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Audit: Group health plan for state workers ignored bidding rules, engaged in ‘wasteful spending’

Riley Snyder
Riley Snyder
Health CareState Government
A hallway at Sunrise Hospital

Nevada’s group health insurance program for state employees consistently failed to seek competitive bids on nearly $96 million worth of contracts over the past four fiscal years, according to a recent state audit that also found examples of “wasteful spending” and state policies not being followed.

An audit report released last week by the Legislative Counsel Bureau’s Audit Division into the contract management practices of the Public Employees Benefits Program, or PEBP, found that leadership of the health insurance program consistently failed to follow state laws and policies requiring contracts be put out to bid every four years, choosing instead to extend contracts in violation of normal practices for state agencies.

The audit also found PEBP management often privately negotiated contract extensions without putting them out to a competitive bid, including one instance where one under-performing vendor had a contract extended and scope expanded after PEBP staff took paid trips to their headquarters at an estimated cost of more than $7,000.

PEPB Executive Director Laura Rich, appointed in March 2020, said that the agency has since cancelled that contract and has begun putting multiple contracts out to bid this year and next year. She added that PEBP had accepted all recommendations from auditors and that a compliance package would come up at the agency board’s meeting next month.

But news of the vendor expensed trip and other past practices by PEPB’s former leadership irked state lawmakers on an interim audit subcommittee, who heard details of the audit on Thursday. Democratic Assemblywoman Maggie Carlton said she was disappointed that it took several years to catch the issue, and that some of the findings — namely the vendor-paid trip — were “beyond unethical.”

“The fact that this happened, state employees may have been very misserved,” she said. “And somehow, the ball was hidden from us on this.”

PEBP has more than 44,000 primary participants and 27,400 covered dependents, for a total of more than 71,000 individuals covered under the program. The agency is governed by a 10-member board (nine appointed by the governor and the tenth is the director of the Department of Administration) and day-to-day operations are managed by an executive officer and 34-person full-time staff. 

Funding for PEBP operations and insurance plans comes primarily from participant and employer contributions — the Legislature reviews the agency’s funding and budget requirements every two-year session and upon approval sets contribution levels for active employees and retirees.

Many of the decisions and management practices analyzed by auditors happened under the leadership of former PEBP Executive Officer Damon Haycock, who retired from the position in January. He did not return a Tuesday call requesting comment on the audit findings. 

Contract extensions

As of the 2019 fiscal year, PEBP had 19 active contracts covering a variety of services — pharmacy benefits manager, HMO, plan actuary, dental network, administration and several other services available through the program.

But auditors found that starting in 2015, PEBP began authorizing contract extensions with existing vendors, as opposed to putting out those contracts for bid through the state’s Request for Proposal process, which agencies are typically required to do every four years.

Between 2009 and 2014, the PEBP board approved zero contract extensions and 21 competitive bids, but between 2014 and 2019, the board signed off on 23 contract extensions and only 12 competitive bids, according to the audit. Those extensions drove the average length of PEBP contracts from 5.5 years to more than 8.5 years, with two contracts having 11-year terms.

“To justify extending contracts without competition, PEBP management claimed it knew the market, regularly performed market checks, and that extensions saved millions of dollars,” auditors wrote in the report. “However, our review found market checks were only performed regularly for one vendor. When competitive procurement of services is viewed as optional, there is a greater risk of fraud or abuse with the State, and its employees not receiving the best services at the best price.”

The auditors added that previous PEBP management had portrayed the process of competitive bidding as “too costly, of little value, or the State risked paying more with a new vendor.” They provided an example of a contract extension for a health care auditing contract, where PEPB management portrayed the bidding process as “dangerous and scary” and that other vendors may not be able to provide specialized services (something auditors said there was “no evidence” for without a competitive bid.) 

Rich said the rationale for extending contracts was generally to avoid any implementation costs of starting up with a new service or vendor, as well as a desire to avoid service or provider disruptions that could lead to PEPB beneficiaries having to change doctors or make other sudden changes.

“It has to be super-sensitive to that kind of disruption, because you are ultimately affecting people's health and their access to care,” she said.

But she reiterated that the agency currently had six expiring contracts either out to bid or going through the competitive bidding process, with another two expected to come up for bid next year.

“There will not be any contract extensions under my leadership,” she said in an interview.

In order to comply with the audit requests, Rich said she would recommend creation of a PEBP board subcommittee to ensure a closer review of contracts, as well as a regularly-scheduled compliance check every two years to have an outside team review PEBP’s practices and procedures.

During the audit committee meeting last week, Department of Administration Director Laura Freed — who now serves as the PEBP chair — told lawmakers that the board will take the audit recommendations seriously.

“We are not going to do this in the future,” Freed said. “As the board chair, it would have to be a very compelling reason to extend a contract past four years without rebidding it.”

Trip to Toronto

One contract negotiation highlighted by auditors as problematic involved a negotiated, vendor-funded trip to a vendor’s headquarters in Toronto. The two trips included transportation, lodging, meals and entertainment for a combined cost of $7,200. The vendor was not identified in the audit report.

Auditors reported that after the first trip in July 2017, the contract was amended to include additional performance standards and agreements stemming from PEBP’s dissatisfaction with the vendor’s past performance and system functionality.

After the second trip in January 2018, auditors reported that PEBP entered into a “significant scope modification” and two year-extension on the contract with the vendor, despite PEBP “management and staff dissatisfaction with the vendor’s performance.” Auditors said it also likely violated a 2014 executive order from former Gov. Brian Sandoval prohibiting state employees from seeking or accepting gifts or services that could “improperly influence decisions.”

“Although interactions with vendors is necessary to ensure contract compliance and delivery of services, private negotiations and vendor paid travel are not acceptable and in violation of state laws and policies,” auditors wrote in the report. “Purchasing laws do not allow for negotiations during contract terms.”

Rich said that the former PEBP executive officer had consulted with the state Ethics Commission before the trips were made, and that they were told there was precedent for similar trips to be taken and paid for by a vendor. She also said PEBP believed it was “reasonable” for a poorly performing vendor to cover travel expenses, as opposed to having PEBP cover the expenses.

Still, she said that PEBP would not undertake any similar vendor-sponsored trips in the future.

“In my opinion, I would rather be safe than sorry,” she said. “And so in the future, I think that this is just something that we're going to have to follow the State Administrative Manual and all the state rules regarding gifting, and just stick to the letter of the law.”

Auditors also wrote that other contract extension negotiations were conducted through emails, including one four-year extension of a basic life and long-term disability insurance contract. Though the negotiated rates were slightly lower, the long-term disability rates were higher than the original contract rate, and the lack of a competitive bid meant PEBP did not know if there was a better deal available.

Auditors also found that PEBP did not follow state processes for requesting information for vendors, and in one case inviting two potential vendors to give a private presentation to PEBP management on a $9 million contract. After hearing the presentations, PEBP opted to extend the contract with the current vendor, but did not document the reasons why those vendors were selected or what reasons were used for extending the contract.

PEBP officials told auditors that they used regular market checks to ensure the value of extended contracts, but the audit report found only instances of a market report being checked and only one that was checked for multiple years.

One such market check analysis with PEBP’s pharmacy benefits manager indicated that the cost for the agency’s vendor was between $3.6 million to $9.3 million more expensive than comparable plans of a similar size.

‘Wasteful spending’

The audit also found examples of what it called “wasteful spending,” including decisions to dedicate more than 620 hours and nearly $51,000 total to apply for a business award and an accreditation.

Auditors said that in the 2018 fiscal year, PEBP management began applying for and obtaining awards as “a means to promote itself.”

The health agency applied for the American Business Awards’ “Stevie Awards,” which are given to honor and recognize the “achievements and positive contributions of organizations and working professionals worldwide.” PEBP was awarded a “Gold Stevie” and “Silver Stevie” in 2018.

Auditors estimated that PEBP spent 143 staff hours and nearly $12,000 on applying for those awards, which included application fees, travel, and award ceremony tickets. Those expenses were later flagged and removed by state budgeting authorities because they were not deemed “necessary.”

PEBP also sought to obtain accreditation through a group called the “Utilization Review Accreditation Commission,” an entity that establishes national standards for the healthcare industry. 

Auditors wrote that PEBP dedicated 482 staff hours (worth more than $14,000 in employee pay) to obtain the accreditation, even though auditors said it wasn’t typically necessary for an organization such as PEBP.

“The URAC accreditation is generally awarded to frontline healthcare entities that provide direct services and not public health plans where direct services are contracted out and participants don't have a choice in the government entity managing their health benefits,” auditors wrote in the report.

Auditors reported that PEBP was the first and only public sector program to obtain that accreditation through URAC, which has since been discontinued.

Rich told lawmakers last week that PEBP did not have any plans to re-apply for the “Stevie” awards, and that she believed the decision to apply for those awards or accreditation was to “illustrate how well our agency was doing and to compete against the private sector to show the innovation that our agency was really taking on.”


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