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A report from the state auditor brings more of the financials for the Department of Health and Human Services into focus, but there are no easy answers to the state of Medicaid’s finances.

By Rose Hoban

Last fall, legislators instructed the state auditor, Beth Wood, to examine the financial standing of North Carolina’s largest governmental departments: Health and Human Services, Public Instruction and Public Safety.

State auditor Beth Wood answered reporters' questions after her presentation to members of the General Assembly Monday. Photo credit: Rose Hoban
State Auditor Beth Wood answered reporters’ questions after her presentation to members of the General Assembly Monday. Photo credit: Rose Hoban

On Monday, the auditor delivered the first of those reports, on DHHS. It was the first comprehensive and detailed look in almost two decades into the nitty-gritty of the finances of the state’s largest governmental department, which spends upwards of $18 billion each year in state and federal funds.

Just to accomplish the audit required more than 10,000 hours of accounting time and more than $1.4 million in contractor fees over five months, Wood said.

“It hit us at our busiest time of the year,” Wood said of legislators’ request for the audit, made last October.

The biggest chunk of DHHS spending comes from Medicaid, the program that provides health care for close to 1.8 million beneficiaries who are low-income children, some of their parents, people with disabilities and low-income seniors, many of whom live in nursing homes.

And after a tumultuous run of years marked by budget overruns, mistaken drawdowns of federal funds and a historic recession, the takeaway was cautious optimism that Medicaid’s financial status is slowly improving, even as it has a deficit of about $355 million.

Lots of information

“When you get into these numbers, and you break it down by division, It is just a lot of information that I don’t think the General Assembly has ever really truly had before,” Wood told the Joint Legislative Program Evaluation Oversight Committee Monday afternoon.

Wood’s report – 142 pages in all – broke down the finances of 10 of DHHS’ divisions, everything from the massive Division of Medical Assistance, which runs Medicaid and spent $11.36 billion in state and federal dollars in the 2014 fiscal year, to the Division of Blind Services, which spent $25.6 million during the same period.

“What I would hope is that this committee and others will look through this information and start to ask questions about why things are this way or that way and get comfortable about where this department is as a whole,” Wood said.

She said she believed the most important benefit of the audit was helping legislators understand what is really happening with the state’s money as they begin the budgeting process.

“It gives you not only what we spent – here’s cash that really went out the door – but here’s what we owe next year, for the year we just finished out,” Wood said. “So you have the information here to take that into account and know what the true expenses for a year are, not just the cash we put out.”

Long-term debt

According to Woods’ analysis, In the fiscal year ending in the summer of 2013, DHHS had a longstanding structural deficit of $408.6 million that’s accrued over years. She explained this deficit is more of an accounting phenomenon of assets less liabilities, different from the yearly budget overruns that have plagued Medicaid in recent years.

Several officials pointed out that this is the kind of deficit that bond ratings agencies look at, not the kind of deficit that brings bill collectors knocking at the door.

“This goes back to at least 2009, when there was $360 million that the department over-collected in Medicaid because they used the wrong percentage for drawing federal receipts,” said Medicaid Chief Financial Officer Rod Davis after the meeting. “That created a big hole and it grew a little bit in those bad years when we had [yearly] deficits.”

Davis said the structural deficit in Medicaid probably dates back further, to about 2007, at the beginning of the nation’s economic crisis.

DHHS spokeswoman Kendra Gerlach compared the Medicaid deficit to credit card debt.

“You can acquire that debt over many years and build it up to a big number that you carry for years,” Gerlach said. “It’ll take years to pay it down; but if I’m responsible, I’m going to try to pay down that balance.”

Wood’s analysis showed that from the end of the fiscal year ending June 30, 2013 to the end of the 2014 fiscal year 12 months later, the structural deficit shrunk by more than $58 million.

She also explained that the structural deficit is, in part, generated by the fact that some services “incurred but not reported” in one fiscal year roll over to the next, even as receipts continue to roll in.

“If you ended business tomorrow, it would take $350 million in state funds to make that up if we ended business tomorrow,” Wood said. “What we hope or expect to happen is that over the next several years, little by little, we’ll get this number more in line.”

She said she hoped legislators would continue to ask for the annual audits, noting that now that the initial report has been done the next iteration would not be as difficult or take as much personnel time.

Big gulp

Members of the usually lively Program Evaluation Division committee had only a few questions for Wood after her presentation, most of which were looking for clarifications among the mass of information.

“It’s good information for us to process and look at,” said Rep. Jason Saine (R-Lincolnton) after the meeting. “The better data we have on an ongoing basis, the better off we all are in terms of policy-making decisions. Then we can know where are we spending money, what can we do better.”

DHHS officials sounded a triumphant note in a press release Monday afternoon.

“Our budget is in the best shape it’s been in for five years,” Davis said in the release. “These audits are an affirmation of the progress we’ve made in achieving more transparency to our budgeting and better forecasting processes. We are currently on budget again this year.”

But Saine and others said there’s still plenty more to chew over.

Pam Kilpatrick from the Office of State Budget and Management pointed out there’s only two years of data on Medicaid’s structural deficit, and said that’s not enough to declare a definitive trend to the better.

“[The committee] wanted to have some greater accountability into how the financial systems of the larger state agencies are working. This is a step in that direction,” Kilpatrick said. “But there’s still a lot to digest.”


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