Auditors say state overbilled the feds.

Byline: David Steves The Register-Guard

SALEM - Oregon overbilled the federal government for $244 million in Medicaid and Medicare reimbursements, state auditors have concluded. And the state may have to pay back the money.

The state Audits Division will release a report Friday that shows the Oregon Department of Human Services improperly claimed the extra money for fiscal years 2001 and 2002 just as the federal government tried to crack down on the loophole.

The Register-Guard obtained the auditors' findings and other documents through a public records request.

The General Accounting Office, the investigative arm of Congress, also is looking into Oregon's use of the loophole as is the federal agency that administers Medicaid and Medicare dollars.

It is likely to take months before Oregon officials learn whether they must forgo some or all of the hundreds of millions of dollars in question; auditors will formally turn their findings over to the U.S. Centers for Medicare and Medicaid Services by the end of March, and are unlikely to get a final decision for several months after that, Deputy State Auditor Mary Wenger said.

Lawmakers and officials who were aware of the accounting maneuver dismissed the report, saying auditors have misinterpreted the complex rules governing states' use of Medicaid and Medicare dollars.

State Rep. Ben Westlund, a Bend Republican who helped orchestrate the plan to get more money from the federal government, said the move was made only after thorough research and the approval of numerous state agencies.

"I don't know how they can make their assertion," he said of the auditors' conclusions. "We didn't just make numbers up."

The loophole works like this:

The state is entitled to Medicaid reimbursements to cover residents in nine public nursing homes run by public health districts.

But starting in 1999, the state also began collecting reimbursements from the Medicare program on top of the Medicaid money. The residents were eligible for money under both programs because of their advanced age and low income. Medicaid provides federal health dollars for poor people, and Medicare provides money for elderly people.

The extra money was dubbed Medicare Upper Payment Limit, or MUPL.

Before the loophole money could reach Oregon's coffers, it had to be filtered through nine "health district nursing facilities" - nursing homes that, because they were publicly rather than privately operated, were eligible to serve as a conduit for the increased federal aid.

The federal government would transfer the extra money into each nursing home's account, and then the state Department of Human Services would transfer the bulk of it back to Salem. A few million dollars would remain in the accounts for the nursing homes themselves to cover patient care, with $250,000 a year going to the lobbying group that engineered Oregon's use of the loophole as something of a finder's fee.

Oregon is among more than half the states that have taken advantage of the provision.

The Oregon Association of Hospitals and Health Systems introduced Oregon lawmakers and agency officials to the loophole in 1999, based on the successes other states were having with it.

"I guess what you could say is, we provided the state with some technical assistance and some legal review," said Ken Rutledge, president of the hospital association. "And then they went and did their own due diligence to determine that, yes there was an opportunity there."

In the past two years, lawmakers and state officials have turned to the loophole the way a short-on-cash consumer relies on an ATM.

They used $131 million to plug budget holes in last year's second emergency session. In the regular 2001 session, the Legislature bolstered the schools budget with $99 million from the loophole, and used $101 million to help the Oregon Health & Science University's bottom line.

At the heart of the state auditors' findings isn't that the Department of Human Services, the state agency that deals with Medicaid, used the loophole to get both Medicaid and Medicare money, but that it padded the overall amount retroactively.

The state did that, the auditors said, by telling the federal government that it used an outdated calculation that didn't allow Oregon to claim all the money that it had coming for fiscal 2000.

That was important because the federal government used the 2000 rate as a baseline to set reimbursements in future years in a crackdown on the growing number of states that were exploiting the loophole. The state reaped additional payments of $42 million in 2001 and $202 million in 2002.

Auditors say the state relied on questionable accounting practices - including the revision of spreadsheets - to make the retroactive claims.

Julia Huddleston, the DHS official who oversees the loophole process, said retroactive payments are a long-accepted part of the federal law.

"Under Medicaid law, you can go back eight quarters and make a claim," she said.

But state auditors reported that they found no such leeway in the rules.

And a federal official from the Centers for Medicare and Medicaid Services said this week that state auditors have raised "good questions" that his agency is looking into, as well.

The official, Robert Reed from the centers' regional office in Seattle, indicated in e-mails to state auditors late last year that they appeared to be on-track with their conclusions that the retroactive payments were improper.

"We do not see a basis for making retroactive payments in the approved State plan ... we have asked Oregon to justify the allowability of retroactive payments," Reed wrote a state auditor in a Dec. 13, 2002, e-mail.

In their official response to the audit findings, state human services officials wrote that their department "is confident calculations to these transactions were made correctly," in consultation with two separate state agencies. The department also cites a Jan. 17 attorney general's letter, which said the DHS used the loophole in a way that "was consistent with Medicare payment principles and was not prohibited."

But auditors' criticisms extend beyond the question of what federal rules do and don't allow. Neal Weatherspoon, state financial audit administrator, said DHS officials couldn't even produce any evidence that the state received the retroactive payments because no records existed.

To this, Huddleston said, she and other human services officials' understanding of the rules was that such paperwork wasn't necessary.

"We never felt we had to formally ask (federal officials) for permission to employ this new methodology," she said.

State officials and others may be defending the payments and questioning the wisdom of Oregon government auditors for going public with findings that could exacerbate Oregon's desperate fiscal situation.

But the federal government itself has indicated that Oregon auditors may be right.

Asked if the state could eventually be required to return the money, Reed, the federal regulator who oversees Oregon's use of Medicaid and Medicare money, responded: "That is always one possibility, that they might have to repay."