CORRECTION

A July 17 article about a state audit of the Department of Health and Human Services' monitoring of key contractors incorrectly said that the state ordered ValueOptions Inc., a private contractor, to remove fiscal controls from a computer program intended to prevent Medicaid fraud. The audit actually referred to EDS, another state contractor.

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The state auditor says the state Department of Health and Human Services failed to adequately monitor the performance of a key contractor that oversaw eligibility for mental health services.

The auditor's report, released Wednesday, bolsters the findings of an investigative series in The News & Observer. The newspaper reported in February that the state wasted at least $400 million on mental health services known as community support, a prime component of reforms intended to shift patient treatment from state hospitals to private outpatient care.

"I believe that the inadequate planning and insufficient monitoring revealed in this audit are representative of the problems plaguing the whole mental health system," State Auditor Leslie Merritt said in a written news release.

Internal DHHS audits have shown that some private treatment providers charged Medicaid as much as $61 an hour to take clients to malls or movies or to sit with them in school. In most cases, the work was done by employees with only high school diplomas.

The federal government pays about two-thirds of the cost of services provided through Medicaid. The state and counties cover the rest.

As part of the reform effort, responsibility for pre-approving services was removed in 2006 from county-run agencies and transferred to a private company. ValueOptions Inc., which has its headquarters in Norfolk, Va., was tasked with certifying which treatments a patient could receive under Medicaid, including community support.

According to the auditor, technical glitches in how data was processed and sent to another private company led to the denial of legitimate claims. To get around the problem, the state ordered ValueOptions to disable essential controls intended to prevent fraud.

Two years later, the problems have still not been fully corrected. The result is potentially many millions of dollars in payments to private treatment providers that should never have been approved.

DHHS is now seeking to recover at least $58.3 million in community support payments, though department officials said Wednesday "very few" of those overpayments were directly related to the technical glitches described in the auditor's report.

DHHS currently has contracts with ValueOptions totaling $57.2 million.

"If a primary purpose of the $57 million contract was to safeguard against unnecessary and inappropriate medical expenses, it was certainly counterproductive for [DHHS] to turn right around and disable the critical controls designed to prevent unauthorized payments to providers," Merritt said in the release.

The auditor's office is conducting a second review to determine just how much money was wasted.

In written responses included in the audit, DHHS blames the problems on a number of factors, many outside its control. They include the technical problems, shortcomings in oversight by local mental health agencies and employee turnover in the state Division of Medical Assistance, which oversaw the contract.

DHHS responds

William Lawrence, director in the state Medicaid office, could not point to any factual errors in the auditor's report, though he did not agree with all of its findings.

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