An audit of the MNsure insurance exchange has found that it had “generally adequate” internal controls for spending public money, but it took issue with how officials expanded a marketing contract earlier this year.

The problem with the marketing contract — which paid for the creation of a high-profile ad campaign featuring Paul Bunyan and Babe the Blue Ox — is one of eight findings related to internal control weaknesses and instances of noncompliance, according to the report released Tuesday by the state Office of the Legislative Auditor.

The audit did not examine MNsure’s operational performance. It’s the first of three reviews the office is conducting on the state’s health insurance exchange.

“MNsure did not appropriately authorize $925,458 of additional marketing work or execute a contract amendment until after the contractor completed the work,” auditors wrote in the report.

In an interview, Deputy Legislative Auditor Cecile Ferkul said: “We certainly think the first finding is significant — that’s almost a million dollars that was incurred without having a contract.”

But the problem wasn’t so large, she said, that it pushed the overall audit conclusion into the “not adequate” category. MNsure fell short of having “adequate” controls, Ferkul said, meaning the exchange’s results fell in “the middle ground.”

In a letter to Legislative Auditor James Nobles, MNsure Chief Executive Scott Leitz said the health exchange has resolved or is working to resolve all issues identified by the audit. The marketing director responsible for the contract problem is no longer with MNsure.

“I’m pleased this report found MNsure has generally adequate internal controls and complies with legal requirements, and that the report found no fraud or abuse at MNsure,” Leitz wrote in a letter that’s included as part of the audit report.

Minnesota was awarded $155 million in federal grants to create the MNsure exchange, and the audit released Tuesday looked at how the exchange complied with state and federal rules for spending $60 million in grant money through the end of 2013. The review also looked at an additional $34 million in spending to upgrade state computer systems related to public health insurance programs.

MNsure was allowed to use federal grant money to launch a statewide public education campaign, and ultimately paid a contractor nearly $1.59 million for work that included the Paul Bunyan ads, which stopped running in January.

The original contract had a value of less than $670,000, auditors found, and MNsure’s former marketing director allowed the company’s scope of work to increase without written authorization from MNsure management.

In all, MNsure spent $925,458 without proper advance authorization.

“Without executing a contract amendment before work starts, the extent and cost of the contractor work is subject to possible fraud and abuse,” auditors wrote.

‘Wasteful marketing’

In an interview, Ferkul added: “We didn’t identify evidence of fraud and abuse. We have that there as a risk.”

In its response to the finding, MNsure officials said that all services provided by the contractor were requested, received and utilized by MNsure. Joe Campbell, a spokesman for the exchange, added in an interview: “The former marketing director obtained services she did not have authorization to obtain on her own, but the money was budgeted and allocated to the marketing department.”

Even so, MNsure said in a response to the audit findings that when Leitz learned of the situation he ordered a review that resulted in personnel changes. The contractor received full payment, MNsure said, only after health-exchange officials confirmed that all requested services were provided.

Republicans who have been critical of the MNsure exchange seized on the finding in a statement issued Tuesday.

“It is sadly unsurprising that MNsure … improperly approved almost a million dollars of taxpayer money for wasteful marketing activities,” said House Minority Leader Kurt Daudt, R-Crown.

Nobles is scheduled to release a second audit on Nov. 12 that will look at MNsure’s ability to make eligibility determinations for people seeking coverage in public health insurance programs. An overall evaluation of MNsure’s development and implementation is scheduled for early February 2015.

Aside from the finding about the marketing contract, the auditor’s report found a variety of weaknesses ranging from incomplete inventory records to inadequate controls for collecting receipts. But Ferkul said of these other findings: “They are, unfortunately, typical of weaknesses we see in other state agencies.”


Twitter: @chrissnowbeck