MNsure should repay more than $1.2 million in grant funds, federal auditors say, including money spent on marketing work that wasn't properly authorized until after the job was completed.

Auditors from the Office of Inspector General at the U.S. Department of Health and Human Services (HHS) outlined the recommendations in a report issued Monday.

The report also flagged certain costs that MNsure allocated to federal grants, which auditors said should have been charged to state public health insurance programs.

MNsure, however, said it did not accept the recommendations. The marketing work, for example, was an allowable grant expenditure that was requested, received and utilized by MNsure, despite problems with the timing of the contract amendment.

"After reviewing the [MNsure] comments, we maintain that our findings and recommendations are valid," auditors wrote.

Officials with the federal Centers for Medicare and Medicaid Services (CMS) ultimately will decide whether repayment is warranted.

The HHS Office of Inspector General has completed audits at five other state health exchanges thus far, and raised questions about spending in four of them. An audit released this month, for example, questioned about $150 million in cost allocations by the health insurance exchange for the state of New York.

Minnesota launched the MNsure exchange to implement the federal Affordable Care Act, which called for state-level websites where people could sign up for health plans. In Minnesota, state officials opted to create an exchange that would serve the private health insurance market where individuals buy coverage, as well as people who qualify for the Medicaid and MinnesotaCare public health insurance programs.

By the end of 2014, the federal government had awarded $189.6 million in grants for MNsure, and the state used $86.4 million between July 2011 and June 2014. The audit released Monday looked at $19.6 million of the total spent during the three-year period.

The expanded marketing contract was part of MNsure's high-profile, but ultimately abandoned, ad campaign in 2013 that featured Paul Bunyan and Babe the blue ox.

In a November 2014 report, Legislative Auditor James Nobles first questioned the contract expansion, which he valued at around $925,000. Federal auditors Monday bumped up the price a bit to roughly $929,000.

When Nobles released his audit, MNsure officials said the marketing director responsible for the contract was no longer with the exchange. She did not have authorization to obtain the marketing services on her own, a spokesman said, but the money was budgeted and allocated to the marketing department.

MNsure reiterated these arguments in its response to Monday's audit, and noted that all services provided by the contractor were requested, received and utilized by MNsure. In addition, payments weren't made until MNsure's senior management reviewed the matter and a contract amendment was executed.

"When viewed in the proper context and in light of remedial steps taken by MNsure, it is clear that requesting a refund of the amount involved to CMS would not only harm MNsure, but would be an extreme measure inconsistent with MNsure's mission to provide a marketplace for Minnesotans to acquire health insurance," health exchange officials said in a detailed response to the report.

But federal auditors called the work "unauthorized because it was completed without an executed contract extension approved by management, which is a violation of federal and state requirements."

On the cost-allocation issue, federal auditors said MNsure wrongly charged to federal grants $346,095 in costs that should have been directed to the public health insurance programs that use the MNsure system. MNsure used a cost-allocation formula using outdated and estimated data, auditors said.

In its response, MNsure said it was following federal guidance on how to allocate costs, and that it used the cost-allocation formula in place at the time the transactions at issue were incurred.

On Monday, MNsure issued a statement noting that the exchange already recovered and repaid CMS for a $4,000 expenditure that also was highlighted in Monday's report. The statement added: "MNsure believes it has a strong case for not repaying the other funds and looks forward to resolving these issues with CMS in due course."