A blistering audit claims the state's Medicaid system is in such disarray that 1. 4 million pills are missing, thousands of people who are dead or lack Social Security numbers...

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A blistering audit claims the state’s Medicaid system is in such disarray that 1.4 million pills are missing, thousands of people who are dead or lack Social Security numbers are getting millions of dollars in benefits and abuse of mental patients may be going unreported.

The state agency that oversees Medicaid agrees there are some problems — but also says there are some good explanations for many of the findings. With accusations on both sides, it appears an outside mediator will need to sort through the growing dispute and help determine what reforms, if any, are needed.

Draft findings from the state Auditor’s Office were released yesterday by the Department of Social and Health Services (DSHS), which manages the $6.1 billion annual health program for the poor. DSHS also offered its explanations for the findings.

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State Auditor Brian Sonntag said earlier this week he has been forced to “disclaim” the entire Medicaid system after DSHS staffers deliberately obstructed audit efforts, making the report incomplete. A disclaimed audit means the auditor did not get enough information to reach an opinion, because the information was either withheld or nonexistent.

That unusual label is a black mark against the state with deep ramifications, said Doug Porter, who heads the state Medicaid system. For instance, it could cost the state money by lowering its bond rating on financial markets.

DSHS Secretary Dennis Braddock said this week that his staff did not interfere, and the audit “falls short” of professional standards. Yesterday he called for the federal Office of the Inspector General to intervene.

Despite not completing their report, state auditors were able to come up with 22 findings that paint a troubling picture of the Medicaid system:

• Drugs, including Vicodin and Percocet, were mishandled at four institutions for people with developmental disabilities. In all, the institutions could not account for 1.4 million pills worth $529,333, the report found.

Fircrest School in Shoreline, for example, kept prescription drugs in an unlocked safe, and some drugs disappeared. “Losses may not be detected in a timely manner, if at all,” the auditor wrote.

• Medicaid paid more than $180,000 for elective surgery in 2003, including money for sex-change procedures such as penile implants, breast enlargements and reductions, and ear piercing, auditors said.

Porter disputed the amount, saying it was based on a faulty sample of just 12 cases.

Medicaid does pay for sex-change operations under a rule requiring coverage for “demonstrably medically necessary” services, Porter said.

His office has paid for three or four such operations since 2001 — flying at least one patient to Florida for the surgery.

Other states have lost lawsuits after declining such surgery, Porter added.

But Mindy Chambers, a spokeswoman with the auditor’s office, said that when auditors asked DSHS to produce authorizations for the procedures, the department could not. DSHS later provided some of the authorizations, according to the report.

• Mental hospitals Western State and Eastern State do not have the required system to report allegations of patient abuse — including neglect and financial exploitation — to either Aging and Disability Services or a Medicaid fraud unit, the report says.

In its response, DSHS agreed to start reporting such cases to the fraud unit.

• As many as 45,000 people in the Medicaid database lack Social Security numbers, normally a requirement for treatment, according to the auditor. A sample indicated about two-thirds were valid patients. But Medicaid paid about $22 million in questionable claims to the remaining patients, the auditor estimated.

Porter said there were reasons for the problem. The public mental-health system does not routinely collect Social Security numbers for patients involuntarily committed to state hospitals, he said. Other payments may be going to foster children without numbers, he said.

• In a six-month period, Medicaid paid $73,654 to medical providers for services to 71 dead people, according to the auditor. Medicaid largely is dependent on health-care providers to report a client’s death, the report found.

DSHS acknowledged the death of one Medicaid patient and agreed with the auditor that it needs a better system of tracking deaths.

In reviewing the audit, Porter said, the Medicaid system is not as bad as it might appear.

“The auditor has been chewing on things for years, with repeat findings,” Porter said. “We’ve made the case about what we’re doing and why. For them to keep coming up with the same finding I think is a disservice.”

But Chambers said it is time for action.

“This is serious and it needs to be taken seriously,” she said, adding that large amounts of public money are at stake.

Nick Perry: 206-515-5639 or nperry@seattletimes.com

Jonathan Martin: 206-464-2605 or jmartin@seattletimes.com