Review of North Carolina State Medicaid Agency Disproportionate Share Hospital Payments for Fiscal Years 1997 to 2001

April 30, 2003

EXECUTIVE SUMMARY:

The objectives of this review were to verify that disproportionate share hospital (DSH) payments in North Carolina were calculated in accordance with the approved State Plan Amendments (SPA) and to verify that payments to individual hospitals did not exceed the limits imposed by the Omnibus Budget Reconciliation Act (OBRA) of 1993.  Our review also included an evaluation of how the North Carolina Medicaid agency's (state agency) use of DSH payments and intergovernmental transfers (IGTs) impacted the Medicaid program.  The state agency makes its DSH payments to hospitals based on cost estimates.  We found that the state agency was broadly within the framework of the SPAs by following this methodology.  However, the SPAs state that the estimated payments will be adjusted to actual costs based on completed cost reports.  At the time of our review, the state agency had not adjusted the estimated fiscal year (FY) 1997 DSH payments to actual costs.  As a result, we could not determine if the state agency's DSH payments were made in accordance with OBRA 1993 limits.  Consequently, we have no assurance as to the propriety of federal funds expended during the audit period.  We anticipate conducting a follow-up audit in this area once the state agency completes its final settlement of the DSH payments. 

We also found that a large majority of the payments to hospitals are transferred back to the state agency via IGTs.  For FY's 1996 through 2001, the state agency made DSH payments to non-state public hospitals totaling approximately $900 million of which approximately $826 million ($522 million federal share) was sent back to the state agency and deposited into a trust fund to be used to match future federal draw downs.  For state-owned hospitals, during the same time period, DSH payments totaled approximately $825 million of which approximately $821 million was sent back to the state agency.  Upon receipt of the IGT amount, the state agency immediately transferred the federal share (approximately $521 million) to the Department of the State Treasurer where it was deposited into the state's general fund.  The state legislature used its discretion to budget these funds.

In a written response to our draft report, the state agency acknowledged that several significant problems relating to DSH payments had surfaced.  Efforts are being made to correct the problems and to settle the 1997 cost reports.  The state agency is in the process of reorganizing in an effort to assure the integrity of financial information and operations.