How NC failed to protect millions Cardinal spent on big payouts, parties

Long before Cardinal Innovations came under scrutiny this year for using taxpayer money for high-priced parties and retreats, chartered flights and pay bonuses, North Carolina officials had been warned that they needed to look into spending at the agency.

A 2012 audit recommended that the state Department of Health and Human Services thoroughly examine finances at Cardinal and other managed care organizations in North Carolina that receive hundreds of millions dollars a year to coordinate Medicaid services for people with physical disabilities, mental health issues and drug addiction.

But DHHS – which oversees Medicaid spending in North Carolina – took no significant steps to address investigators’ concerns, State Auditor Beth Wood told the Observer.

The inaction, Wood said, paved the way for Cardinal to boost its CEO’s pay to $635,000 – about three times higher than the state limit – and hand out more than $4 million in bonuses to employees.

“Nobody (was) monitoring our tax dollars,” she said.

Now, Cardinal and six other managed care organizations across the state face a year-long investigation. State auditors plan to examine how they spend money and whether clients received the care they needed – the same issues DHHS was urged to look into five years ago.

State lawmakers, government administrators and health experts told the Observer insufficient oversight dated at least as far back as the administration of former Democratic Gov. Bev Perdue, who took office in 2009, and continued under GOP Gov. Pat McCrory.

DHHS leadership changed under Democratic Gov. Roy Cooper and the agency head says actions taken over the past year have held Cardinal accountable.

Officials did not take significant action until about a year ago when state Sen. Tommy Tucker asked state auditors to investigate, they said. DHHS later conducted its own audit, which criticized Cardinal for severance packages paid to departing executives.

Tucker, a Union County Republican, said that means the state failed its duty to protect its most vulnerable residents.

Ousted Cardinal CEO Richard Topping and other executives profited while reducing services for some people with severe disabilities, including children, Tucker said.

In one recent case, Tucker said he intervened because Cardinal planned to remove a teen from her therapeutic foster home even though her mental health had not changed.

“Nobody was pushing to look under the covers,” Tucker said about state oversight of Cardinal. “They did not operate with any rules. Everybody let Cardinal become unaccountable.”

Salaries in the spotlight

In an interview with the Observer, Topping said that employee salaries and bonuses had no impact on clients.

When Cardinal receives money from state contracts, it has kept 8.5 percent for administrative costs, which is allowed under federal law. The remainder goes to services, Topping said.

The organization paid workers with money dedicated to administrative costs and not dollars that went toward services, he said.

Cardinal leaders set compensation based on the private market since they did not consider themselves state government employees, Topping said.

State officials say Cardinal is required by state law to produce a pay plan comparable to government employees.

But Topping said the state never raised concerns about salaries until recently.

“If they had an issue with market-based compensation at Cardinal, then they should have brought that up and it should have been resolved,” Topping said.

Earlier this year under the former leadership Cardinal sued the Office of State Human Resources, contesting the state’s position that Cardinal was out of compliance with the law.

Stronger oversight

A state audit of Cardinal in May found that for nearly 15 years the Office of State Human Resources failed to conduct mandated annual checks meant to ensure employees at Cardinal and other organizations did not receive pay out of line with government employees.

Through a spokeswoman, State Human Resources officials refused to answer questions. They would not say why staff did not conduct annual reviews of Cardinal pay.

The Human Resources office said in a written statement it has strengthened its oversight of Cardinal and the other managed care organizations since early this year.

Officials did not detail what changes they have made, but put blame back on Cardinal.

“This does not change the fact that Cardinal did not follow the requirements contained in North Carolina” law, the Human Resources office statement said.

DHHS Secretary Mandy Cohen said her office is now holding Cardinal and other managed care organizations accountable. She said the agency has conducted two audits of Cardinal this year.

DHHS, which oversees Medicaid in North Carolina, last month took the rare step of taking over the Cardinal operations after its board of directors fired Topping and paid him and three other executives nearly $4 million in severance.

Since taking over, DHHS staff has been reviewing Cardinal’s finances, Cohen said.

A new Cardinal board of directors was appointed last week, including three former members for the 21-member board.

“The actions that we’ve taken over the course of this year have shown that we are absolutely doing our oversight job,” Cohen said. “We’ve done two audits this year. What was different about Cardinal was just their repeated lack of compliance and even after problems were identified.”

Cohen said she did not know why DHHS didn’t monitor Cardinal more closely before her arrival in January.

Former leaders of Cardinal counter-sued DHHS Thursday, arguing the state lacked the authority to take over Cardinal and remove its board.

‘We flunked’

Money Cardinal spent on bonuses, salaries and retreats and parties raised red flags to state leaders this year.

North Carolina relies on Cardinal to provide services for roughly 850,000 people in 20 counties, including Mecklenburg.

Cardinal effectively performs the same role as an insurer, contracting with health providers, to oversee care for some of the most vulnerable people in the state. Some suffer from severe mental and physical disabilities and need round-the-clock care.

As the largest managed care organization in the state, Cardinal received $587 million in Medicaid money and another $88 million from the state’s mental health office in the 2016 budget year.

Under the system, North Carolina pays groups such as Cardinal a fixed amount per participant, per month. They promise to improve service while saving taxpayer money.

In the 2015 and 2016 budget years, Cardinal accumulated $70 million in Medicaid savings. Those same years, it paid $4.3 million in employee bonuses from administrative funds, money that could have been used to provide more behavioral-health care, according to the state audit.

Topping, the ousted CEO, said the accumulation of money shows Cardinal leaders were good stewards.

But state auditors reached a different conclusion. A May report said a large fund balance raises questions about whether the state set the right amount Cardinal should receive per participant.

The 2012 audit report also suggested the state should re-examine payment rates.

“You think about what you could do with $70 million that the organization is sitting on,” said Wood, the state auditor. “You would think, if you are following the mission of what these MCOs are set up for that they would reinvest the money in the program itself and serve more, provide more services.”

DHHS Secretary Cohen said the payment rate for Cardinal and other managed organizations is calculated by independent actuaries who use historical data.

“We feel good that those actuaries’ standards were met as that work was being done,” Cohen said. “Having a fund balance is a feature of the program, not a flaw.”

Marvin Swartz, head of Duke University Medical School’s department of social and community psychiatry, said he understands the outrage surrounding the salaries and benefits paid to Cardinal executives.

But Swartz says the more pressing issue is the state’s failures to include a clear set of expectations in Cardinal’s contract and then to make sure the company met them.

Those failures fall at the feet of one state agency, he says.

“DHHS has to transition from simply paying Medicaid claims,” Swartz says. “They need to clearly set parameters for administrative costs, executive salaries and, most importantly, what proportion of funds should be spent on patient care.”

In Cardinal’s case this did not happen, and Swartz places part of the blame on “drastic cuts to DHHS staffs and salaries in past recessions. The General Assembly dictates cuts but rarely restores the lost positions when a recession ends.”

North Carolina’s regulatory problems are a “common phenomenon” in other states.

A 2013 report by the Kaiser Foundation’s Commission on Medicaid and the Uninsured says state government must assume “front line, day to day responsibility for the actual operations” of its Medicaid program.

That includes everything from designing the system to determining who it will serve while ensuring accountability.

Asked if proper attention to detail and trouble-shooting took place when the current mental health system was put in place, Swartz was succinct.

“No, we flunked,” he said.

High hopes

Paula Yost, chairwoman of the Cabarrus County Child Protection and Fatality Team, agreed that state officials failed to put enough restrictions on how Cardinal and other managed care organizations can operate.

That means Cardinal often reduces services even when clients’ conditions haven’t improved significantly because it saves money. Now, she said parents live in constant fear their disabled children won’t get the help they need.

But Yost said the state takeover of Cardinal has given her hope things will improve.

“The state is saying, ‘You cannot continue to go on like this,’” Yost said. “I am now more hopeful than I have ever been.”

This story was originally published December 16, 2017 at 1:26 PM with the headline "How NC failed to protect millions Cardinal spent on big payouts, parties."