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Medicaid Audit Finds Overruns, Governor Calls Program ‘Broken’

State auditor Beth Wood finds administrative overruns in the Medicaid program, Governor McCrory says the state needs to fix Medicaid before considering expanding the program.

By Rose Hoban

North Carolina’s Medicaid program has been plagued by cost overruns and poor budget projections, and the program needs to be fixed before the state can consider expanding it, Gov. Pat McCrory told reporters at a press conference Thursday morning.

State Auditor Beth Wood describes the results of her audit of the state Medicaid program, while Governor Pat McCrory listens.

State Auditor Beth Wood describes the results of her audit of the state Medicaid program, while Governor Pat McCrory listens. Photo credit, Rose Hoban

McCrory said that even before he took the oath of office, he had asked State Auditor Beth Wood to review expenditures in the program that provides health care for low-income children, seniors, people with disabilities and pregnant women.

Thursday morning, Wood released an audit that found about $1.4 billion in administrative overruns over the past three fiscal years, $375 million of that in state dollars.

“This audit reinforces the fact that we cannot expand Medicaid and put more North Carolinians into this system without first addressing many of the underlying issues that are costing taxpayers millions of dollars every day,” McCrory said.

“We are still going through the review of the Medicaid expansion,” he said, “But at the same time, we have to reform the system we’ve got, and our total focus is on reform.”

Wood said she found that North Carolina’s administrative spending rate of 6.3 percent was higher than in other states. Part of the problem, she said, is that other divisions within the Department of Health and Human Services spend money that is budgeted by the Division of Medical Assistance, which runs Medicaid.

“There’s no accountability for these costs being spent in the other divisions in DHHS,” Wood said.

“Of the $524.3 million in costs incurred by the other DHHS Divisions, the three divisions that spent the largest amounts were the Division of Social Services at $238.3 million, the Division of Mental Health at $96.7 million, and the Division of Central Administration at $164.8 million,” Wood wrote in her audit.

And Wood’s audit also found many of the administrative services were handled by contractors working for any of 10 other divisions, and the money spent by the contractors wasn’t being monitored well.

“We don’t know how much other contracted services are being done by the other divisions and whether or not they’re properly tracking their costs,” Wood said.

Poor data

Secretary of Health and Human Services Aldona Wos said one of the problems dogging DHHS is a lack of good information about Medicaid spending and claims, which accounts for a total of $13 billion in combined state and federal spending annually in North Carolina and more than $3 billion in the state budget.

Secretary of Health and Human Services Aldona Wos told reporters the Medicaid program accounts for $13 billion in spending per year, and processes more than 88 million claims.

Secretary of Health and Human Services Aldona Wos told reporters the Medicaid program accounts for $13 billion in spending per year, and processes more than 88 million claims.

“There are over 1.5 million North Carolinians presently enrolled in Medicaid,” Wos said. “So each year, DHHS processes 88 million Medicaid claims.”

Wos said that the largest private insurer in the state processes only 47 million claims a year and that it has more than 4,000 employees to do so, while the state has only 400 employees in its Medicaid division.

One of the problems cited by Wos and McCrory is the department’s outdated information system, which is in the process of being replaced by a new Medicaid management information system (MMIS).

But the MMIS project has also been plagued by cost overruns and delays. Earlier in January, Wos ordered a stop to any changes being made to the state’s 35-year-old Medicaid computer system as the department readies the updated MMIS for implementation this summer. And for the first time, Wos hired a chief information officer for DHHS, who will start in February.

“If you don’t have good data, you can’t decide, ‘Wow, that’s a program we really need to fund,’” said DHHS spokeswoman Julie Henry. “The secretary wants Medicaid to be more engaged in that and work more closely with the divisions to measure effectiveness. And to monitor more closely.”

“There’s lots of money that goes out to lots of different agencies in the state from Medicaid,” Henry said. “We need to know how are we monitoring the Medicaid flow of money out of the department and into the state.”

Controlling Costs

Wood’s audit found that Medicaid expenditures are driven by three factors: the number of people in the program, the price of services and the amount of health care used by each recipient.

The number of people in Medicaid fluctuates with the state of the economy: In good times, enrollment drops; in bad times, it rises. Wood said there are few ways to control the number of people in the program, so Medicaid has to rely on strategies to control consumption of services.

The report suggested one way to manage the growth of costs would be to freeze reimbursement rates to doctors and hospitals, subject to legislative control. Currently, costs increase automatically “unless action is taken to stabilize or reduce rates.”

New State Medicaid head Carol Steckel

New State Medicaid head Carol Steckel has been asked to lead Medicaid through major changes. Photo credit, Rose Hoban

Wood’s report quoted a 2010 budget report that concluded: “Historically the Medicaid program has been more concerned about how to provide more services to more people than in containing costs.”

Henry also said North Carolina covers a number of “optional” services, such as prostheses, dental care and eyeglasses. She said neighboring states save money by not covering such services.

“Do we start looking at some of those optional services and making decisions about that?” Henry asked. “It could be something we look at.

“Medicaid has been the fallback for lots of people in North Carolina and lots of programs in North Carolina. Reforming Medicaid means looking at where that money is spent.”

Community Care

One way North Carolina has controlled the amount of health care used by beneficiaries is by enrolling them in Community Care of North Carolina (CCNC), a medical home care-management program.

An independent auditor’s report submitted to the General Assembly in late 2011 estimated that the program saved the state about a billion dollars between 2007 and 2011.

But Wood questioned the amount of money being saved by CCNC. She noted that legislators planned on at least $72 million in additional savings in fiscal year 2011-12 because of changes to the state Medicaid program. But the program only saved $34 million, in part because it took time for federal officials to approve state-plan changes.

“The changes were required to implement these plan amendments retroactively, and [the Division of Medical Assistance] never had any intention of retroactively implementing those changes because they said it would result in lawsuits and problems with providers,” Wood said.

Wood recommended in her audit that savings needed to be “more realistically calculated by the DMA and DHHS with consideration of implementation costs and realistic implementation dates given current system constraints.”

“We’ve been evaluated by three different organizations using completely different methodologies, and the answer in each case is that it has been pretty definitive that we save a fair amount of money,” said Paul Mahoney, vice president for media affairs for Community Care.

Mahoney said some of the criticisms of CCNC come from private companies that are pushing state officials to replace the nonprofit program with for-profit managed-care companies.

“The criticisms that we’re getting are coming from folks who have an agenda, that they want to replace this system, so we’re not going to accept that,” Mahoney said.

“We get calls every day from other states saying, ‘How did you build this system? How can we get this infrastructure in place?’”

Mahoney said Colorado, Oregon and Connecticut are using CCNC as a model to change their Medicaid programs.

McCrory said Wood will be undertaking an audit of CCNC in the coming months.

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