Recovery audit — A success story in two parts

Originally Published in Statewise Spring 2011

by Jerell Lambert

Those of us in Texas state government take pride as public servants in carrying out the mission of our agency and the state of Texas. Most of us work quietly behind the scenes, making sure the machinery of state government works efficiently and productively for the citizens of Texas. Though success stories in state government are written every day, most go unsung.

Here’s one that reflects the good work of financial professionals throughout state agencies and institutions of higher education and involves something that’s on a lot of people’s minds right now — paying the bills.

The program

The Expenditure Audit section of the Comptroller’s office is responsible for ensuring agencies’ compliance with state laws, rules and policies covering expenditures. To ensure compliance and accurate payment processing, the section conducts agency post-payment audits on purchase, procurement, travel and payroll expenditures.

The section is also responsible for managing the Recovery Audit Program for the detection and recovery of overpayments. It is here our success story begins.

The law

In 2005, the 79th Legislature passed a law requiring the Comptroller’s office to contract for the recovery of certain state agency overpayments (Texas Government Code, Chapter 2115). At the time the program was formed, the Legislative Budget Board saw an opportunity to recover money for use in general revenue that otherwise would be lost.

The law limits the scope of the recovery audit to state agency and institution of higher education payments made to vendors, and defines agencies eligible for audit under the program as those with biennial expenditure totals over $100 million. Ultimately, 34 agencies met the criteria for vendor overpayment recovery audits.

What constitutes a vendor overpayment?

• A duplicate payment made to a vendor for a single invoice
• An available discount from the vendor that was not applied
• A late payment fee improperly applied by the vendor
• Shipping costs that were computed incorrectly or incorrectly included in an invoice
• A payment for a good or service the vendor did not provide

Recovery — part one — standard vendor payments

In March 2006, the Comptroller’s office contracted with Horn & Associates, a consultant specializing in recovery audits, to carry out the audits at the 34 agencies. The recovery audit was completed June 2010.

The results

So how did we do? We did great! How do we know this? By looking at the total pool of expenditures audited and the recovery on that total.

A total of $57.6 billion in expenditures was analyzed. Yes, billion. Out of that total, $1.08 million was recovered and deposited in the State Treasury. That’s less than 0.002 of a percent of total expenditures! Horn noted in its audit report that agencies were doing an excellent job managing their payables, resulting in minimal audit findings and recovery opportunities.

Even with this “A” report card, there were valuable lessons learned from the audit.

Lessons learned

“We took some of the techniques Horn employed during their agency audits and incorporated them into our own post-payment audit activities,” says Chris Escalante of the Expenditure Audit section who heads the Recovery Audit Program at the Comptroller’s office.

“One of those is the statement review where we mail out letters to the top 10 vendors for each agency, requesting statements of any open credits. Often, vendors will hold on to this money and won’t relinquish it until requested. It’s a simple technique we can apply to recover funds,” Escalante says.

“Additionally, we have developed programs to compile and generate duplicate payments reports, applying some digital data analysis techniques used by Horn to pick up duplicate payments.”

But there’s a second part to this success story.

Recovery — part two — Medicaid payments

Escalante explains, “There are really two very different types of audits handled in the Recovery Audit Program. One is the accounts payable audit where standard vendor payments are analyzed. Then there’s the Medicaid payments portion that involves the Health and Human Services Commission (HHSC) agencies. The Medicaid audit got under way in October 2008.”

Escalante continues, “Our primary recovery audit contractor, Horn, hired PRGX USA, Inc., a third-party vendor specializing in healthcare audits, to carry out the Medicaid audit portion with HHSC. The scope of the Medicaid recovery audit was limited to inpatient claims, covering a payment period from 2005 through 2008, with $1.8 billion in claims data analyzed.”

The results

So how did we do on this round? Great, but for different reasons than the non-Medicaid vendor payments audit. Out of the audit population of $1.8 billion, PRGX identified $12.79 million in overpayments, with $12.55 million recovered and deposited in the State Treasury.

The recovered funds were a big plus. But the overpayments also signaled that processes needed to be reviewed and solutions put in place. These issues were addressed as they came up in the audit process.

Still more to learn

“Moving forward, HHSC is potentially going to use some of the things we developed together during the course of the audit, such as a governance structure for audits involving lots of parties,” Escalante says.

At the outset of the Medicaid audit, a Governance Council was formed to oversee all parts of the HHSC recovery audit process. The Council included the contractor, TMHP (a third-party vendor that administers all Medicaid payments made by the state of Texas) and HHSC’s own medical experts.

Ahead of the fed

All in all, this was a success for all parties involved. The timing could not have been more perfect for HHSC, as the Medicaid audit put them well on the road towards compliance with a new federal law requiring states to have Medicaid Recovery Audit Contractor (RAC) audits/recovery audits.

“As we had already completed a highly successful Medicaid RAC audit, our contractor pointed out we were ahead of the federal curve by doing so. There was some discussion with HHSC on how we were going to proceed from this point forward. They will go ahead and carry out the Medicaid audit per the new federal guidelines, in case our audit did not address all of the new federal requirements,” Escalante explains.

Next steps

“Because we have made one complete audit cycle of eligible agencies, and Medicaid recovery audits are to be handled by HHSC directly per federal statute, we’re taking another look at our accounts payable portion while incorporating some of the techniques learned throughout the recovery process,” Escalante says.

“We presented our latest report to the Legislature last month, as statute requires. This is the first time our report reflects the completion of our audit cycle that ended June 2010. It includes both the results of our recovery audits on accounts payable and Medicaid-type payments to vendors, and recommendations for going forward.”

Thankfully, not all state government success stories go unnoticed. Stay tuned, as the next chapters of the Recovery Audit Program story have yet to be written.