Covered California Slammed for Handing Out $178 Million in Sole-Source Contracts

By Brian Hews

In a scathing report issued today, the California State Auditor slammed the State’s health insurance exchange, Covered California, for handing out sole source contracts saying the agency  “needs to improve its contracting practices to ensure the integrity of the process it uses in awarding sole‑source contracts,” while finding the justifications for awarding nine of forty sole‑source contracts “were insufficient.”

The report cited two instances of questionable of sole-source contract awards amounting to over $178 million dollars.

A contract with the advertising firm of Weber Shandwick was first submitted at $98.6 million, ended up costing the agency $134 million.

Another, with a subcontractor of the advertising firm Ogilvy, started at $813,000 and ended up at a staggering $44 million.

Covered California’s policy, which was approved by its board of directors, permitted the use of sole‑source contracts when “timeliness or unique expertise may be required.”

But the auditors found that two of the contracts were missing justifications, and the remaining seven failed to assert either timeliness or unique expertise as the basis for sole‑sourcing the contracts.

“In some instances the justifications asserted reasons that the board had not approved for using a noncompetitive procurement process. In other instances the justifications failed to explain why Covered California was using a sole‑source contract at all.”

The review found that from the nine contracts two were missing award justifications altogether—one for an original contract and another for an amendment; the remaining seven justifications—five for original contracts and two for amendments—failed to assert either timeliness or unique expertise as the basis for sole‑sourcing these contracts.

Covered California was given broad statutory authority to establish its own procurement and contracting policy using methods such as leveraged procurement agreements, (which allow departments to buy directly from suppliers through existing competitively bid contracts and agreements) or to use its own competitive contracting methods.

However, Covered California’s board‑adopted policy also included a noncompetitive process that allowed the agency to use sole‑source contracts when timeliness or unique expertise may be required.

Covered California’s board consists of two members appointed by the Governor; one by Senate Rules Committee; and one by Speaker of the Assembly. The Secretary of the Health and Human Services Agency or another designee serves as an ex-officio voting member of the Board. Appointed members serve four-year terms.

The members are: Art 
Torres, appointed by the Senate Rules Committee; Genoveva 
Islas; Diana S.
Dooley, a Gov. Brown appointee; Paul
   Fearer, appointed by Speaker John Perez; and Marty 
Morgenstern, a Gov. Brown appointee.

The report went on to state, “During fiscal years 2012–13 through 2014–15 Covered California did not consistently follow the part of its board‑adopted policy that addressed noncompetitive procurements.”

The audit questioned the use of a sole-source contract for their $134 million marketing and outreach program with Weber Shandwick, a large multi-national firm based out of New York.

The original bid was $96 million, $38 million lower than what was awarded as a non-competitive contract.

Three other award justifications suggested that either the vendor was not unique or that Covered California had sufficient time to use a competitive procurement method.

The contracts in question were with Ogilvy to provide marketing and outreach services.

Richard Heath and Associates, Inc. (Richard Heath) became a subcontractor to Ogilvy for one contract. In late September 2013 Covered California executed a sole‑source contract with Richard Heath for more than $813,000 for the purpose of supporting, training, and managing the Outreach and Education Grant.

18 days after awarding Richard Heath’s original contract, Covered California amended the contract with Richard Heath to increase the contract total to a staggering $44 million without using the competitive process.

Covered California justified the original Richard Heath contract and the subsequent first amendment on the basis that the sole‑source contract was necessary because of the severe time constraints it was facing.

But the auditors questioned that justification and said that Covered California had the time and capacity to seek competitive bids for these services.

Covered California’s assistant general counsel stated, “conducting a competitive procurement process for the outreach services that Richard Heath had already performed for over a year under the Ogilvy contract would have been more costly than awarding the contract to Richard Heath, as a new contractor would have had to expend additional time and resources to get up to speed on the program.”

See report click here.

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