shows a red cross with the word Medicaid printed on it, in front of a pile of dollar bills. For Medicaid transformation

By Thomas Goldsmith

A state auditor’s report says North Carolina taxpayers paid an excess $439 million during a three-year period, money that wound up as cash reserves for managed care organizations charged with looking after people’s mental health problems.

State Auditor Beth Wood

The money intended to treat Medicaid beneficiaries and uninsured people with mental illness instead stayed on the books of state-established and publicly funded agencies called LME/MCOs (local management entities/ managed care organizations), according to a finding in the audit released Wednesday.

The state Department of Health and Human Services agreed with portions of the audit but countered that the level of savings is appropriate given the need to prepare for emergencies and to put money back into the community.

Beth Wood, who’s served as elected state auditor since 2009, said that DHHS “lost control” of the money, paid in 2015-2017 to the state’s seven local management agencies. She attributed the “excess savings” — estimated at $800 million by 2019 — to the agency’s failure to calculate and set a percentage limit on how much above per-person costs the agencies could get and keep.

“There’s over $800 million sitting with them as we speak, and yet there are people on a waitlist for years waiting for services,” Wood said in a phone interview. “Now, just because you’re on the waitlist and you haven’t been given the waiver yet to get into these programs, you could still be provided services.”

States can ask federal permission to allow for the provision of services beyond those allowed by Medicaid to some beneficiaries with conditions such as traumatic brain injury. Nonetheless, many of those people continue to wait for help.

“Accumulate and reinvest”

Health and Human Services Sec. Mandy Cohen said in a written response to the audit that the MCOs’ unspent balance is within industry norms and that the money is needed to supply breathing room in case of emergencies, as well as to pay for innovation and reinvestment.

“The Department believes that the current policy of allowing LME/MCOs to accumulate and reinvest savings into their communities, in accordance with state law, is appropriate,” wrote Cohen. She also noted the audit’s finding that the agency set its rates in a way that was actuarially sound.

headshot of Cohen with the sign reading "DHHS" behind her
Mandy Cohen in her office on the Dorothea Dix campus. Photo credit: Rose Hoban

The audit comes as the state prepares to transition to providing physical health care via a managed-care system to Medicaid recipients. Wood said North Carolina hasn’t always done a good job of setting standards and must be prepared for the Medicaid transition.

“We did this audit because we know that the General Assembly is headed towards most if not all Medicaid recipients being in managed care,” Wood said. “So what we wanted to see is, did the state of North Carolina do it right the first time? And if we didn’t let’s get that fixed and straight.”

Either DHHS should set new rates designed to lower the amount of reserves in LME/MCO coffers, or the General Assembly should take action to address the issue, Wood said.

An exchange between Wood and Cohen centered on the percentage rate of revenue over expenses that the LME/MCOs should be allowed to hang on to. Cohen said the average rate of savings by the North Carolina agencies averaged 5.12 percent during the three-year period examined.

States, including North Carolina, require insurers to set aside some percentage of their total claims as a reserve in case of contingency, but there’s no one industry standard, rather a range depending on the type of reserve that’s needed.

“That level of savings is not atypical in the industry,” Cohen wrote.

According to examples provided in the audit, the state of Texas allows MCOs to keep all of any excess up to three percent, with the state sharing in any amount above that level on a graduated scale. Florida allows MCOs to keep up to five percent, sharing higher amounts with the state.

Performance by North Carolina MCOs ranged as much as 22 percent above the expenses to loss ratio on the part of some agencies.

Money for uninsured

Legislators voted to restructure the state’s mental health care system in 2011, creating the state-established managed-care agencies.  The practice of LME-MCOs building up unspent balances has long been an issue at the General Assembly and in state government.

A NCHN reported at the end of the last budget cycle, legislators cut funding that would go into reserves for four straight years. Called single-stream funding, this money has been the object of complaints by legislators who believe the managed care organizations shouldn’t be holding on to millions in excess payments.

When Wood audited Charlotte-based Cardinal Innovations in 2017, the audit heavily criticized the Cardinal MCO for piling up $70 million in reserves, doing a poor job of caring for its hundreds of thousands of members, and spending money on cars, employee travel, parties and the like, instead of putting money back into innovative programs.

“Every LME/MCO has to have a plan to reinvest that money,” Wood said. “Of that money, the $800 million they are sitting on, there hasn’t been any — very little I’ll say —  reinvestment or help to those sitting on a waitlist.”

High-risk business

Deby Dihoff, state director of the NC branch of NAMI, addressed the issue from the point of view of people in need of behavioral health care.

“It’s balancing the risk of the liability of having to serve everybody, when 10 days before the end of the year, you don’t know if the equivalent of a hurricane might occur,” Dihoff said in a phone interview.

“It’s a high-risk business and I think they (LME/MCOs) have done a good job.

“We would like them to spend more to serve the needs that are unmet, but we also think it’s an obligation of the state of North Carolina to look at the state funding for those entities and to look at, is the rate really sufficient?”

What did the audit say?

Specifically, the Office of the State Auditor NC found that the Division of Medical Assistance, the DHHS unit that oversees Medicaid, failed to:

++ Set a goal for the percentage of reserves each local management agency could maintain,
++ Monitor the resulting reserve in relation to the goal, and
++ Make changes in the rate of serves based on findings.

In another finding, the audit said: “There is no assurance that the financial, encounter, and member month data used to establish Medicaid capitation rates was reliable.” In its response, DMA agreed to use audited and validated financial data to establish the per-person rate, paid for each beneficiary.


Department of Health and Human Services responds

“The highest priority of the NC Department of Health and Human Services (DHHS) is ensuring the health and well-being of the people we serve. We hold ourselves and our partners accountable for providing high-quality services while being responsible stewards of State resources.

“As the NC Office of the State Auditor has conducted its review of Medicaid Capitation Rate Setting covering July 2015 to June 2017, DHHS has upheld our values of transparency and proactive communication in our interactions with the team conducting the review.

“DHHS agrees with many of the findings of the report, including the State Auditor’s assessment that LME/MCO capitation rates are actuarially sound and that capitation rates should always be set with the most reliable and reconciled financial data possible.

“While DHHS does not agree with certain policy recommendations included in the report, we appreciate the thoroughness and professionalism provided by the State Auditor’s staff in the performance of this audit. We look forward to continuing to work with the Office of the State Auditor and other partners to ensure the delivery of high-quality, appropriate services to the people we serve.”

DHHS statement of Jan. 24, 2019

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Thomas Goldsmith worked in daily newspapers for 33 years before joining North Carolina Health News. Goldsmith is a native Tar Heel who attended the UNC-Chapel Hill, and worked at newspapers in Tennessee...

3 replies on “State audit: NC DHHS’s failure to set proper rates kept dollars from mental health patients”

  1. Let us coin a concept that encapsulates what is being done here:

    “Psychiatric Benefit Manager” or PBM.

    But no, that term is already reserved for Pharmacy Benefit Managers (PBMs) the pinnacle of proper management of excess payments in the USA, if not the world, is that not so?

    Ah hah, we have two PBM’s for the price of one and the PEOPLE of North Carolina will be forever grateful of the gravitas of these TWO GREAT benefit managers.

    Yes siree Bob and Bobette, add that triumph to the triumph of the CSC contract with DHSS and we will all understand where North Carolina stands in the provision of cost-beneficial care to the PEOPLE IN NEED of health care, mental and/or physical.

    After all, there is no mental health care need unmet in the glorious state of North Carolina, is there not? AND OUR outcomes of mental health care are among the best in the nation, are they not? There is surely not a penny wasted in the care of OUR citizens, right?

    In addition, there is no question but North Carolina ranks among the top states in the Union for integrated psychiatric and non-psychiatric care. What’s the sweat created by this obviously uninformed critique of the Psychiatric Benefit Manager?

  2. Amazing. They’re saving reserves for emergencies, re-investments. Families have been on caps waiting lists over 10 years. What is an emergency. Oh, I know…their trips to the South of France got delayed.

  3. I’m the mother of a young adult that has struggled with mental health issues his entire life. His father served in the United States Navy and got an honorable discharge. I have worked with disabled adults most of my working life. Yet, my child is not eligible for Medicaid because the SSA he receives, of his father, is $96 over the allowed amount. My son also has some medical issues. We’ve offered to take less money for the medicaid. NO DICE. I can’t express how I feel ,as a parent, knowing that my son’s “possible demise” is totally preventable.

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