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Press Release

DHHS numbers don't add up


This article originally appeared in the Raleigh News & Observer on January 12, 2003.


Dave Mosley wasn't out to uncover anything when he began asking questions in May 2002 about payments made to hospitals for Medicaid, the state-run health insurance program for the poor. Having been hired recently by the state Department of Health and Human Services, Mosley, 34, said he was merely trying to educate himself. "I just couldn't get some of the numbers that I was looking at to make sense," he recalled.

What Mosley found, over approximately six weeks, was a succession of accounting blunders dating from 1997 that caused the state to overpay hospitals for Medicaid services.

DHHS documents now say that, worst case, the overpayments could total more than $625 million.

Top department officials say they believe the actual overpayments will turn out to be much less, and hospital industry officials question whether they occurred at all. But it is likely to take a year or more to untangle the problems.

"I truly do not believe the problem is going to end up being of that dimension," DHHS Deputy Secretary Lanier M. Cansler said in an interview last week. "Right now, we really don't know."

Medicaid costs are shared by the state and federal governments. In the past decade, the state's costs have quadrupled, to more than $2 billion, helping propel the state into its worst budget crisis since the Great Depression.

The accounting errors uncovered by Mosley involve federal payments and have no direct effect on state finances, but DHHS officials acknowledge that the errors Mosley found in one program raise questions about the state's overall handling of Medicaid.

"We realize that mistakes have been made, our process has been weak, and we're making every effort now to fix that," Cansler said.

Hospital officials agree.

"There was a great deal of slop on the state's part," said Ken Morris, chief financial officer of the Duke University Health System. "They didn't know what they were paying because they weren't paying attention. The program was not well-managed."

At issue is a pot of federal money known as the supplemental Disproportionate Share Hospital payment program, which the state taps to assist hospitals with a high percentage of Medicaid patients. The program was created in recognition of the fact that Medicaid's regular rates don't cover hospitals' costs.

Since 1997, North Carolina hospitals have received $1.25 billion in supplemental Disproportionate Share payments. For many, the payments are the difference between solvency and bankruptcy, said Bill Pully, president of the N.C. Hospital Association.

Although DHHS made no public disclosure when Mosley first brought the errors to light six months ago, the department and the hospitals are working feverishly to clean up the mess:

* The state has hired a consultant, Tucker Alan Inc., at a cost of up to $48,000 to examine Disproportionate Share Hospital program payments.

* Cost settlement reports, accounting procedures required for the purpose of identifying errors such as the overpayments, have not been completed by DHHS since 1996. They are now being expedited.

* After being advised of the apparent overpayments, hospitals are trying to offset them by documenting hundreds of millions of dollars of previously unreported Medicaid expenses.

* The department says it has tried to eliminate the overpayments from the last two quarterly payments to hospitals.

* Mosley, who uncovered the problem, has been given a 20 percent pay raise, to $72,000, and a promotion to assistant to the director of the Division of Medical Assistance, the agency that handles all Medicaid payments.

At the federal level, the Centers for Medicare & Medicaid Services, the agency that administers Medicare, has scheduled a financial review to determine whether there is a problem with the supplemental hospital payments.

"Staff has already been in the field for one week," said Rhonda Cottrell, an administrator in Atlanta. She said her agency was tipped off by the U.S. Department of Health and Human Services' Office of Inspector General.

That office has already requested some of the pertinent records.

"It's probably reasonable to assume that the Office of Inspector General will be asked to perform additional audit work in regard to these supplemental Medicaid payments," said Ben St. John, a spokesman in Washington for the office.

Hospital and state officials say it would be difficult to force hospitals in the state to repay tens of millions of dollars.

Even the most fiscally fit hospitals are earning between 1 and 3 cents on every dollar of revenue. About a third of North Carolina's hospitals are operating in the red, according to a recent hospital association survey.

"Having to pay back what the state says it has overpaid would be very painful for us, but we would find a way to do it," said Morris, the Duke executive. "If you think about smaller hospitals that don't have the wherewithal an institution like Duke has, it would be devastating."

Penetrating questions

Mosley went to work for DHHS in fall of 2001 in the Office of Policy and Planning. He holds a master's degree in business administration from Auburn University.

He recalled that as he began to grapple with the Medicaid numbers, he wondered how payments to hospitals for Medicaid patients could change little in 2000, 2001 and 2002 while expenses climbed sharply.

"Like a lot of things," he said, "the more I understood, the more questions I had."

With the help of colleagues, Mosley discovered that a state contractor who processes claims for the Medicaid program had accidentally omitted one or two months of revenue for fiscal 1998-99. The Division of Medical Assistance apparently missed the error and used the numbers anyway, causing the state to vastly understate payments to hospitals. The contractor corrected the error the next year, but the state agency continued using the flawed payment numbers in 2001 and 2002.

As word got around that Mosley was questioning the numbers, help came from unexpected quarters. Documents, including some he didn't understand at the time, were left anonymously in his office or in his car.

It also came to light that the Division of Medical Assistance had mistakenly instructed EDS not to include hospital revenue from "third-party" payments, a category that includes direct payments from patients and from private insurance companies. This error artificially suppressed hospitals' income from Medicaid patients even further.

Together, those two errors caused payments to hospitals to be understated over a five-year period, from fiscal year 1997 through 2001, by $950 million, according to a summary Mosley gave to his superiors. And the understatement of revenues caused the state to pay the hospitals an additional $625 million in supplemental Disproportionate Share funds.

Allen Gambill, an assistant director of the Division of Medical Assistance and the man responsible for the supplemental Disproportionate Share program, acknowledged that the formula used to calculate Medicaid patient revenue may have been wrong.

Gambill also acknowledged that he failed to notice when more than a month of revenue was omitted from the annual report submitted to his agency in early 2000.

"Well," he said, sighing, "it's kind of like, why did you run a stoplight last year? You may have not have seen it. You may have been focused on another issue. Do mistakes happen? Yes, they do. Are sometimes things overlooked? Yes, they are."

And why have no cost settlement reports been compiled since 1997?

"We wanted to do 'em quicker but, how can I say it in a simple way? They're a little bit more complex than we ever dreamed."

Gambill said he believes that when all the errors are corrected, on the revenue and the expense sides, the hospitals won't owe much -- that it will be close to a wash.

'No crisis'

Pully, the hospital association president, said hospital leaders are confident that corrections on the expense side will show that they were entitled to the money.

"To the average person, I understand it must look like something went terribly wrong," he said. "But none of this money has been misappropriated or misspent. ... And at the end of the day, we believe that there will have been no overpayments, or at least that any amount of overpayment is no more than would have been expected. There is no crisis."

Pully and others said the expenses can be adjusted because most hospitals failed to submit complete cost reports.

For example, about 100 hospitals in the state allowed Medicaid to calculate their expenses from a cost report submitted to Medicare, the federal health insurance program for the disabled and elderly.

The reports are largely the same, but Medicare requires hospitals to omit several types of charges that Medicaid allows, said Wendell Ott, a Greensboro lawyer whose firm represents many of the state's largest hospitals. If hospitals don't file a second cost report to capture the additional expenses, Medicaid doesn't count them.

Hospitals that didn't file Medicaid cost reports may be able to claim previously unrecorded expenses for emergency room physician services, ambulance costs and hospital-owned clinics, among others. Teaching hospitals will be able to claim expenses for residents and interns.

Raleigh's largest hospital, WakeMed, is among those that did not file a Medicaid-specific cost report.

WakeMed officials believe the hospital will be able to claim an additional $1 million a year in teaching expenses alone by refiling for the years in question, said Becky Andrews, WakeMed's vice president for patient financial services.

Cansler said he is determined to get to the bottom of the problems with the supplemental Disproportionate Share program.

"Sooner or later we're going to have to hold some people accountable," he said. "The problem is, right now, until I know exactly what the problem is, I don't know what to hold them accountable for."

Another high DHHS official said she is concerned that what happened with the supplemental payments suggests that there may be other problems with the state's handling of Medicaid.

"There may be other places where we're not clear on what's going on, because we lack this capability to handle a lot of things in this program," said Nina Yeager, director of the Division of Medical Assistance since 2001.

She said her agency hasn't been given enough staff to keep up with the Medicaid program's growth. Overall Medicaid spending in the state, including the federal share, is up 50 percent in the past five years, to $7.2 billion.

Cansler agreed.

"Over the years, as Medicaid continued to grow, the infrastructure of Medicaid didn't grow along with it," he said. "And the result is, we didn't have people looking over shoulders, asking questions."

Staff writer Pat Stith can be reached at 829-4537 or