Special Reports

July 5, 2014

PART TWO: Gov. McCrory wants to change Medicaid, but DHHS struggles to manage program

Operating the state Department of Health and Human Services is a huge undertaking, one that has bedeviled governors of both parties and their appointees for decades. Under McCrory, who entered office declaring the Medicaid program broken, things have gotten no better.

On May 14, Gov. Pat McCrory rolled out his proposed state budget, a spending blueprint supported in part by an unusual scheme designed to snag an extra $60 million from federal taxpayers.

The plan was complicated, involving matching state and federal Medicaid dollars, but one detail was simple: In order to pull off the deal, the state needed approval from Washington.

But as McCrory and budget director Art Pope explained the budget to reporters, the state was still nearly two weeks away from even mentioning the plan to federal officials.

When it was proposed, the feds quickly said no.

Operating the state Department of Health and Human Services is a huge undertaking, one that has bedeviled governors of both parties and their appointees for decades. Mental health reform flopped under Mike Easley, and the state Medicaid program overpaid hospitals an estimated $400 million for inpatient care 15 years ago under Jim Hunt.

Under McCrory, who entered office declaring the Medicaid program broken, things have gotten no better. Two experienced Medicaid managers recruited by his appointed secretary, Aldona Wos, departed soon after they arrived, prompting the department to rely on a stream of contractors selected without competitive bids and without significant Medicaid experience.

Medicaid management is so messy that the General Assembly is resorting to guesswork on how much money the program will need this year. The state program, hamstrung by troubled new computer systems, cannot provide trusted data on claims and enrollment.

Medicaid is a $13 billion-a-year enterprise in North Carolina that cares for 1.7 million people, from newborns to the most frail and poor seniors. As of June 1, a quarter of the division’s 332 jobs were vacant; the average unfilled job had been open for 347 days, or nearly a year.

In November, DHHS’ chief financial officer sent out a cry for help. The Medicaid office “does not have adequate staff with the necessary experience and skills to properly manage the … program,” Rod Davis wrote to the state budget office.

Medicaid needed help with everything, Davis wrote: finances, basic management, recruiting and training. Years of budget shortfalls had undermined legislators’ confidence in the division’s ability to forecast spending, he wrote.

His solution: a no-bid contract for Alvarez & Marsal, a consulting firm from the Washington, D.C., area, that would eventually reach $3.25 million a year.

Alvarez & Marsal helped craft the budget with the ill-fated $60 million proposal. Such problems, along with slow payments to health care providers and huge backlogs in delivery of food stamps, have cost the department in its relationship with the legislature and the state’s medical community.

Sen. Ralph Hise, a Republican from Spruce Pine and the Senate’s lead budget writer for DHHS, has become increasingly impatient with the Medicaid division, which has run over its budget by hundreds of millions of dollars in four of the past five years. The problems have contributed to competing proposals for change that are a major reason legislators haven’t yet adjourned for the year.

“I don’t have confidence in their data, I don’t have confidence in their numbers, and I see no clear path on how they will provide that information to the legislature,” Hise said. “That’s been over multiple secretaries and multiple divisions. We have never been able to do a budget that they can stay within and operate within.”

Whether the department has failed in its forecasts, or the legislature has been too stingy in its appropriations, this year’s budget is different: Problems with Medicaid’s two new computer systems have forced the legislature’s Fiscal Research Division to rely on some numbers and a bit of guesswork.

“We do not have reliable claims/enrollment data,” analyst Steve Owen wrote in a memo to legislators in late June, “therefore, we do not have a forecast.”

The $60 million oops

When assembling this year’s budget, DHHS had planned to tax the 10 managed-care organizations that provide Medicaid services for the disabled, mentally ill and substance abusers.

The $30 million tax would give the department extra money designed to attract a federal match twice that size; with the $90 million, DHHS could refund the $30 million in taxes to the managed-care companies and funnel $60 million to the state’s general fund to pay for other programs.

McCrory rolled out his budget on May 14. According to records supplied by DHHS, the first inquiry to federal regulators occurred at 1:21 a.m. May 26. David McMahon, a local CPA on contract with DHHS, emailed federal staff in Atlanta asking to discuss the proposal.

Three days later, the answer came: No.

An Internet search for Medicaid provider tax turns up the federal guidelines, which the North Carolina proposal violated in at least three significant ways:

• The tax must apply to all managed-care organizations, not just Medicaid-funded entities.
• The collected taxes cannot be returned to the managed-care organizations.
• The tax cannot be directly correlated to Medicaid payments. The managed-care organizations that would have been taxed serve mostly Medicaid patients, so any tax would correlate to Medicaid payments.

Frank Thompson, a Medicaid expert at Rutgers University, said he was shocked that such a proposal made it into the budget.

The federal government started tightening regulations on schemes such as provider taxes in the early 1990s, he said. Such policies are allowed but require careful drafting and negotiation with regulators.

“There should be all sorts of Medicaid officials in North Carolina who would tell the governor, ‘Dude, this is not going to fly,’ ” Thompson said. “This sounds like government by amateurs.”

Don Taylor, a Duke health care expert, was more succinct.

“Malpractice,” he said.

Wos declined to be interviewed for this report. McCrory has backed Wos, saying she’s been trying to clean up the mess left by previous administrations.

“She’s the one who’s actually trying to solve the problems, many that she inherited, from computer systems she inherited, to operations systems that were dysfunctional, to policies that were dysfunctional, and frankly to some federal new rules and regulations that came to us the minute we came in that were dysfunctional,” McCrory said at a June news conference.

The contractors come

Soon after McCrory took office, Wos hired Carol Steckel, an administrator with 27 years of Medicaid experience in Alabama and Louisiana. Steckel then recruited a Medicaid chief financial officer, Rick Brennan, who had 35 years of Medicaid experience in West Virginia.

But Steckel left last fall after eight months in the job. Other senior managers followed.

Melissa Weeks, pharmacy director, resigned earlier this year after more than a decade in the department. Brennan resigned in May, lamenting that contractors with little experience working under no-bid contracts had taken over the division.

Davis, the DHHS chief financial officer, relied on private contractors to put together the governor’s Medicaid budget this year.

DHHS had already been criticized for other no-bid contracts. Former State Auditor Les Merritt signed a $312,000 annual contract to act as chief financial officer in the Division of Mental Health; he reports directly to Wos, not the director of mental health.

Joe Hauck, a vice president at the company owned by Wos’ husband, got an annual contract worth $310,000 to serve as senior adviser to Wos. Robert Atlas, an adviser on Medicaid reform, signed a contract worth up to $224,000 a year.

The biggest no-bid contract has gone to Alvarez & Marsal. When it was awarded in January, Davis described the company as the only entity with the needed experience and skills. Davis said the company served as a subcontractor on a $700,000 sole-source contract in 2011. That contract studied whether the state should consolidate the administration of the state’s two big insurance plans, Medicaid and the State Health Plan.

Alvarez & Marsal has installed two senior executives, Nicholas Srebrow and Rudy Dimmling. Neither listed any Medicaid experience on the company website; Dimmling has spent his career in private insurance, and Srebrow has worked with government agencies such as the Departments of Defense and Homeland Security.

The contract with Alvarez & Marsal began Feb. 1. The main task listed was “operationalization” of a reorganization of the Medicaid division.

The reorganization was drawn up by Brennan and the consulting firm Navigant. The author, Catherine Sreckovich, has three decades of Medicaid experience in 25 states. The state paid Navigant $49,000 to design the reorganization; it is paying Alvarez & Marsal $3.25 million a year to draw up job descriptions, recruit employees, and develop training materials for the Medicaid program, which on June 1 employed fewer than 300 people.

Going silent

Under Wos, DHHS has been an elusive presence, granting few interviews. Her department has been notoriously slow on fulfilling public records requests; in one request for Medicaid emails, the department waited six months before beginning work. State law requires public agencies to provide records as promptly as possible.

The cramped communication isn’t just with the media.

In May 2013, Steckel, the Medicaid boss, told her staff not to answer any questions from the General Assembly.

“Please make sure EVERYONE in your area knows that any and ALL questions posed by anyone in the legislative body (policy and fiscal), including former employees, should be routed through (1) Rocky Thompson if it is legislative in nature and/or (2) Rick [Brennan] if it is budget/finance related.

“The next time someone responds inappropriately, there will be significant personnel actions taken for both the supervisor and the person not complying with this policy.”

The Medicaid office also sent out other memos telling staff not to talk with federal or state auditors. That was repeated this year.

On April 9, Adam Sholar, the lobbyist for DHHS, told staff at the General Assembly and the state budget office in an email that they had to address all information requests through Davis, the CFO, and two other staffers.

The next day, Sholar rescinded the policy, citing “an inference among some that the policy was being instituted in response to actions by those outside the Department.” Sholar did not respond to requests to explain.

Shifting the blame

On April 15, DHHS officials scrambled to meet a deadline from State Budget Director Art Pope, who wanted an estimate of the change in Medicaid spending due to higher costs, increased enrollment, changed policies and other factors.

Pope’s staff asked Davis, the DHHS chief financial officer, for a written commitment to deliver it that day.

With the pressure on, Davis worked into the night with three contractors, emails show. McMahon, the local CPA on contract with DHHS, pulled the numbers together. Trey Sutten and Dimmling, two Alvarez & Marsal contractors, worked from their hotel rooms.

There is nothing in the Alvarez & Marsal contract about drawing up budgets, and the emails show no contact with Brennan, the chief financial officer for Medicaid. Brennan, according to the contract, supervised Alvarez & Marsal.

At 12:23 a.m. the next day, Davis emailed the documents to Pope’s office. Later that morning, Pope’s office told Davis his spreadsheet was wrong.

Davis used an incorrect amount from the previous year’s budget. The mistake turned a $14 million shortfall into a $229 million deficit.

Rather than admit an embarrassing though unintentional error and move on, Davis and Alvarez & Marsal consultants apparently looked for someone else to take the blame.

A flurry of emails flew among Davis, McMahon and the Alvarez & Marsal contractors.

McMahon protested that he was being asked to take the blame for a mistake that wasn’t his: “I was asked to send an email apologizing for sending the wrong file last night. I sent the correct file last night and had confirmation to go with that file.”

He refused, saying in an email to Sutten, “In our opinion, you are asking me to make a statement that is not truthful.” He copied Davis, his boss, and others in the message.

Sutten wrote: “To be very clear, no one asked you to make a false statement.”

To back himself up, McMahon had forwarded to Pope’s office email exchanges where Davis had instructed McMahon which numbers to use.

Davis, Sutten and McMahon didn’t respond to questions.

‘No practical experience’

In May, the other Medicaid veteran recruited by Wos left the department. Brennan, Medicaid’s chief financial officer, quit after helping compile what looks to be the first Medicaid surplus in five years.

He said the department was being taken over by inexperienced contractors. According to its contract, Alvarez & Marsal was supposed to report to Brennan.

“Now, in the last two months, as is evidenced in no small part by sole source contracts and reliance upon individuals with no practical experience, it appears that the Department has opted to go in a totally different direction,” Brennan wrote in May when he resigned. “Over the last couple of months, it has become increasingly apparent that there is no more that I will be allowed to do. Our hands have been tied and those with prerequisite experience and capabilities are unable to address the most elementary, substantial risks to the Agency.”

On June 27, in response to a public records request for all written work delivered to the department by Alvarez & Marsal, DHHS released 28 pages. The bulk was an assessment of Medicaid’s Information Technology operations. The report listed feedback from staffers:

• “There is no support, morale is bad, and we are set up to fail.”
• “Managers will make promises and not keep them, very little feedback.”
• “Why am I staying when everyone else in the organization is leaving?”
• “Leadership is non-communicative, secretive, and do not know their staff.”

Alvarez & Marsal added its own observations:

“Little to no engagement with the staff to provide sound leadership, clarity and direction. … The lack of leadership, talent and incentives creates an environment which fosters poor results and execution.”

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