NC Audit Faults Cardinal Innovations For Excessive CEO Pay, Lavish Trips

May 19, 2017

Hoarding $70 million in Medicaid money that should be spent on patients while spending lavishly on CEO pay and luxury board retreats. These are just some of the findings laid out in a state audit of Cardinal Innovations Healthcare. The company says the spending is justified.

Cardinal Innovations Healthcare is the largest provider of mental health services, substance abuse treatment and developmental disabilities services to Medicaid recipients in the state. It serves 20 counties, including Mecklenburg, Union, Cabarrus and Stanley.

Its budget was just over $682 million in 2016, the vast majority of it from federal, state and county taxpayers.

But Cardinal has not been quick to answer questions and concerns raised by politicians who manage how taxpayer money is spent.

"The General Assembly members contacted me with concerns," explains North Carolina's State Auditor Beth Wood. "tTey had heard about extravagant spending and they couldn’t get any answers from Cardinal."

So Wood and her staff launched an audit nine month ago and released their findings Wednesday.

The report covers two years. It starts with an explanation of the state law creating what's known as local management entities – and this is key throughout the report.

These groups are not for-profit companies. They're not classic non-profits either. Since they're in charge of spending tax dollars, they're legally defined as a part of state government, and subject to a specific set of rules.;

First on that list is CEO pay. The statute mandates a maximum salary of just over $187,000.

Cardinal CEO Richard Topping's current salary is $635,000, and over the past two years he's been paid $1.2 million more than state law allows.

Cardinal contends the Office of State Human Resources gave its approval.

"We submitted our salary plan every year in accordance with guidelines set forth for that purpose. So we have followed everything we are instructed to follow," says Amy Kendall, Cardinal's chief administrative officer.

In response, Auditor Beth Wood says "This is true for all your employees except the CEO."

And the audit faults Cardinal for not knowing or following the law, and the Office of State Human Resources for not enforcing it.

But the CEO compensation issue doesn’t end there. There's also the matter of the CEO's car.

There's an annual $12,000 car allowance, gas is completely covered by a company credit card, and once a month Cardinal pays for someone to clean the CEO's car top to bottom.

That's all part of luring top talent, says Amy Kendall.

Amy Kendall: "We have to provide a compensation and benefits package that is competitive within the markets in which we operate. Which includes the Charlotte and the Triangle market."

Tom Bullock: "You're a member of the C suit at Cardinal. Do you receive these same benefits?"

Amy Kendall: "So my, my exact transportation benefit does not identically match up. But I would tell you my job requirements and travel requirements do not identically match up with the CEO either."

There is also a section of the audit which notes a 2014 contract was awarded to consultant Rory Riley. At the time, Cardinal's current CEO, Richard Topping, was serving as general counsel and dating Rory Riley.

It's a case of nepotism, according to Wood, "and certainly at worst a conflict of interest."

Cardinal says there was a firewall in place, but Wood says }we didn't find any proof of that."

Topping and Riley are now married.   

The audit also raises questions about retreats for Cardinal's board of directors. They went to a luxury hotel in downtown Charleston, SC., in 2015 and 2016. The bill for the 13 board members and their guests: $133,000. At the first retreat in 2015, the board met for just six hours, "which cost Cardinal $9,000 per hour," Wood says.

Cardinal's Amy Kendall counters by saying:

Amy Kendall: "Our board consists of 13 individuals who volunteer their time and come from a cross section of our counties. And so we make every effort possible to ensure we are meeting at a location that is convenient for all of them because they all have full time jobs."

Tom Bullock: "OK, but this is in Charleston, South Carolina. All of your counties, the 20 counties are in North Carolina. It seems there would be a more cost efficient place to be found in North Carolina as opposed to the Carolina to the South."

Amy Kendall: "I hear you on that I think I would focus everybody back to the fact that that total administrative fee amounts to .34 percent of our total administrative spend."

Meaning all the questionable spending found in the state audit is a tiny fraction of Cardinal's overall administrative costs. This amounts to around $2 million over the past two years. That number pales in comparison to the extravagance of some for-profit companies. But Cardinal is spending taxpayer dollars, Wood says. She contends there would be loud calls for an investigation if Cardinal was any other state agency.

"In fact there are calls for investigations for much less than this."

Cardinal's Amy Kendall disagrees, adding, "There was no legislative rule or law that was alleged to be violated."

She refers to Cardinal's contract with the state.

"Our contract with the North Carolina Department of Health and Human Services sets out that we are a prepaid inpatient health plan in accordance with federal rules governing Medicaid."

That would mean Cardinal is more like an independent contractor and not a part of state government, making the rules much less strict.

Cardinal's CEO told the auditors basically the same thing.

But there's a problem with that logic.

Tom Bullock: ”A contract does not supersede state law. If it did then basically anybody who could write a state contract would have more power than the General Assembly and Governor Combined."

Amy Kendall: "Sure.  And I would, I would come back, come back to that with the fact that we are as demonstrated by the audit we are complying with the state laws and regulations."

This report ends with a response from Richard Topping, Cardinal's CEO. He thanks the auditors and writes "We are pleased that the audit findings do not find any type of fraud or malfeasance" in terms of Medicaid bills themselves.

And that is true.

The audit also shows Cardinal has taken in $70 million more dollars of Medicaid money than its spent. This is savings, and federal rules allow Cardinal to keep that money.

There is, however, a wait list for patients seeking the mental health, substance abuse and developmental services offered by Cardinal.

So in her audit, Wood asks if the General Assembly and the federal government should rethink just how much they're paying Cardinal for these services. The North Carolina Senate agrees. Their proposed state budget calls for tens of millions of dollars to be clawed back from companies like Cardinal that are not spending enough of their money from Medicaid on patients.