McCrory Administration Officials Suppressed Insight Into Medicaid

By Rose Hoban, North Carolina Health News, October 8, 2013.

Soon after taking control in Raleigh in early 2013, people hired by Gov. Pat McCrory to run the Department of Health and Human Services made strategic edits to the departmental response to State Auditor Beth Wood’s audit of the North Carolina Medicaid program.

Documents obtained by North Carolina Health News through a public records request show that in January, incoming Sec. Aldona Wos and Medicaid head Carol Steckel eliminated detailed explanations of alleged high administrative costs, management problems and budget overruns in past years.

The resulting document accepts the criticism in Wood’s assessment wholesale and paints the health care program that covers 1.6 million North Carolinians as “broken.”

The criticisms contained in the audit have yielded talking points used by Wos, Steckel and McCrory for the past eight months as justification for turning down a federal expansion of the program under the Affordable Care Act and proposing to privatize the program.

The original response to the audit created in December 2012 by outgoing officials from Gov. Bev Perdue’s administration was revised in successive editions of the document throughout January, with a decisive, near-final edit by Steckel.

In a document that displays “track changes” that include Steckel’s electronic signature, whole paragraphs were deleted, with evidence that, for example, North Carolina’s administrative costs are lower than most states rather than 30 percent higher, as maintained by McCrory administration officials.

Incoming administration officials also deleted whole sections explaining that budget overruns were in large part a function of under-budgeting by the General Assembly.

And in her first week in her new office, Steckel struck through paragraphs explaining that Community Care of North Carolina had been studied by two national groups that found cost savings. Instead, she inserted language casting doubt on the efficacy of CCNC and suggesting further study of the statewide program that’s been lauded nationally and that is being replicated in several states.

‘Administrative costs are 30 percent higher’

During a press conference to present the audit in January, Wood said her analysts had determined that North Carolina was spending significantly more on administrative costs than states with Medicaid programs of comparable size (see table, below).

“The administrative spending for the state’s medicaid program is 38 percent higher than the average of nine states with similarly sized Medicaid programs,” Wood maintained. “While those states on average have administrative costs of 4.5 percent, the state of North Carolina spent over 6 percent of its total budget on administrative cost. In real dollars that means that the state is spending $180 million more than the average of our peer states.”

For her analysis, Wood used information from the Centers for Medicare and Medicaid Services.

In a February appearance before the Joint Legislative Oversight Committee on Health and Human Services, Steckel cast some doubt on those numbers, telling the committee that in many states administrative costs are hidden inside the contracts with managed care companies that run Medicaid programs.

Administrative cost comparison calculated by state auditor staff (screenshot from final audit)

“Actually, the administrative cost functions are in the managed care entities. And if you look at what is termed the ‘medical-loss ratio,’ which is what the managed care companies are allowed to use for administration, if you look at that for Arizona, their administrative costs would actually be 13.74 percent,” Steckel told the committee, explaining that the managed care company, rather than the state, was spending the administrative dollars.

Steckel may have gotten the Arizona figure from an analysis prepared by outgoing DHHS officials in December 2012. In the original departmental response to the state auditor’s report, which called Wood’s comparison “incomplete and misleading,” DHHS officials used actuarial data from national firm Milliman and from an Academy of Health report to calculate actual administrative overhead in the states Wood used in her comparison, including overhead from state expenditures and from managed care companies.

That table shows Arizona’s administrative expenditures at 13.74 percent.

When figures from all the states are tallied up and compared, North Carolina is among the lowest for administrative expenditures (see table and document, below).

Wos wrote in the final departmental response that DHHS agreed with Wood’s findings and recommendations on controlling administrative expenses.

During the press conference to announce the audit, Wos said, “Cost overruns will not be tolerated and will not be acceptable. There’s a budget for a reason, and we must adhere to this budget.”

Administrative cost comparison compiled by DHHS using data from July 2012 study by Milliman & Academy of Health report. Source: Issue Sheet 3, “Admin Costs w Responses,” dated Dec 18, 2012 (screenshot from document shown below).

Since release of the audit, Wos and McCrory have used Medicaid’s supposedly high administrative costs as talking points for problems in Medicaid; most recently, McCrory cited that figure in a September interview with Tom Campbell on NC SPIN.

“We had a more than $500-million overrun based on Gov Perdue’s projections on Medicaid, and our costs are 30 percent higher than other states in Medicaid administration,” McCrory told Campbell, “just basic operational issues.”

“The state overspent its Medicaid budget by $1.4 billion under the previous administration, and this administration thought that was indefensible,” wrote DHHS spokesman Ricky Diaz in response to a request for comment on this story.

Budget issues

Another talking point used by Wos and McCrory is the Medicaid budget overruns that have plagued the program over the past three fiscal years. Both have been quoted numerous times stating that Medicaid has been over budget by a total of $1.4 billion during that time period.

In the audit, Wood tallies the state budget overrun for the three years at $375 million, which includes federal matching funds to reach the $1.4 billion total. And Wood states that administrative overruns were the result of an “apparent lack of oversight.”

Initially, DHHS officials strongly disagreed with this assessment, writing that any exceeded budget amounts were due to “other factors such as consumption and price, not lack of oversight.… Since Medicaid is an entitlement program, the Division has little control over consumption.”

But this defense was edited out by Steckel, as evidenced in the tracked-changes version of the audit response dated Jan. 22, 2013. Steckel noted that telling Wood Medicaid is an entitlement would be “speaking out of school to the auditor.”

Steckel also deleted most of the language that provided any defense or explanation of departmental actions. In her edits, Steckel added that the department would be implementing a system where “we track contract requirements and expenditures on a weekly basis,” something DHHS officials had been doing since the previous summer, as noted in earlier versions of the document prepared by outgoing Perdue officials.

Perdue’s team had also included explanations of how the Office of State Budget and Management had been consulted on – and approved of  –  any overruns, explaining: “The Department cannot unilaterally expend funds beyond budgeted amounts.”

Later in the document, former officials argued that the department had repeatedly provided legislators, OSBM and the legislative Fiscal Research Division “with information regarding the inability to achieve savings included in the budget for [fiscal year] 2012-2013 as early as April, 2011.”

That was around the time former DHHS Sec. Lanier Cansler began sending letters to legislative leaders and to OSBM warning that budget targets were too low, essentially forcing DHHS to overspend its budget. Cansler sent letters in May and June, and again on Oct 27, 2011, when he wrote that “aggressive budget cuts mandated by the General Assembly’s budget are unreasonable and unattainable.”

In a letter to Speaker of the House Thom Tillis and Senate President Pro Tempore Phil Berger dated June 2, 2011, then-governor Perdue wrote that she believed the amounts budgeted for Medicaid were too low.

Perdue pointed out that since 2008, the state had grown by 400,000 people and the state was still struggling to emerge from the economic downturn that meant many workers lost insurance, with some of those workers and many of their children swelling Medicaid’s rolls.

“[Y]our budget relies on over $750 million in reductions to Medicaid over the course of the biennium,” Perdue wrote. “When the loss of Medicaid matching funds are accounted for, your cut is actually $2 billion in real money taken out of the North Carolina economy….

“It is anticipated that over $200 million of these reductions will not be achievable due to technical mistakes and overestimating of savings.”

But any references to departmental attempts to warn others outside DHHS of issues were edited out by Steckel. She also removed references to the fact that federal rules prohibit states from changing their Medicaid programs unilaterally; any rule changes require federal approval, which can take months, and those delays mean a state ends up spending at a higher rate than desired in the meantime.

Later, in sections of the audit that fault the Division of Medical Assistance for poor forecasting of expenditures, Steckel edited out the following: “The Department disagrees that actions were not taken to reduce expenditures to stay within budget. Despite the actions taken by the Department, estimates were exceeded largely due to factors outside the Department’s control. Medicaid is an entitlement program and changes require approval outside of the Division and the Department.”

Again, these explanations of budgeting procedure and warnings by DHHS to other branches of government were edited out by Steckel, adding to an overall impression of a rogue department that was spending out of control.

“North Carolina Medicaid is not broken,” argued John Oberlander, professor of social medicine at the UNC School of Medicine. “This is a contrived crisis.”

“They had a solution and they were looking for a problem. And they were looking to portray Medicaid in as negative a light as possible in order to justify what they wanted to do, which is privatize.”

But DHHS spokesman Diaz said administration officials “stand by our final responses to the audit.”

“We continue to update and improve the Department’s forecasting practices as we reform our state’s broken Medicaid system,” he said.