Can the Single Audit Be Applied to Medicaid?

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* This article was written by Lawrence Cutler in his private capacity. No official support or endorsement by the Medicaid Bureau, Health Care Financing Administration, Department of Health and Human Services is intended or should be inferred.

The single audit process, as currently constructed, does not lend itself to the extensive research, evaluation and reporting processes required to audit the Medicaid program effectively; and it should not be used in evaluating states' Medicaid claims for federal reimbursement.

The Medicaid program requires the performance of a series of comprehensive audits by auditors having extensive knowledge of health care delivery systems and computerized information and telecommunications systems. These auditors must also have an understanding of related programs from which Medicaid beneficiaries receive their basic eligibility, such as Aid to Families with Dependent Children (AFDC), Supplemental Security Income (SSI) and Indian Health Service (IHS) programs.

Most Medicaid audits are expensive, as large numbers of highly qualified auditors are required to spend extensive amounts of time to perform such audits adequately. This is especially true in those states that are undergoing major changes in their Medicaid programs resulting from their implementation of new and innovative ways of delivering health care services. More importantly, the methods we are using to evaluate a state's Medicaid programs are changing to a more outcome-oriented approach, meaning that we will need to evaluate patient quality of care, while assessing the increasingly complex financial aspects of state programs. As a result, I believe that the program compliance and financial management aspects of state Medicaid programs should not be evaluated through the single audit process.

If we recognize its limits, the single audit can be a useful tool in the Health Care Financing Administration's (HCFA) oversight of the state's Medicaid programs. If it is focused on evaluating the state Medicaid agency's general internal control, it will provide an indicator of the adequacy and accuracy of claims submitted for federal reimbursement.

Medicaid Program Oversight

Title XIX of the Social Security Act, enacted in 1965, authorizes federal grants to states for medical assistance to low income persons who are age 65 or over, blind, disabled, members of families with dependent children, qualified pregnant women and other limited categories. The program is jointly financed by the federal and state governments and administered by the states.

Within broad federal rules, each state determines eligibility groups, type and range of services covered, payment levels for services and administrative and operating procedures. Payments for services are made directly by the state to individuals or entities that furnish the services. Total expenditures (both federal and state shares) exceeded $125 billion during federal fiscal year (FFY) 1994.

HCFA, specifically the Medicaid Bureau and the Divisions of Medicaid in each of HCFA's 10 regional offices, (RO) have the primary responsibility for overseeing the administration of the Medicaid program. A significant part of that process concerns overseeing (1) states compliance with federal laws and regulations in operating their Medicaid programs, and (2) states' financial management and internal control processes employed in controlling and reporting expenditures to HCFA for federal reimbursement.

Financial management is the process of maintaining control and accountability for the resources provided to an agency or program. The process includes establishing and maintaining a system of management controls designed to enforce management's policies directed toward the achievement of management's goals, including guarding against undesired actions and providing for full accountability for the resources provided and used.

Management controls, or internal controls, are defined by the Comptroller General as "the plan of organization and methods and procedures adopted by management to ensure that resource use is consistent with laws, regulations and policies: that resources are safeguarded against waste, loss and misuse: and that reliable data are obtained, maintained and fairly disclosed in reports. …