Kentucky Misallocated Millions to Establishment Grants for a Health Insurance Marketplace

The Cabinet for Health and Family Services (State agency) did not allocate costs for establishing a health insurance marketplace to its establishment grants in accordance with Federal requirements. Specifically, the State agency:

• used a flawed methodology to allocate $23.6 million in costs from October 1, 2013, through April 15, 2014, and
• misallocated $25.5 million in costs from April 16, 2014, through December 31, 2014, because it continued using a flawed methodology and did not update its cost-allocation methodology using updated, better data.

The State agency misallocated these costs because it used a cost-allocation methodology that did not allocate costs to particular cost objectives relative to the benefits received. In addition, the State agency did not have a written policy that explained the necessity to use updated, better data when available. Contrary to Federal requirements, the State agency, with CMS's permission, continued to use a flawed allocation methodology even after CMS informed the State agency of the significant difference between the estimated enrollment projections and the actual enrollment activity.

We recommended that the State agency (1) work with CMS to determine what portion of $23.6 million was properly allocated in accordance with the relative benefits the establishment grants received from October 1, 2013, through April 15, 2014; (2) refund $25.5 million to CMS that was misallocated to the establishment grants by not using updated, better data, or work with CMS to resolve the amount misallocated to the establishment grants, from April 16, 2014, through December 31, 2014; (3) work with CMS to ensure that the $123.3 million that was allocated to the establishment grants on the basis of a flawed cost-allocation methodology from November 2010 to September 2013 were allocated correctly and refund any unallowable amount; (4) work with CMS to ensure that costs claimed after our audit period were allocated correctly using updated, better data and refund any unallowable amount; and (5) issue a written policy that explains how to develop and perform cost allocations on the basis of relative benefits received and to reassess and revise allocations when necessary.

In written comments on our draft report, the State agency fully concurred with our fifth recommendation, and it said that it would issue a more formalized written policy that explains how to develop, reassess, and revise its cost allocations. The State agency did not fully concur with the first four recommendations, but said that it would work with CMS to ensure that funds were properly allocated. After considering the State agency's comments on our draft report, we maintain that all of our findings and recommendations are valid.