Unauthorized executive compensation, high-end board retreats and “unreasonable spending could erode public trust” in Cardinal Innovations Healthcare Solutions, according to a state Auditor’s report released Thursday.

Cardinal oversees behavioral health providers that serve more than 850,000 enrollees in 20 counties, including Alamance, Davidson, Davie, Forsyth, Rockingham and Stokes in the Triad.

Cardinal took over CenterPoint Human Services of Winston-Salem on June 1, 2016, as part of a state effort to reduce the number of managed care organizations or MCOs to three or four.

The report was requested by legislators in February 2016 “relating to Cardinal operating outside of its statutory mission and extravagant or excessive spending.”

The audit comes as Cardinal is trying to gain the approval of state Health Secretary Dr. Mandy Cohen to acquire Eastpointe Human Services, which covers 12 counties in Eastern North Carolina.

The audit also criticized the Office of State Human Resources for failing to properly oversee salary compensation — at $635,000 nearly three and a half times the state recommended maximum — paid by Cardinal’s board of directors to executive director Richard Topping.

The state office is responsible for approving any executive compensation above the average of peer officials for a state entity. Auditors determined $1.2 million in salaries to Topping and his predecessor Pamela Shipman “was paid without proper authorization” since July 2014.

The audit comes after the state House voted 109-0 on April 6 to approve a bipartisan bill that restricts the salary and compensation that top executives of a behavioral health MCO can be paid. A co-primary sponsor is Rep. Donny Lambeth, R-Forsyth.

The bill has not been heard in the Senate Rules and Operations committee since being submitted April 10.

At the heart of antagonistic give-and-take responses between Cardinal and state auditors is Cardinal’s role as a state government entity. Several times the auditors said in their response to Cardinal’s response that it was making “inaccurate assertions.”

Meanwhile, Cardinal and Topping view the agency as an independent contractor as part of state Medicaid reform, gaining financial and business flexibility beyond those of other MCOs.

That included being able to retain about $70 million in Medicaid savings from fiscal years 2014-15 and 2015-16. Topping has said Cardinal is performing in accord with what legislators have asked it to do.

State Auditor Beth Wood said Thursday that Cardinal “is not independent of the state ... and it is definitely responsible to the General Assembly.”

“Its whole independent contractor claims have been taken out of context, and they are being misleading when they say they are,” Wood said.

The distinction is critical given that as a political subdivision of the state, Cardinal’s oversight contracts are subject to approval by the state health secretary. The secretary can remove the Cardinal board and replace the executive director for poor performance with short notice.

Cardinal’s official audit response said it has followed Office of State Human Resources guidelines for executive compensation, including an annual submission of compensation plans for approval.

Topping said in a brief letter to Wood he was pleased “there were no findings regarding any type of fraud or malfeasance” in the audit.

Audit findings

The audit disclosed Cardinal spent money, including before Topping became executive director, to explore strategic opportunities outside of its core mission, including attempting to provide services to veterans on a local and national scope.

Topping was promoted to executive director with the apparent forced retirement of Shipman in April 2015. His starting salary was $260,000 — the same as Shipman — and about 38.8 percent higher than the $187,364 maximum established by the Office of State Human Resources for the job.

By comparison, a study by N.C. Health News determined the average salary of the other six MCO executive directors is about $200,000.

Cardinal’s board of directors raised Topping’s salary to $400,000 in June 2015, to $516,000 in October 2015 and to $635,000 in July 2016. At the current amount, Topping’s salary was determined to be unauthorized by state guidelines by $447,636.

During a heated Nov. 29 state oversight committee meeting on Medicaid reform, a bipartisan group of legislators and former Health Secretary Rick Brajer targeted Topping’s potential $1.2 million annual compensation.

Topping defended the compensation as justified in part because Cardinal represents the consolidation of six entities.

“We have gone from 2,000 mostly government employees to 800 non-government employees, so the cost to the state has been less over time,” he said. Cardinal’s 2015-16 annual report — released Monday and the first since Topping became executive director — lists 617 employees.

Cardinal Chairwoman Lucy Drake said in April that Topping has requested his salary return to $400,000, which the board has approved.

Legislators, analysts and statewide advocates dispute Topping’s assessment that its employees are non government.

“The arrogance and lavishness reflected in the audit belie the overworked and underpaid care providers and coordinators, and come on the wings of crippling sadness to those who wait years and years for services,” said Bill Donohue, a local developmental-disabilities advocate.

Public money

State Republican legislative leaders have expressed concern about the agency’s discretionary spending patterns.

Cardinal gets 85 percent of its funding from Medicaid monies, including $567 million in fiscal 2014-15 and $587 million in fiscal 2015-16. It also got $83.8 million in state funding and $7.2 million in county funding in its last reported fiscal year.

The audit cited nearly $500,000 in “unreasonable” non-core spending, including board meetings and retreats, Christmas parties and perks for Topping.

Cardinal said “it approves 98 percent of all the health-care services our members request.”

However, Democrat legislative leaders have cited cost cuts affecting Cardinal’s services to its most vulnerable clients.

The leaders and advocates have decried Cardinal’s failure to spend its surplus to significantly reduce the number of individuals who have been waiting several years for enhanced developmental disabilities services, including 162 in Guilford County and 137 in Forsyth County who have waited more than 10 years.

The audit determined that part of Cardinal’s bonus goals involves administrative savings.

“However, bonus awards based on organizational achievement, such as cost reduction, run the risk of incentivizing Cardinal reducing the utilization of services or rates paid to providers,” auditors said.

The audit’s recommendations include that Cardinal should “consult and collaborate” with the legislature “before taking any actions outside its statutory boundaries.”

Auditors said state health regulators should consider disallowing and requesting reimbursement for any excessive salary expenditures to Topping.

"Cardinal serves North Carolina's most vulnerable citizens with taxpayer money," local advocate Mary Miller said. "This audit shows they have failed both communities.

"As a parent, I am heartsick at the greed and selfishness shown by Cardinal leadership.

"I plead with all stakehoiders to hold Cardinal responsible for the problems found in this audit by speaking out."

rcraver@wsjournal.com 336-727-7376 @rcraverWSJ