Medicaid fight between governor, GOP lawmakers spills into NC auditor’s findings
AI-generated summary reviewed by our newsroom.
- State audit says DHHS used vacancy-driven lapsed salaries to fill budget gaps.
- DHHS disputes audit methods and results, cites hiring rules and funding shortfalls.
- Medicaid funding dispute between lawmakers and governor remains unresolved.
A months-long fight over Medicaid cuts spilled into a new report released Tuesday by the state auditor’s office.
The report says the state’s health and human services department left hundreds of positions vacant, generating millions in lapsed salaries that the health agency has said it uses to fill holes in its finances.
The report says relying on vacancy savings to cover operations “detracts from financial transparency needed for decision-making” and argues that agencies should align their budgets more closely with the resources they actually need to meet their obligations.
The report, released Tuesday, comes as Democratic Gov. Josh Stein and DHHS remain in a dispute with Republican lawmakers, who control the General Assembly, over how much money is needed to reverse Medicaid provider payment cuts the Stein administration enacted starting Oct. 1 citing funding shortfalls.
State Auditor Dave Boliek, a Republican and former UNC Board of Trustees chair, framed the findings as evidence of poor fiscal management.
“When a state agency is generating hundreds of millions of tax dollars from job openings it fails to fill, and then voluntarily enacts cuts to health care services, bureaucracy is being placed ahead of the needs of North Carolinians,” Boliek said in a news release. “Lapsed salary funds are not meant to be a permanent supplement to agency budgets. Taxpayers in North Carolina expect state agencies to provide services to the people, not let job openings stay vacant so budgets can be buoyed.”
The report also noted that the lapsed-salary totals should not be interpreted as money that could simply be redirected to close the Medicaid gap.
DHHS pushes back
DHHS told The News & Observer through spokesperson James Werner that the auditor’s report “contains misleading associations and omissions of context.”
“The report inaccurately conflates NCDHHS’s lapsed salary with the Medicaid rebase shortfall. The Medicaid rebase shortfall is a result of the North Carolina General Assembly not fully funding DHHS’s forecasted cost to deliver Medicaid services,” the department said.
DHHS also said the report omits context — including vacancy and spending restrictions — and noted the auditor’s office did not consult with it using a “formal audit process under generally accepted government auditing standards.” DHHS said information it shared with lawmakers in mid-October was not incorporated, and that questions and feedback it submitted were not fully addressed after auditors told the department a response was “not necessary.”
During the October hearing, when asked about the department’s reliance on vacancy savings, DHHS Chief Financial Officer Adam Levinson said, “There are growing demands, and certainly we try to project and forecast what the needs will be.”
“It may be that demands outpace the forecast — that’s part of it,” he said. “But also, I think there is a need to right-size in some areas of the budget, and we would certainly welcome partnering with you all to do that.”
What the report found
DHHS generated $386 million in lapsed salary funds from July 1, 2024, to June 30, 2025. Of that, $151 million came from state appropriations and $235 million from federal funding and other sources, the report says, citing Office of State Budget and Management reports.
DHHS generated 30.6% of all lapsed salaries statewide, more than any other agency, the report said.
DHHS criticized that finding, saying the $386 million figure was presented “without disclosing the methodology or data sources used to calculate it.”
The three-page report says the auditor’s office used OSBM reports, North Carolina Financial System data and vacancy information self-reported by DHHS. It also says DHHS did not provide contradictory data to refute the findings.
By analyzing the North Carolina Financial System data, the auditor’s office estimated that in September alone, DHHS saved $23.3 million through vacancies. If that pace continued, the department would generate about $210 million in unused salary funds from September 2025 through June 2026, the report says.
Auditors also found that 340 positions that were never posted or advertised between August 2024 and August 2025 generated $16.5 million in unused salary money — noting that that is nearly the same as DHHS’s recent $13 million request for Medicaid technology upgrades.
The report also says DHHS has been 296 days late on average in filing required lapsed-salary reports since 2017.
‘Slush fund’? Lawmakers question the practice
In the mid-October legislative meeting, while DHHS officials defended their reliance on vacancy savings, some lawmakers called the practice a “slush fund.”
Stephanie Olson, DHHS’s chief operating officer, said DHHS has a 23% vacancy rate, citing competition with private health systems, state hiring rules and posting requirements that slow recruitment.
Responding to the auditor’s findings, DHHS said it abolished more than 500 positions in 2024 to free up funding to reclassify or raise pay for nearly 4,000 roles. At the same time, about 1,300 positions remain vacant because both the House and Senate budget proposals would eliminate them if enacted. The legislature has not agreed on a state budget.
Olson also shared DHHS’s recent lapsed-salary totals:
- $80 million in fiscal year 2021–22
- $120 million in FY 2022–23
- $121 million in FY 2023–24
She told lawmakers DHHS depends on this money to cover unfunded costs including temporary and contracted workers, overtime, training, travel and equipment. Lapsed salary money also pays for work with the auditor’s office, legal representation from the attorney general’s office, accessibility services and unbudgeted workers’ compensation claims.
“If those lapsed salaries decrease significantly, then we will have some pretty major constraints on meeting our mandated services,” she said.
Sen. Steve Jarvis, a Lexington Republican, noted more than 4,200 positions have been vacant an average of over 600 days, saying, “We don’t need to be using a slush fund and holding vacant positions for that purpose.”
Rep. Timothy Reeder, an Ayden Republican, questioned why nearly $1 million in travel expenses for inspections weren’t already in DHHS’s budget, asking: “If you’re putting together a budget, you know you’re going to have to travel, how is that we were a million dollars off of that? And if that’s a function of what we’ve done or not done, or the fact that you haven’t asked for the right amount of money, this seems like a budgeting problem.”
That’s when Levinson stepped in to say that the agency faces growing demands.
Funding dispute on Medicaid goes back to the summer
The Medicaid funding dispute traces back to the summer.
The department previously said the state budget office notified legislators in May that Medicaid costs were rising. By mid-July, DHHS shared updated projections showing $819 million would be needed, up from the $700 million in Stein’s earlier budget request. In an August letter, DHHS Secretary Devdutta Sangvai said that without more funding, it would enact cuts to Medicaid provider payment rates ranging from 3% to 10%.
More funding was not provided, and so DHHS took that action, which has been met with rebuke from Republican lawmakers who say it was premature and the state could’ve waited for a deal. They say Stein’s actions were a political move and that it’s common for there to be disputes that need to be sorted out over what is known as the Medicaid rebase. Stein says costs can’t be put on a credit card and the state needs to keep a balanced budget.
In a spending bill passed in late July, lawmakers included $600 million for Medicaid. After administrative costs, about $500 million went toward the rebase, which is the annual cost update needed to keep Medicaid funding in line with actual expenses. That left a $319 million shortfall, according to DHHS.
House and Senate GOP leaders have both agreed that more Medicaid funding is needed. Both chambers have passed bills that would provide about $190 million, based on estimates from the legislature’s Fiscal Research Division. But neither chamber has taken up the other’s bill because of disputes over unrelated provisions, including a disagreement about children’s hospital funding that Senate Republicans say was agreed to in 2023 and that House Republicans have not wanted to include in a Medicaid bill.
There has been no breakthrough, and the House and Senate are not expected to return until next year.
