A state audit released Thursday blasted the Hawaii Health Connector’s former head and board of directors for inadequate planning, lack of oversight and improperly awarding contracts worth millions of dollars, resulting in an unsustainable health insurance exchange.
The 58-page report details the role of the Connector’s board and former Executive Director Coral Andrews in the failed launch of the exchange created by the Affordable Care Act in October 2013 and poor management that exposed the organization to significant financial risks and the inefficient spending of more than $204 million in public funds.
Without mincing words, acting state Auditor Jan Yamane described Andrews as an "uncooperative executive director" who withheld information from board members on the Connector’s budget and technological progress. She didn’t trust the insurance company representatives and state department directors on the board and feared any information provided to the board would be leaked to the public, the audit said.
The report also says Andrews "misused" her authority and circumvented the procurement process, thereby eliminating open competition.
The Connector received $204.4 million in federal grants to establish Hawaii’s state-based health insurance exchange. Former Gov. Neil Abercrombie appointed the Connector’s 15-member board of directors. The board named Andrews head of the Connector in November 2011. She resigned Dec. 6, 2013, less than two months after launching the exchange. Andrews didn’t return a call for comment.
The audit reveals how much board members were in the dark about significant problems with the technology up until the day the Connector was to launch on Oct. 1, 2013. The launch had to be aborted due to computer problems, which were not resolved until two weeks later.
Several board members arrived at the Connector’s offices on the start date ready with food to "celebrate the launch" only to find no one there.
"We thought things were OK up until the morning of the launch. We brought boxes of manapua for a celebration to an empty office," Yamane quoted an unnamed board member as saying. "Then it hit — boom — that there were some real issues with IT. We all expected there would be some glitches, but not like what happened."
The auditor faulted Andrews and board members for awarding contracts without following their own procurement policy designed to comply with federal standards. Yamane scrutinized a number of contracts that circumvented the procurement process, most of which were later amended numerous times with significantly increased contract amounts.
The Connector’s current executive director, Jeff Kissel, who took over in October from interim Director Tom Matsuda, agreed with the audit and said he has fixed the problems.
"The recommendations are reasonable and have been addressed," said Kissel. "Strict controls on the procurement process are in place, and the relationship with certain contractors and service providers has either been terminated or revised."
The audit said Andrews handed out contracts for less than $100,000 to avoid scrutiny by the board, and, once issued, the value of the contract would increase dramatically. The board only reviewed contracts of $100,000 or more.
In one instance, Andrews hired IT consultant Mansha Consulting for $56,000 to help the organization prepare for a design review of its IT system. The contract was amended many times until reaching $21.9 million.
"Many of the Connector’s IT consultant contracts were amended numerous times and ballooned in costs as the Connector continued to rely on their services," the auditor said. "Without proper monitoring and oversight, public funds may be inefficiently expended, consultants may deliver unwanted services, and the Connector exposes itself to greater risks. Given the magnitude of the Connector’s mission and the $204.4 million in federal funding involved, the potential loss from fraud, waste, and abuse posed a significant risk."
Yamane added that the questionable costs are not in compliance with federal regulations and might result in the state having to repay the grant funding.
In addition, she said the Connector did not have information technology staff to manage the project’s development or monitor contracts, relying on vendors to self-report their progress.
"The board’s ability to monitor its massive IT system’s development progress was impaired by an uncooperative executive director who withheld information," the audit said. "Throughout the website development process, the board was largely unaware of the Connector’s myriad problems."
A number of other contracts were substantially modified with missing documents and no proof that the original work was completed properly, the auditor said. The group also paid for legal services, at a rate equivalent to five full-time employees, despite already having an in-house legal department.
"The Connector should have implemented enhanced oversight and monitoring of these contracts, especially since its grant applications reflected that it anticipated spending $177 million — approximately 87 percent of its $204.4 million grant budget — on consulting and contractual costs."
The auditor also noted "numerous questionable travel and entertainment costs as well as unsupported severance pay."
At least one employee received $46,250 in severance pay without an employment agreement or other documents, the report said. In addition, the auditor found 11 instances totaling $12,771 where travel costs were not supported by documents showing the employee, purpose and reason for the travel, and one other amount of $1,185 where the travel cost did not have supporting documentation showing an official business purpose.
"It has been my policy to eliminate all severance pay and bonuses," Kissel said. "They are completely gone."
Matsuda, the interim executive director who replaced Andrews, told lawmakers last year that the Connector wouldn’t be sustainable beyond 2014 even with substantial reductions to its annual operating budget and a 2 percent fee on insurance policies on the exchange, its sole source of revenue.
Kissel, former head of Hawaii Gas, acknowledged all the mistakes made by his predecessors.
"Unlike a lot of times when there’s controversy, I think the auditor generally did a good job and got a lot of it right. Everything they said was substantially correct," Kissel said. "The issue is different for the Connector because it’s a brand-new enterprise. Good people make mistakes when you start a brand-new enterprise. The important thing is to learn from the mistakes and not repeat them."
In his response to the audit, Kissel said the Connector has made significant changes including completing a strategic and sustainability plan, which determined it will need about $28 million of taxpayer money over the next eight years before becoming self-sufficient in 2022.
AUDITOR’S FINDINGS
>> The Connector’s board of directors failed to effectively plan or develop a long-term financial model, resulting in an unsustainable organization.
>> The Connector did not properly procure and administer contracts, circumventing its own policies and putting its federal grants at risk.
>> The exchange was designed without clear goals and objectives.
>> The Connector did not have IT staff to manage the exchange’s development or monitor contracts.
>> The Connector’s executive director, Coral Andrews, withheld information from board members on budget and technology progress reports.
CONNECTOR NUMBERS
>> $204 million federal grants
RECEIVED
>> October 2013 launch date
>> 16,500 sign-ups
>> 3 executive directors
