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The Associated Press November 9, 2010, 5:37PM ET

Ky. auditor: Medicaid provider oversight needed

An organization that manages taxpayer-funded health services for Kentucky's poor and disabled spent freely on luxury hotels, meals, salaries, lobbying and consulting, a state auditor's report released Tuesday found.

The 200-plus-page report issued by state Auditor Crit Luallen calls for stricter accountability for Passport Health Plan, a Medicaid managed-care provider that serves 164,000 people in Louisville and more than a dozen nearby counties.

The audit comes as the state grapples with a $470 million shortfall in its Medicaid budget after a smaller-than-expected federal contribution. The report found:

--Passport officials spent almost $230,000 on travel in the three years reviewed. The nonprofit corporation's staff stayed at high-end hotels, used limousine service and rang up big dinner tabs.

--The salary of one executive rose by nearly 33 percent from 2007 to 2009 -- the period reviewed.

--One vice president was a partner in a consulting firm that had a business relationship with a Passport contractor, and original investors had "benefited significantly" from cash distributions.

Luallen said her office had not referred the findings to any law enforcement agencies. But Luallen told reporters that the organization acted more like a private company than an entity handling taxpayer money.

"If the state is going to continue to use this model or consider additional managed-care approaches, it's critical that there is strong accountability and oversight of these public funds," Luallen said.

Beshear on Tuesday called it "disheartening to learn of Passport's excessive spending of taxpayer dollars," and he directed his administration to meet with Passport leaders to correct spending patterns.

"I fully expect Passport to make quick and permanent changes in their business practices," he said in a statement.

In a statement Tuesday on Passport's Web site, company Chairman and CEO Larry Cook said the organization's board had reviewed the report and "is taking actions, as appropriate, that are consistent with recommendations made by the auditor."

In a formal response included in the audit report, Cook said the organization received the critique "in a spirit that strives for improvement." Cook said the organization would "re-evaluate and strengthen its oversight" of expenditures with an eye toward assuring that expenses have a "demonstrable purpose and benefit to the operation of the plan."

However, regarding expenditures that appeared extravagant, Cook said in his response that "business names may not reflect" the services provided or the availability of alternatives -- mentioning a sedan rented from a limousine service and a citywide taxi strike during two trips.

Louisville-based Passport holds the state's largest contract, receiving $793 million in state and federal money in the last fiscal year. It provides services to Medicaid recipients in 16 counties -- Breckinridge, Bullitt, Carroll, Grayson, Hardin, Henry, Jefferson, LaRue, Marion, Meade, Nelson, Oldham, Shelby, Spencer, Trimble and Washington.

State lawmakers earlier this year pressed for details about Passport with an eye toward possibly expanding the Medicaid managed-care approach to other areas of Kentucky as a way to better control costs.

The Medicaid program provides health care for 800,000 poor and disabled residents in Kentucky.

Passport has won high national ratings for its access to care, member satisfaction, prevention services and treatment. The audit didn't delve into the quality or delivery of medical care.

Auditors found that Passport spent nearly $14 million on consulting and other services over the three-year period, including $1 million for lobbying and public relations. The report said Passport's lobbying might conflict with its articles of incorporation and contract language, and urged Passport's board to review whether the spending was a proper use of funds.

The report also found that original investors in Passport benefited from cash distributions due to excess capital and accumulated surpluses. Those distributions allowed Passport to secure maximum funding during negotiations with the state.

The audit found that Passport staff spent almost $73,000 on meals during the three years.

Auditors say Passport spent freely in early 2008 for its 10-year anniversary celebration. Passport spent $2,500 for dining decorations, $10,000 for a short video, $1,000 for anniversary items and $242,000 for bonuses for employees of Philadelphia-based AmeriHealth Mercy Health Plan, which handles day-to-day operations for Passport, the report said.

The review found that Passport Executive Vice President Shannon Turner had an average annual income of $285,000 for the three years, including salary and bonuses. The audit said she also received compensation as a partner in a consulting firm that received more than $354,000 from AmeriHealth Mercy for consulting services.

The audit found that the initial base salary for Passport Associate Vice President Nici Gaines rose by almost 33 percent from 2007 to 2009.

Auditors also found that Passport spent more than $423,000 on donations and sponsorships to various groups, some of which had "no relevance" to the program, the report said.

The report said the state Department for Medicaid Services lacked sufficient financial analysis to effectively negotiate with Passport. Auditors also said the state had inadequate documentation in monitoring Passport.

DMS has relied on annual independent audits of Passport to assure the organization was run appropriately.

State Health and Family Services Cabinet Secretary Janie Miller said Passport must work with state officials to "restore our confidence" in the organization and to "return the plan to one of integrity, transparency and trust."

At the end of 2009, Passport had almost $77 million in excess reserves over the amount required by insurance regulators, the report found. It also found that Passport distributed more than $10 million in 2008 as a return of capital to its original investors, and distributed indigent care grants of $10 million in both 2008 and 2009 to those investors. The audit questioned whether those distributions comply with Kentucky law and the federal tax code.

House Speaker Greg Stumbo said two questions remained unanswered -- why the Cabinet for Health and Family Services didn't uncover Passport's spending behavior and whether the contract with Passport has saved the state money?

"We shouldn't abandon the concept of managed care just because of random acts by this entity," Stumbo said in a statement.

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