OIG Finds North Carolina ‘Loophole’ Use Had ‘Less Negative Effect’ on Medicaid Than in Other States

North Carolina did not "misuse" the Medicaid upper-payment-limit "loophole" by using extra federal funds for non-health-related purposes, an audit by the HHS Office of Inspector General has found. The AP/Winston-Salem Journal reports that a review of the state's supplemental Medicaid payments and intergovernmental transfers found they had "less negative effect on the program than in other states." Under the loophole, states pay state- or county-owned care facilities more than the actual cost of health services, consequently receive more matching funds from HCFA than they would otherwise and then require the facilities to return the extra state funds. The state then sometimes pays the facilities a small fee for participating. In many states, the extra federal funds have been used for non-health-related purposes, but the audit found "that wasn't the case in North Carolina," the AP/Journal reports. Between 1996 and 1999, the audit found, the state made "enhanced payments" of about $647 million to hospitals, which generated $412 million in federal funds. The hospitals then returned the state funds but kept the federal dollars. The report said, "While we were unable to determine the specific use of the supplemental [federal] payments, we did determine that they were deposited into the hospitals' general funds and used to pay facility expenses." The audit did, however, "questio[n]" the way North Carolina handles state funds returned by providers, which are "recycled" through a trust fund used to finance future supplemental payments. The audit said this transfer -- which allows North Carolina to match federal money with federal money, effectively reducing its own matching contribution -- "contradicts the purpose of assisting those hospitals." Allen Gambill, the assistant director of financial operations for the state Division of Medical Assistance, said, "What we have is an opinion by the (OIG) - they do not like it, [the Centers for Medicare and Medicaid Services (formerly HCFA)] says it doesn't like it, but that's the way it is" (AP/Winston-Salem Journal, 7/13).