Institutional Federal Compliance Report 2021

During the fiscal year ended March 31, 2019 audit, we identified the following issues resulting in the noted impact to the prior year ended March 31, 2018 Medicaid estimates reported in the government-wide financial statements: • Federal Medical Assistance Program (FMAP) Liability – Due from Federal government and Payable to local government were understated $127M as of March 31, 2018 and were uncorrected by management • Incurred but not reported (IBNR) Claims Liability for the Local Share of Medicaid funding which were over the local cap and therefore became the State’s liability – Public Health Expenditures and Accrued Liabilities were understated $462M as of March 31, 2018 and were uncorrected by management • Medicaid Manufacturer Drug rebate receivable – Other receivables were understated and Public Health Expenditures was overstated by $883M and Federal Grant Revenue and Due from Federal government were overstated by $456M as of March 31, 2018 and were uncorrected by management. For each of these estimates, we reviewed the State’s methodologies for determining the amounts recorded as of March 31, 2019, including key assumptions and sources of underlying data, and considered possible management bias in the estimates development. We also performed tests of details and analytical procedures over the underlying data used in determining the amounts of the estimates, and over the amounts of the estimates themselves, as deemed necessary, to conclude on their reasonableness. As summarized above, seven and three misstatements were identified related to the Medicaid estimates recorded as of March 31, 2019 and March 31, 2018, respectively. For each of the above listed estimates, we reviewed and identified instances where the recorded balance was not reasonably stated due to issues such as incorrect information, inadequate review, typo errors, cut off and estimates based on inappropriate assumptions. These findings are the result of a breakdown in communication between individuals within the Department of Health (DOH) responsible for transactions of the program and individuals at OSC’s Bureau of Financial Reporting & Oil Spill Remediation (BFROSR) responsible for recording accruals. As BFROSR management has limited insight into the day to day transactions of the Medicaid program, they rely on the experience and understanding of DOH management to provide the information needed to record the appropriate accruals of the Medicaid programs as of the State’s fiscal year end. Further, this breakdown is also a result of inadequate review of the recorded accruals by the agency prior to submission to BFROSR and inadequate understanding in how the information provided would be used by BFROSR to record the estimate. In addition there is a lack of actuarial specialist review and involvement in the development of the Medicaid IBNR claims liabilities.

Risk

The State’s other receivables, accrued liabilities, due from Federal government, payable to local governments, deferred inflows of resources, Federal grant revenue and public health expenditures activity are not properly reported in its government-wide and fund financial statements.

Recommendations

The State should have a higher precision in their review at both the agency and BFROSR. The agency must improve their understanding of the purpose of the various reports provided to BFROSR ensuring the completeness of the items required to be accrued and the impact of an error in these reports. Similarly, when BFROSR is reviewing the reports provided and preparing the accrual calculations, BFROSR should consistently communicate with the agency to ensure BFROSR has adequate knowledge of the program and also ensuring the individual at the agency understands accrual accounting and the report provided takes accrual accounting into consideration. Lastly, we recommend the State enhance their methodology in calculating complex estimates by utilizing an actuarial specialist review of the IBNR calculations.