Cardinal Innovations Healthcare Solutions is a giant in a very specific field. It’s responsible for administering $682 million in taxpayer money to Medicaid recipients in 20 counties in need of mental health treatment, developmental disability services and those seeking treatment for addictions.
All told, some 850,000 North Carolinians rely on Cardinal for these services each year. Yet even with its large footprint and patient population, Cardinal has gone relatively unnoticed by the general public. That changed this year after a series of scandals, audits and questionable spending led state officials to take over the organization in mid-November.
There are a lot of twists and turns in this saga -- and a lot of questions, allegations and claims that we still are investigating. In the meantime, here’s a quick explainer of Cardinal itself and the scandal that has played out over the last few months. One key factor here is the salary of Cardinal’s now ex-CEO Richard Topping. You can find a timeline of his raises and other key moments in this story at the bottom of this page.
1) What exactly is Cardinal Innovations Healthcare Solutions?
Cardinal is what’s known as an Local Management Entity/Managed Care Organization (LME/MCO), a type of organization created by North Carolina state law in the 2011 legislative session. These organizations are not for profit companies but they’re not a standard nonprofit either. LME/MCOs are a quasi-governmental agency working on contract with the state. Their employees are in the private sector but are still subject to specific public sector rules (such as CEO salary, more on that below). LME/MCOs act like an health insurance company for a specific population with specific needs: Medicaid recipients who qualify for behavioral health services such as mental health care, developmental disabilities services and/or substance abuse treatment. They also serve a similar role for certain segments of the uninsured and homeless population. There are six similar organizations across the state.
2) Where does Cardinal get its money?
The vast majority of Cardinal’s budget comes from federal, state and county tax dollars. In 2016, the organization received $682 million in tax dollars. Here’s the breakdown:
The bulk of that money, $587 million, comes from the federal Medicaid system.
The next largest portion, $84 million, comes from the state health department's division of Mental Health, Development Disabilities and Substance Abuse Services.
$7.2 million comes from the 20 counties Cardinal serves.
And the smallest amount of money, $4.2 million, comes from a federal grant.
The state gives LME/MCOs such as Cardinal a lump sum each year to cover the costs of behavioral health services the organization's "members" receive.
In turn, Cardinal is responsible for making sure that money covers the cost of care. In other words, Cardinal is on the hook for any cost overruns but is also able to keep any money left unspent. As of October 2017, Cardinal reported $140 million in their unreserved "fund balance," meaning money the organization had saved over the years. Cardinal was the first LME/MCO in the state, and through a series of mergers, it has grown to become the largest. This combination of longevity and size has allowed Cardinal to grow that "fund balance."
3) How did Cardinal begin?
Cardinal has gone through a few name changes and iterations since its inception. Back in 2005, it was called Piedmont Behavioral Health and was picked by the General Assembly to run a pilot program seeking to control costs while ensuring quality of care. It served Medicaid patients in five counties: Cabarrus, Davidson, Rowan, Stanly and Union. The idea was that the PBH would take over the role of state officials and review, coordinate and authorize services. The pilot was deemed successful, and lawmakers expanded the program to the rest of the state. Hence LME/MCOs were born.
4) How does Cardinal do managed care differently from the state’s old model?
Before Cardinal and LME/MCOs existed, the state was responsible for managing behavioral healthcare. When the state Department of Health and Human Services managed the care, they did so in a fee-for-service system. That means the government would just pay for each doctor's appointment or whatever other services people needed. There wasn’t a limit on the amount of dollars one person could spend.
Under the LME/MCO or "managed care" Medicaid model, Cardinal and the other six similar organizations designate a certain amount of money per person. And that money can be spent on a range of services. These limits were implemented as way to control costs.
THE SCANDAL AT CARDINAL
5) Why did the state take over Cardinal?
Deep inside the law that governs Cardinal and North Carolina’s other LME/MCOs is a clause that reads: ‘‘In the case of serious financial mismanagement or serious regulatory noncompliance, the Secretary may temporarily remove an LME function after consultation with the Joint Legislative Oversight Committee on Health and Human Services.” This clause is at the heart of the state’s takeover of Cardinal. The Secretary here means the head of North Carolina’s Department of Health and Human Services, currently Mandy Cohen.
On Nov. 27, Cohen sent a letter to lawmakers stating that she was triggering this clause. At 3:30 pm that same day, DHHS officials showed up unexpectedly at Cardinal’s headquarters with a letter saying they were taking over the organization, firing the Board of Directors and Cardinal’s CEO Richard Topping. The reason stated was serious financial mismanagement.
6) What was Cardinal doing wrong?
Cardinal’s now former CEO and some of its former board members say they did nothing wrong. The state sees it very differently. Officials point to a series of audits to back up their case. The first, compiled by State Auditor Beth Wood, came out in May. That audit found that Cardinal, among other things:
- Spent tax dollars on lavish trips for its board of directors and company parties.
- Gave Cardinal’s CEO Richard Topping a $12,000 yearly car allowance and paid for his vehicle to be professionally cleaned every month.
- Paid Topping, more than $635,000 in salary and bonuses, three times the amount allowed under state law.
But the audit also faulted North Carolina’s Office of Human Resources for not enforcing the LME/MCO salary limit.
Cardinal acknowledges the findings but said they were still abiding by state law. But this audit spawned other audits by DHHS. And that is important to note since DHHS controls Cardinal’s contract.
7) What did DHHS find?
The second audit backed up the first and added context. North Carolina’s other six LME/MCOs were not paying their CEOs as much. The chart is from the DHHS second audit.
In addition, the second audit found very generous severance packages for CEO Topping and 10 other key Cardinal officials.
What we know about the severance packages comes from the audits. Since Cardinal employees are private-sector employees their contracts are not public information.
According to the audit, CEO Richard Topping’s severance package stated he could get between two and three years at full salary even if he quit so long as some unusual triggers were in place: such as regulatory changes made by the state, a change in the board of directors or any changes in Cardinal’s revenue.
The other 10 key Cardinal employees could also get two to three years in severance if they quit after a change in the organization’s CEO. This arrangement worried state officials since it seemed to imply Cardinal’s leadership team had more of an allegiance to the CEO than the organization they led. Or, as Dave Richard, North Carolina’s Deputy Secretary of Medical Assistance put it, “If you have an allegiance of the key staff members to one individual, a CEO, not to the board of directors or the organization itself, then we believe you put in jeopardy the ability of that organization to sustain itself."
It is also worth noting the six other similar LME/MCOs didn’t have severance packages that were nearly as generous. According to the second DHHS audit, not all of them even offered their CEO a severance package. But certainly none have severance for anyone other than the CEO.
The second chart from a subsequent DHHS audit compares the severance packages offered by the other LME/MCOs.
They also questioned the amount CEO Richard Topping was getting paid. A followup audit found it was far more than previously thought.
8) So how much was Topping being paid?
Richard Topping made $1,191,671 during Cardinal’s last fiscal year. State law capped his compensation at $204,195. North Carolina’s Office of Human Resources did start enforcing that cap in late September. Cardinal’s board responded by cutting Toppings salary, but he said he would not take the pay cut. This standoff ended on Nov. 17, when the board terminated Topping’s contract (though they voted to let Topping stay with Cardinal for two additional weeks).
But once fired, Topping still received $1.7 million in severance. And three other top Cardinal executives followed Topping out the door. They, too, received severance. All told, $3.8 million was paid to these four individuals.
That was the last straw for the state. They say these payouts amount to serious financial mismanagement by Cardinal and led to the takeover.
9) What happens next at Cardinal?
This is the big question. The state says the takeover is temporary and they will leave once a new board of directors is in place. That could be as early as mid-December. And some of this story is currently playing out in court.
DHHS and lawmakers say they are also trying to recoup the $3.8 million severance payouts, not from the individuals but from Cardinal itself. This means these severance packages could eventually cost Cardinal $7.6 million. That “clawed back” money would come from Cardinal’s administrative budget and not from the pool which covers patient care.
Cardinal has appointed Trey Sutten as interim CEO just a month after he joined the organization. Previously Sutten had worked as the CFO of the Medicaid division of DHHS.
And we’re watching to see if the state takeover will have any adverse effects on the Medicaid recipients Cardinal serves. Both the state and Cardinal say they are doing everything they can to make sure Cardinal’s daily operations run smoothly.
Contact the reporters Alex Olgin and Tom Bullcok at firstname.lastname@example.org or email@example.com or 704-926-3859