Audit: DHHS still digging out of financial hole

Posted April 13, 2015

Lawmakers get update on DHHS operations

— Did North Carolina's Medicaid program run a surplus or operate at a deficit during the fiscal year that ended June 30, 2014?

That may seem like a fairly simple and straightforward question.

As it turns out, it has at least two answers, maybe three.

In September, officials with the Department of Health and Human Services ballyhooed the fact that they could report the health insurance program for the poor and disabled operated at $63 million under budget. Given recent budget troubles with the program, that was cause for celebration.

But a financial report presented to lawmakers Monday by State Auditor Beth Wood showed the agency still chipping away at a deficit.

Specifically, the audit says Medicaid owed $350 million more in liabilities than it has in assets. That's better than the $408 million negative fund balance it had the year before but still under water, or in "a hole," according to Wood.

"The $63 million was an actual number," said Rod Davis, chief financial officer of North Carolina's Medicaid program.

And the $350 million?

"That's just an accounting number; it's not a real number," Davis said.


Wood presented the audit to members of the legislative Program Evaluation Committee. None seemed particularly nonplused by Medicaid being in a financial hole. Of course, they weren't being asked to throw $350 million more into the program, which surely would have raised their collective blood pressure.

But if the $350 million isn't a real number, why is it on the books?

When Wood took a shot at explaining this, she likened it to someone who had run up a big debt on their credit card. They may be doing better financially, even have money in the bank at the end of the year, but they would still have the credit card balance hanging over them.

In this case, Medicaid got in trouble at the end of the Perdue administration by overestimating how much the federal government should provide for its share of the jointly funded program. The state paid the feds back but has been carrying a liability since then, seemingly because, to pay Paul in the guise of the federal government, Peter was robbed.

We asked who, exactly, Peter might be and whether he may come looking for his money.

"No," said Laketha Miller, Medicaid's controller.

But, she said, it is money that the state would eventually have to pay to somebody, and it's definitely a number the state wants to be smaller rather than bigger.

"Last year, that $350 (million) was $408 million negative," Miller said. "But under the leadership of Secretary (Aldona) Wos and all of the policies she's been implementing and all of the oversight, we've been able to recognize a positive impact that brought the $408 million down to $350 million negative. So, we're seeing a positive impact to Medicaid."

After going several rounds of questioning with Wood, Miller and Davis, the $350 million negative fund balance comes from the claims that Medicaid is likely to have to pay doctors for services rendered but have not yet been billed. Essentially, it's the difference between the money the state will likely end up owing and the money it had available at that point in time to pay those bills.

Insurance companies typically deal with this by having a risk reserve, a pot of money that could be used to pay bills in the case of a financial bump in the road. In the case of North Carolina's Medicaid program, lawmakers have been loathe to create such a fund – at least one without strings attached.

Still, when Medicaid officials reported to lawmakers last year that the program had operated in the black for 2013-14, it wasn't exactly a complete picture of the Medicaid program's fiscal health.

That said, in terms of the state budget, $350 million isn't world-ending money.

Spending on DHHS takes up roughly a quarter of the $21 billion in state tax revenue North Carolina government spends every year. Counting federal funds, the department projects it will spend $17.8 billion during the fiscal year that begins July 1.

There was one other side not in Monday's audit report that raised eyebrows.

In a section authored by DHHS, the agency said that it anticipated having a deficit for the fiscal year in question.

"The total estimated Medicaid budget shortfall for fiscal year 2014 of $81.7 million was substantially less than the previous year’s shortfall of $496 million," the report says. "Specific actions taken during the current period to mitigate growing population and expenditures in Medicaid included prior authorization for mental health drugs and other pharmacy improvements, rate reductions, modifications to hospital reimbursement and increased retention of revenues generated by hospital assessments."

Davis said to pay no attention to that number. It was proffered months ago, he said, back when certain interactions between the federal Affordable Care Act and the Medicaid program had the potential to cause problems.

"If certain things happened, it could have been that bad," Davis said. "It turned out it wasn't."

It seems that $81.7 million, which was in the audit report, wasn't a real number either, which may explain why Wood said what she did when asked if Medicaid was in good financial shape or not.

"It is a hard question to answer because I don't have four other years or five other years audited," Wood said. "It's hard to say at this point in time."


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