Auditors are starting to give the state-based public exchanges their first audits since the exchange program went live, and posting the results on the Web for all to see.

States that chose to set up their own Patient Protection and Affordable Care Act (PPACA) exchange programs had to cope with complicated, rapidly changing federal regulations; the conflicting interests of federal agencies, state agencies, patients, health care providers, insurers and vendors; and severe uncertainty, until June 27, 2012, about whether the U.S. Supreme Court would let implementation of PPACA proceed.

Now the auditors are looking back at the decisions made as the exchange builders raced to get ready for the Oct. 1, 2013, start date of the first PPACA open enrollment period. 

Officials in the Hawaii state auditor’s office argue that, in their state, management choices, and the board’s inability to make choices, contributed to operating problems at the Hawai’i Health Connector exchange, and, as of the time the audit was conducted, raise questions about whether the exchange will be sustainable.

Coral Andrews, the founding executive director for the exchange, and representatives for the founding board, could not immediately be reached for comment.

The auditors say in their report that Jeffrey Kissel, the current exchange executive director, and the current exchange board members have agreed with most of the findings.

Kissel himself says in a statement that the exchange has already acted on the recommendations made in the auditors’ report.

The exchange has developed a strategic and sustainability plan, and “strict controls on the procurement process are in place, and the relationship with certain contractors and service providers has either been terminated or revised,” Kissel says. The exchange “is also working closely with its legislative oversight committee to ensure that it continues to improve its operations as enrollment increases and costs are reduced,” he says.

But the auditors’ report can give exchange watchers ideas about the kinds of challenges that organizers of any public exchange, or the organizers of any big, complicated health coverage distribution system, might face.

To learn more about the auditors’ findings, read on. 

Airplane

1. The exchange had problems with documenting travel expenses and other expenses.

Organizers of the Hawaii exchange received $204 million in PPACA grant funding, and strict federal regulations apply to use of federal grant money.

The exchange lacked documentation for the payment of $46,250 in severance pay to one employee, and it lacked documentation for 11 instances of travel costs, with a total value of $12,771 the auditors say. The exchange also paid $1,185 in expenses for one trip without having documentation that the trip was for official business purposes, auditors say.

See also: Do you live in fear of an IRS audit?

Shopping cart

2. The exchange went around its own procurement rules when it hired contractors.

The auditors found many different kinds of problems with procurement.

Only four of the 15 contracts reviewed were awarded through a competitive procurement process, and two of the contracts awarded through noncompetitive methods had an hourly billing rate with no ceiling, the auditors say.

In many cases, auditors say, the exchange builders got around rules requiring board approval for consulting jobs with a value over $100,000 by hiring consultants for a job with a lower value, then later amending the contracts to ask for additional work and getting “token board approval,” auditors say.

The auditors found that six contracts procured through that method were amended 12 times. The value of those contracts eventually increased to $1.6 million, from an original total value of just $433,000.

See also: Watchdog: CMS had trouble getting PPACA exchange IT bidders

A spaghetti highway

3. The board began building the exchange without having a strategic plan in place, because members could not agree on what the exchange should or could be.

The auditors say the Hawaii exchange builders suffered from conflicts between the board members, and problems with communication between the directors and the exchange employees.

Members of the board met often, but they never came up with a real strategic or sustainability plan, and they were unable to agree on a mission statement, the auditors say.

One board member thought of the exchange as building a “simple website,” but the founding executive director thought the exchange should be a vehicle for using federal money to meet Hawaii’s health needs, the auditors say.

The exchange filed a “blueprint” document with the U.S. Department of Health and Human Services (HHS), but the blueprint did not include a realistic operating budget for 2015, when the exchange was supposed to be self-sustaining, the auditors say.

The exchange builders were reasonably accurate about projecting exchange expenses but weak at projecting revenue: The exchange builders predicted the exchange would have annual revenue of $15.9 million to $26.5 million, but, in 2014, the exchange collected only $1 million in fee revenue.

The exchange builders predicted they would need $15.8 million to operate, and an interim executive director said later, in February 2014, that the exchange would probably need $15 million per year to operate.

In the long run, another challenge is that Hawaii has only about 50,000 uninsured residents who earn enough to have to get commercial coverage, rather than being eligible to apply for Medicaid, the auditors say. If the exchange served only previously uninsured residents who earned too much to qualify for revenue, and the exchange depended solely on fee income, it might need about $300 in fee revenue for each of those 50,000 relatively high-income uninsured residents to pay for operations.

See also: 5 ways cash-hungry PPACA exchanges could take you on.