Legislators are appalled over the results of an audit reporting the state Medicaid system is losing millions because of an outdated system.

The state audit released Tuesday found that the Utah Department of Health's Bureau of Program Integrity, which checks for fraud, waste and abuse within the state Medicaid program, is mismanaged and failed on several occasions to follow policy regarding cost-saving methods.

"This is the group supposed to be the watchdog to catch fraud, and we find out they're the most inefficient organization," House Speaker David Clark said at the Legislative Management Audit Subcommittee Tuesday afternoon. "They didn't follow statute. They didn't follow their own guidelines."

The legislative auditor general estimated the state is losing $20.2 million in funding it could recover in its Medicaid program, including $5.8 million from state coffers, because of an ineffective, decades-old, cost-recovery tool. The federal government provides the bulk of Medicaid funding.

Health officials disagree with the audit's findings.

"Implying that if we were doing our job correctly we could pick up an extra $20 million is most unjustified," said Dr. David Sundwall, the health department's executive director. "It's just not possible. They'll be very disappointed if we notch up our efforts and it doesn't turn out that high."

The Surveillance and Utilization Review System, programmed in 1980 and last updated 21 years ago, processes and reviews inappropriate Medicaid payments, but the audit found it doesn't examine 62 percent of providers. The Bureau of Program Integrity administers the system, which reported 9,029 inpatient claims reviewed. However, in an accuracy check, the audit found the system missing about 78 percent of inpatient records.

"Inefficiency and ineffectiveness are hampering cost-recovering efforts," audit supervisor Kade Minchey said in the committee meeting. "The system goes in there and looks for discrepancies and anomalies, such as a physician billing 200 times on one day, but it only looks at 38 percent of providers. We believe they could improve cost recovering from the 1.5 (percent) to 1.7 percent range to 3 percent by our recommendations."

Auditors said improving cost-recovery methods by about 1.5 percent would bring in $20.2 million of funds wasted on fraudulent and unnecessary medical procedures.

Sundwall disagreed, estimating the return of an improved system would be between $1 million and $9 million.

The legislative committee approved a motion for auditors to review the Bureau of Program Integrity and gather statistical information to back up numbers gathered from data sampling.

Health officials said they're already looking into an updated system, which would cost about $200,000 plus $127,000 annually for maintenance, with federal aid to resolve repeated errors made in the current program. They also are waiting for legislative approval to use funds intended for study of a new system.

Auditors also reported that nurses and other health officials ignored basic policy regarding prior authorization, a technique used to review Medicaid expenditures before services are provided to prevent unnecessary spending. The audit stated that the Medicaid program was wasting about $700,000 by authorizing unnecessary medical procedures.

The audit found that nurses have been disregarding policy and approving certain studies and requests "based on personal judgment." In 2008, for example, nurses approved 65 circumcisions, which costs the Medicaid program up to $3,000 each, without consulting a review committee.

"Usually circumcision is a non-covered service, but if there's a medical emergency, like if a baby is diagnosed with a dangerous infection, it will be allowed," said Michael Hales, director of the health department's Division of Health Care Financing. "It appears that in a few select cases, some nurses (agreed to it) themselves."

Hales said the health department has already began reorganizing for better cost-effectiveness and organizational efficiency, including requiring physicians to review all prior authorization cases.

House Speaker Clark, R-Santa Clara, and other committee members still expressed concern over the problems revealed in the report.

"The Medicaid program is meant to help people who need it most," he said. "This is the largest single entity that spends money in the state of Utah. I was most disappointed. This is the first audit I've seen that has six chapters of issues. I'm still not comfortable with their written and stated response."

Auditors showed how an updated analytical search system has worked for Healthy U, an infant-care program at the University Hospitals and Clinics, and could work for the Bureau of Program Integrity by comparing a provider's billing practice against normal billing practices, detecting payment errors and recovering accurate data — saving millions of dollars over time.

e-mail: lgroves@desnews.com