentists enrolled by Public Aid for fiscal years 1996-1998. The number of enrolled dentists by Public Aid has continually decreased over the last three years. In fiscal year 1996, Public Aid had 3,791 enrolled dentists in the program. By fiscal year 1998, Public Aid had only 3,311 enrolled dentists in the dental program. This represents a 13 percent decrease. Of the 3,311 enrolled dentists in fiscal year 1998, 1,524 dentists or 46 percent received payment for services provided to Public Aid clients in fiscal year 1998. (pages 3-6)

CONTRACTUAL CONTROLS ARE ADEQUATE

We found that the contract between Public Aid and Delta for the period May 1, 1996 through February 28, 1999 contained adequate controls to allow Public Aid to effectively manage Delta’s performance. The contract contained provisions that allowed Public Aid to monitor the utilization of services, client access to services, the number of claims paid or denied, and Delta’s financial stability. The contract contained program monitoring requirements, financial reporting requirements, and provisions for liquidated damages to ensure program requirements had been met by Delta. (pages 15-17)

PUBLIC AID DID NOT ADEQUATELY MONITOR DELTA’S PERFORMANCE

Although the most recent contract between Public Aid and Delta contained adequate provisions related to management controls, Public Aid did not track whether required information was being submitted. Delta did not submit all the reports required by the contract. Furthermore, of the reports that we were able to collect, Public Aid utilized very few of them to assess performance or compliance with contract requirements. Public Aid did not have procedures related to how the program should be monitored, reports that should be run with data submitted by Delta, or how to track whether required data was being submitted. In many cases, the reports that were received from Delta were late.

Even though the Department received all 24 of the required utilization tapes required for fiscal years 1997 and 1998, only 9 tapes were received by the contractual deadline. Also, the utilization tape was initially rejected for 6 of the 24 months for reasons such as an error rate greater than three percent or poor quality of tape.

Public Aid was unable to provide us with the number and amount of denied claims for fiscal years 1997 and 1998. We identified a field in the utilization tape record referred to as the disposition code. This code would have shown which claims were denied and the reason for denial; however, the field was not readable. The computer record field was two bytes long but the disposition codes were three bytes in length. Therefore, the data was truncated and unreadable. Also, the edit program did not edit the disposition code field because these edits were removed by Public Aid 10 years ago.

Public Aid has not monitored the number and disposition of denied claims. If denied claims are not monitored, the contractor could be improperly denying payment to dental providers for legitimate services to eligible clients. We questioned 17 of 68 denied claims tested that were initially denied by Delta because the client was ineligible. However, Public Aid records indicate that all 17 clients were indeed eligible on the date of service. Public Aid provided data that showed that providers in 11 of the 17 claims eventually received payment, in some cases almost a year after the submission of the initial claim. Delta’s system does not record the date eligibility files are updated, so we could not determine when Delta received the correct eligibility information from Public Aid.

We asked the Department to provide information that showed how long Delta takes to process claims. From the utilization data submitted by Delta, the Department provided us with the number of days from the provider billing date to the date the claim was paid by Delta. The data showed that during calendar year 1998, more than 95 percent of claims were paid within 30 days. Although the Department was able to provide this data upon our request, they did not monitor the timeliness of claims processing on an ongoing basis.

We conducted samples at Delta of 100 paid claims and 68 denied claims in calendar year 1998. Five of the 100 (5%) paid claims sampled were paid after 30 days, with one claim taking 101 days. Of the 68 denied claims, 7 (10%) were processed after 30 days, with one claim taking 60 days.

Federal regulations (42 CFR 447.45 (d)) require that 90 percent of all clean claims be paid within 30 days of the date received and 99 percent within 90 days. Section 5.11 of the contract between Delta Dental and Public Aid required all claims to be paid within 30 days after receipt of properly documented, complete, and accurate claims. Further, this section required that Delta pay nine percent interest on any claims from the 30th day until the claim is paid. In our examination of claims paid, we found no evidence that any interest had been paid on claims that were paid after 30 days had elapsed. (pages 18-30)

Public Aid did not adequately monitor the financial requirements of the contract. Although most of the required financial reports were submitted, key reports were either not submitted, submitted late, or were not approved in a timely manner.

We were unable to determine if some financial information was submitted in a timely manner because the Department did not date/time stamp the profit and loss statements and one of the audited financial statements or keep a log. In some instances, such as the excess surplus reports and audited financial statements, Department officials interviewed were unaware that they did not have this information and made no efforts to obtain this information until asked by OAG auditors.

Although the contract required Delta to submit a cost allocation plan on an annual basis, only one cost allocation plan was approved for the contract period (May 1996-February 1999). The Department did not approve the most recent plan in a timely fashion or provide documentation on how the final plan was decided. Furthermore, Public Aid did not approve the cost allocation plan for the previous contract period ending April 30, 1996 until nearly 18 months after it had ended (November 18, 1997).

The purpose of the cost allocation plan is to set forth a methodology by which administrative expenses incurred by the contractor are charged to the Department. The amount of administrative expenses allocated to the Department is deducted, along with incurred claims, from the total premium paid to Delta to determine the amount of excess surplus.

Public Aid did not adequately monitor whether Delta was submitting excess surplus reports. Delta did not submit the excess surplus reports in a timely fashion and, once submitted, they did not include the contractually required refund payments. Public Aid officials interviewed were unaware that the reports had not been submitted and only requested them from Delta after the issue was raised by OAG auditors.

The interim and final excess surplus reports that covered the period of May 1, 1996 to April 30, 1997 showed that a total refund of $110,292 was due to the Department. Delta was to submit 40 percent of the excess amount due ($44,117) with the interim report and the remainder ($66,175) with the final report. However, Delta did not submit the refunds with these reports as required in the contract. A Public Aid official stated that the refund was not submitted because amendment number four allowed Delta to use the surplus amount toward the increase in dental rates and the amendment superseded the contract requirement. However, amendment number four was not approved until October 23, 1998 which was after these payments should have been made.

The excess surplus report submitted by Delta on January 7, 1999 covered a 22 month period from May 1, 1997 through February 28, 1999. The contract required this report to cover the 12 month period from May 1, 1997 to April 30, 1998. The report projected that Delta owed Public Aid $434,384 of which 40 percent or $173,754 should have been submitted with the report. However, again no payment was submitted with the report.

Digest Exhibit 4 summarizes the required excess surplus reports submittal dates, number of days the reports were late, and the liquidated damages that could have been assessed. The interim report due December 1, 1997 was received 359 days late. The final report, due on June 1, 1998, was received 212 days late. The interim report due on December 1, 1998, was received 37 days late. Delta officials stated that they were not able to submit the interim excess surplus report due December 1, 1997 because there was no approved cost allocation plan.

Section 10.3(c) of the contract states "the Department shall assess the Contractor the sum of five thousand dollars ($5,000.00) per day until the delinquent report is received." [emphasis added] As shown in Digest Exhibit 4, liquidated damages totaling $3,040,000 could have been assessed against Delta for failure to provide these reports by the dates specified in the contract. We asked Public Aid officials if the Department was going to assess liquidated damages regarding the late submission of excess surplus reports. Public Aid responded that the Department does intend to pursue liquidated damages for the late submittal of excess surplus reports, but is considering carefully the amount and the timing. However, as of September 2, 1999 there has been no decision and no penalty assessed.

Public Aid did not track whether Delta’s audited financial statements were received as required by the contract. In late 1998, the most recent audited financial statements of Delta on file at Public Aid were for 1995 and 1996. Public Aid officials were unaware that they did not have the 1997 report. Public Aid was able to provide all the required profit and loss statements. (pages 31-37)

While internal audits and quality assurance/compliance reviews have been conducted, they have not been consistent or comprehensive. There has not been an internal audit or quality assurance/compliance review completed for the time period during the last contract with Delta (May 1996 to February 1999). The Department also has not conducted an audit that evaluates Delta’s performance as is required in the contract. (pages 37-40)

Public Aid’s overall management of the contract raises some concerns especially related to contract changes and amendments. The last contract signed by Delta and Public Aid originally effective May 1, 1996 through April 30, 1998, was not signed by Public Aid until June 3, 1996. The contract was also amended four times. Three of the four amendments to the final contract with Delta were signed after the effective date of the changes. Amendment one added coverage for DCFS wards, amendment two added the adult emergency program, amendment three extended the contract through February 1999, and amendment four increased reimbursement rates to dentists. (page 41)

Overall, the amount of premiums paid to Delta to administer the dental program has decreased by nearly 28 percent from $43.80 million in 1994 to $31.75 million in 1998. However, adult services were eliminated from the program July 1, 1995 and then reinstated January 1, 1997 on an emergency only basis. The capitation rate paid to Delta for clients ages 0 through 20 increased from $2.38 in 1985 to $2.85 in 1998. This represents a 20 percent increase for the period 1985 to 1998 or about 1.4 percent per year.

The amount of surplus between premiums and expenses for the Public Aid dental program increased from $720,000 in 1996 to over $4.6 million in 1997 and $2.5 million in 1998. The increase in surplus in 1997 and 1998 may be due to the addition of adult emergency services to the dental program in January 1997. In fiscal years 1997 and 1998, Public Aid paid premiums related to adults of $2.6 million and $5.1 million respectively. However, claims paid by Delta for adults amounted to only $645,593 and $1,060,864 for those years. Also, the adult program only served 12,832 clients in fiscal year 1997 and 21,390 clients in fiscal year 1998. Effective July 1, 1999, Public Aid amended the new contract with Doral to make adults eligible for non-emergency dental services also.

Our review of Delta’s financial records identified over $2.2 million in questionable expenses reported by Delta to Public Aid. These expenses were questionable because either there was a lack of supporting documentation or the expenses were inappropriately applied to the Public Aid program. Public Aid has agreed that it will examine these expenses in the Department’s audit of this period. (pages 43-56)

Administrative expenses charged to the Public Aid program by Delta were excessive when compared to typical programs and exceeded the anticipated amount for administration in the contract. In 1998, Delta spent a total of $29.2 million related to the Public Aid dental program ($17.7 million for claims expense and $11.5 million for administration of the program). In other words, for every dollar spent on the program in 1998, about 60 cents was spent for claims while 40 cents was spent for administration. According to a 1990 Coopers and Lybrand study commissioned by Public Aid, reasonable administrative costs for a typical program range from 15 to 20 percent of benefits. The contract anticipated that 27 percent of the capitation rate be spent for administrative expenses. In 1998, Delta’s administrative expenses charged to the Public Aid dental program were 36 percent of total premiums received from Public Aid. Also, while the amount of Public Aid claims paid by Delta has decreased from 1994 to 1998, administrative costs over the same period remained fairly constant.

Digest Exhibit 5 shows how Delta used the premiums paid by Public Aid. The amount of claims paid by Delta significantly decreased from 1994 to 1998. In 1994, Delta paid out $31.71 million (72% of premiums) for claims. Claims paid by Delta decreased to $17.2 million (53% of premiums) in 1997 and $17.7 million (56% of premiums) in 1998.

In 1994, the percent of premiums Delta spent for administrative expenses were very similar between Public Aid and other commercial clients. In 1994, administrative expenses charged to Public Aid amounted to 23 percent of Public Aid premiums while commercial clients’ administrative expenses amounted to 21 percent of commercial premiums. However, after 1994, Public Aid began to pay increasingly more in administrative expenses as a percentage of their premium than did commercial clients. By 1998, 36 percent of Public Aid premium was used for administrative expenses. During this same time period, the administrative costs charged to commercial clients dropped from 21 percent of their premiums in 1994 to 13 percent of their premiums in 1998 (see Digest Exhibit 6).

Contract Allocation Regarding Usage of the Capitation Rate

The contract that was effective May 1996 through February 1999 detailed the capitation rate to be paid to Delta. As shown in Digest Exhibit 7, the capitation rate was comprised of two components: administration and benefits. (pages 46-52)

The fees that Illinois pays to dentists for dental procedures are comparable to the rates paid by other states. Prior to July 1998, reimbursement rates paid to providers under the program ranked very low in comparison to other state dental programs. However, effective July 1, 1998, Public Aid amended the contract with Delta to increase the rates paid to dentists for certain commonly performed procedures. Rates paid to providers, with the exception of x-rays, are now comparable with rates paid by Medicaid programs in other states. (pages 56-58)

SOLICITATION AND EVALUATION OF PROPOSALS

The Department of Public Aid’s manner of soliciting and evaluating proposals for the new dental contract was generally in conformity with prudent business practices and legal requirements. However, there are practices that could be improved. Public Aid did not date stamp proposals as they were received or keep an official record of the proposal opening. Public Aid also did not document committee meetings held to discuss evaluations, discussions with proposers, oral presentations by proposers, or negotiations after the best and final offers.

During the time the RFP was released, procurement was governed by Executive Order 3. This executive order required that agency procurement be substantially in accordance with the Illinois Procurement Code from February 6, 1998 to July 1, 1998. Public Aid officials stated that the new contract for dental services is arguably a purchase of care contract. However, we questioned whether the new contract met the definition of purchase of care. Both Executive Order 3 and the Illinois Procurement Code make that type of contract exempt from requirements. (pages 59-75)

Public Aid fully or partially implemented 20 of 26 recommendations from our 1990 audit of Public Aid’s contract with Delta Dental. Many of these recommendations are applicable to Public Aid’s new contract for dental services with Doral. (pages 77-91)

This audit contains 15 recommendations to improve the management of Public Aid’s contract for dental services. This audit makes recommendations to improve the monitoring of denied claims, the timeliness of claims processing, complaints and grievances, EPSDT requirements, and providers and provider participation ratios. In addition, the audit recommends that Public Aid track whether financial reports are being submitted in a timely manner, approve cost allocation plans in a more timely manner, monitor and collect excess surplus when due, and enforce contract provisions. The Department should also conduct audits and other reviews in a timely manner and should ensure that the contractor documents expenses and adjustments related to the calculation of excess surplus. Finally, the audit recommends ways that the Department can improve the solicitation and evaluation process and recommends that the Department implement recommendations from the previous audit that were not fully implemented which are applicable to the new contract for dental services.

The Department of Public Aid generally agreed with most of the recommendations in the audit. The Department of Public Aid’s responses are provided after each recommendation. Public Aid’s and Delta’s complete written responses are reproduced in Appendix D.