STATE OF
NORTH CAROLINA

DEPARTMENT OF PUBLIC SAFETY
DIVISION OF ADULT CORRECTION
RECOVERY AUDIT EFFORTS
FINANCIAL RELATED AUDIT

FEBRUARY 2013

OFFICE OF THE STATE AUDITOR
BETH A. WOOD, CPA
STATE AUDITOR

DEPARTMENT OF PUBLIC SAFETY
DIVISION OF ADULT CORRECTION
RECOVERY AUDIT EFFORTS
FINANCIAL RELATED AUDIT

FEBRUARY 2013

STATE OF NORTH CAROLINA

Office of the State Auditor
2 S. Salisbury Street
20601 Mail Service Center
Raleigh, NC 27699-0601
Telephone: (919) 807-7500
Fax: (919) 807-7647
Internet
http://www.ncauditor.net

Beth A. Wood, CPA
State Auditor

AUDITOR’S TRANSMITTAL

February 27, 2013
The Honorable Pat McCrory, Governor
Members of the North Carolina General Assembly
Kieran Shanahan, Secretary, Department of Public Safety
This report presents the results of our financial related audit at the Department of Public
Safety, Division of Adult Correction (Division). Our work was performed by authority of
Article 5A of Chapter 147 of the North Carolina General Statutes and was conducted in
accordance with the performance audit standards contained in Government Auditing
Standards, issued by the Comptroller General of the United States.
The objective of our audit was to determine if the Division could use focused recovery audit
efforts to identify overpayments in outside inmate medical care.
We found that the Division can benefit from focused recovery audit efforts to identify
overpayments.
North Carolina General Statutes require the State Auditor to make audit reports available to
the public. Copies of audit reports issued by the Office of the State Auditor may be obtained
through one of the ways listed in the back of this report.

Beth A. Wood, CPA
State Auditor

TABLE OF CONTENTS
PAGE
BACKGROUND AND GENERAL OBJECTIVE .................................................................................2
SCOPE AND SPECIFIC OBJECTIVE ...............................................................................................3
METHODOLOGY .........................................................................................................................4
RESULT AND CONCLUSION ........................................................................................................5
AUDIT FINDING AND RESPONSE.................................................................................................6
APPENDIX .................................................................................................................................9
ORDERING INFORMATION ........................................................................................................10

[ This Page Left Blank Intentionally ]

BACKGROUND AND GENERAL OBJECTIVE

BACKGROUND
As authorized by Article 5A of Chapter 147 of the North Carolina General Statutes, we have
conducted a financial related audit at the Department of Public Safety, Division of Adult
Correction.
This audit is a follow-up to the financial related audit of the Department of Public Safety,
Division of Adult Correction issued in May 2012. In that audit, auditors recommended that
the Division of Adult Correction expand its recovery efforts of medical service payments and
consider contracting with a professional recovery audit firm to enhance its recovery efforts.

GENERAL OBJECTIVE
The general objective of this financial related audit was to identify improvements needed in
the internal control over fiscal matters. The specific fiscal matters included in the audit are
described in the Scope and Specific Objective section of this report.
Management is responsible for establishing and maintaining effective internal control.
Internal control is a process designed to provide reasonable assurance that relevant objectives
are achieved. Errors or fraud may nevertheless occur and not be detected because of the
inherent limitations of internal control. Also, projections of any evaluation of internal control
to future periods are subject to the risk that conditions may change or that compliance with
policies and procedures may deteriorate. Our audit does not provide a basis for rendering an
opinion on internal control, and consequently, we have not issued such an opinion.

2

SCOPE AND SPECIFIC OBJECTIVE

Our audit scope covered the period from July 1, 2011, to June 30, 2012, and included selected
internal controls in the Medical Claims Management Section at the Division of Adult
Correction (Division). Our audit focused on internal controls related to identification and
recovery of overpayments made to hospitals that provided inmate medical care. The specific
objective of our audit was to determine if the Division could use focused recovery audit
efforts to identify overbillings for hospital inmate medical care.

3

METHODOLOGY

To accomplish our audit objective, we gained an understanding of internal control over
matters described below and evaluated the design of the internal control. We then performed
further audit procedures consisting of tests of control effectiveness and/or substantive
procedures that provide evidence about our audit objectives. Specifically, we interviewed
personnel, observed operations, reviewed policies, analyzed accounting records, and
examined documentation supporting recorded transactions and balances. We also hired a
vendor that specializes in medical recovery audits to review 10 medical claims for possible
overbilling. We applied a judgmental approach to our sample of medical claims. As a result,
we were unable to project our results to the population.
As a basis for evaluating internal control, we applied the internal control guidance contained
in professional auditing standards. As discussed in the standards, internal control consists of
five interrelated components: (1) control environment; (2) risk assessment; (3) control
activities; (4) information and communication; and (5) monitoring.
We conducted this audit in accordance with generally accepted government auditing
standards applicable to performance audits. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our finding and conclusion based on our audit
objective.

4

RESULT AND CONCLUSION

We determined that the Division can benefit from focused recovery audit efforts to identify
overpayments in inmate medical care. These items are described in the Audit Finding and
Response section of this report. Management’s response is presented after the finding. We
did not audit the response, and accordingly, we express no opinion on it.

5

AUDIT FINDING AND RESPONSE

Division Can Benefit from Focused Recovery Audit Efforts
The Department of Public Safety’s Division of Adult Correction (Division) can reduce its
inmate medical costs by performing focused recovery audits of hospital medical claims.
An auditor-initiated review of 10 of the largest hospital claims 1 identified about $105,700
in overpayments made to eight hospitals during the past fiscal year (see appendix). The
amount paid for the 10 claims totaled about $1 million, representing an overpayment of
10.6 percent. The Division did not previously identify these or any other overbillings
because it does not perform externally focused recovery audits of hospital charges.
Overpayments Identified
Auditors contracted with a vendor that specializes in recovery audits of medical claims to
review 10 of the largest hospital claims submitted to the Division during the fiscal year
ending June 30, 2012. The contractor used its analytic software and physician reviewers
to assess selected claims, the underlying itemized billing detail, and associated medical
records. Medical records for each episode of care were reviewed by a licensed and boardcertified physician.
The contractor’s review found approximately $105,700 in overpayments within the
10 claims. Overpayments occurred because of separate billings that are normally part of a
larger service, 2 charges for services provided with no clear patient benefit, and duplicate
charges.
Not realizing nor suspecting the claims included excessive billing, the Division paid the
hospitals based on the bills received.
The overpaid amount for each of the 10 claims varied considerably. Five claims had no
overpayments while four other claims had overpayments of more than $20,000 each (see
appendix).
In early January of 2013, the contractor contacted and presented its analysis to each
hospital. Hospitals were given the opportunity to respond to the questioned charges and
the contractor adjusted their challenges where appropriate. One hospital has not yet
responded to the charges challenged by the contractor.
Since this audit was limited to 10 of the largest claims (about $1 million), the results
cannot be projected to the total population of 893 hospital claims (about $14 million) the
Division reported it paid during the fiscal year.

1

Auditors targeted some of the largest claims because they offer more potential for a higher overpayment. The
Division paid approximately $5 million for the top 100 episodes of outside hospital care.
2
Examples of items that are part of a larger service include charging for drawing blood and a lab test or charges
for oxegyn for a patient in surgury or on a ventilator.

6

AUDIT FINDING AND RESPONSE

Division Should Look for Overpayments
By law, the Division is required to explore medical cost containment methods. 3 Medical
recovery auditing is a widely used cost containment practice used to identify and recover
improper payments made due to errors such as:


Administrative non-compliance (non-covered items, duplicate payments, ineligible
recipients, etc.);



Intentional (fraudulent) and unintentional billing errors; and



Inappropriate or unnecessary services.

Large payers of medical claims, such as health insurance companies and Medicare,
commonly use externally focused recovery audits (hospital bill audits) to detect and
recover overpayments of medical claims.
As noted in a previous audit by the State Auditor, 4 the Division could not identify these
overpayments because its existing recovery audit efforts do not include audits of hospital
bills for the legitimacy of the claims.
Recommendation:
The Division should use the results of this audit to pursue and recover the overpayments
identified.
The Division should contract with a professional recovery audit firm to enhance its
existing recovery audit effort. The Division should focus its recovery audit efforts on
larger claims to maximize the cost benefit of its recoveries. The Division should pursue
and recover overpayments identified.
Agency Response:
The Department is in agreement that the Division of Adult Correction (DAC) can benefit
from a system that will eliminate overpayments and provides a mechanism for auditing
payments on large claims.
Currently, it has not been determined the extent to which overpayments occur. The
Department agrees that recovery of overpaid claims is important, and therefore is focused
on contracting out the claims management process to a contractor who has a system
designed to prevent overpayments from occurring.
A Request for Information (RFI) was sent to potential vendors who are experts in claims
management processing. The results from that RFI are due back by March 6, 2013. The
Department will interview several firms to obtain information on how to implement a

3
4

Session Law 2010-31 section 19.6.(e)
Division of Adult Correction, May 2012

7

AUDIT FINDING AND RESPONSE

third party claims management processing firm, and how the firm’s system can most
efficiently and effectively be audited for recovery of overpayments.
Obtaining that information will guide the Department in choosing the best method of audit
recovery. The Department plans to use audit recovery techniques to audit claims.

8

APPENDIX

The table below shows the claims reviewed by the contractor. The claims were selected using
a non-statistical sample, so analysis is limited to the sample items only and should not be used
to make any broader conclusions about the hospitals or other episodes of care. Auditors and
their contractor did not audit the quality of care provided by these hospitals and express no
opinion of the care provided.
Claim
1
2
3
4
5
6
7
8
9
10

HOSPITAL A*
HOSPITAL B
HOSPITAL C
HOSPITAL D
HOSPITAL E
HOSPITAL F
HOSPITAL G
HOSPITAL D
HOSPITAL C
HOSPITAL H

$
$
$
$
$
$
$
$
$
$

Billed
162,986.50
68,441.70
301,869.25
295,738.01
102,765.37
204,924.60
188,089.07
149,306.31
135,406.16
118,911.83

$
$
$
$
$
$
$
$
$
$

Paid
76,603.66
27,376.68
211,308.48
207,016.61
92,488.83
130,266.85
53,825.59
104,514.42
94,784.31
36,351.64

$1,728,438.80 $1,034,537.07

$
$
$
$
$
$
$
$
$
$

Overpaid
22,230.71
0.00
22,786.47
34,799.25
0.00
0.00
0.00
24,322.69
1,535.36
0.00

$ 105,674.48

* Hospital has not responded to potential overpayments as of February 25, 2013.

9

ORDERING INFORMATION

Audit reports issued by the Office of the State Auditor can be obtained from the web site at
www.ncauditor.net. Also, parties may register on the web site to receive automatic email
notification whenever reports of interest are issued. Otherwise, copies of audit reports may be
obtained by contacting the:
Office of the State Auditor
State of North Carolina
2 South Salisbury Street
20601 Mail Service Center
Raleigh, North Carolina 27699-0601
Telephone:

919/807-7500

Facsimile:

919/807-7647

__________________________________________________________________________________________
This audit required 585 audit hours at an approximate cost of $48,969. The cost represents 0.35% of the
approximately $14 million in total expenditures subjected to audit.
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