The audit, which covered fiscal year 2022, examined supplemental Medicaid payments available to nursing homes owned by local government entities. In Indiana, public county hospitals have acquired nearly every nursing home in the state to access the enhanced payments, making Indiana the largest recipient of supplemental nursing home funds in the country.

Auditors found that state officials failed to report overpayments, erroneously included an extra leap year day and used the wrong federal matching rate. In total, the audit concluded that Indiana claimed $12.2 million in federal payments that did not comply with federal and state requirements.

The audit also found that nearly half of the $1 billion Indiana claimed in enhanced nursing home Medicaid payments went to the county hospitals that owned the nursing homes rather than to the facilities themselves. County hospitals used as much as $205.2 million of that money for their own operational and capital expenses instead of for the benefit of nursing home residents.

The audit does not prohibit Indiana from allowing hospitals to divert the money, but it recommends that state officials explore ways to increase the amount of money nursing homes receive.

"The payments are intended to help the nursing facility care for the beneficiaries, maintain financial stability and support the access to quality services for the resident," Assistant Regional Inspector General Tate Clark said. "When a greater share of those payments is retained by participating facilities, those facilities are better positioned to invest in staffing services and resources that support the resident care."

The audit was prompted in part by investigative reporting that found county-owned hospitals in Indiana had diverted more than $2.5 billion in Medicaid money intended for nursing home care, leaving residents in some of the most poorly staffed facilities in the country. The audit cited that reporting as one reason the inspector general's office targeted Indiana's program.

"Investigative reporting identified potential risks tied to Indiana's supplemental payment practices," the audit says. "The reporting indicates that billions of dollars in supplemental Medicaid payments intended for nursing facilities were diverted to county-owned hospitals over several years, raising concerns about whether these funds directly benefited nursing facility residents as intended."

The financing arrangement has been cloaked in secrecy. Although the money comes from taxpayers, many public hospitals claimed the amount of supplemental Medicaid money they distributed to nursing homes was a trade secret. Only after a public records lawsuit did all of the roughly 20 public hospitals participating in the program provide the information.

In a formal response to the audit, Indiana Medicaid Director Audrey Frenzel did not dispute the $12 million in noncompliant payments. She said the state would consider the recommendation to direct more money to nursing homes but noted that the state is not a party to the revenue-sharing agreements between county hospitals and nursing homes.

"Based on information industry feedback," Frenzel wrote, "the State believes nursing facilities are now receiving a larger share of the supplemental payment than they had been receiving during the years addressed by the audit."

Marcus Barlow, a spokesperson for the Indiana Family and Social Services Administration, which administers Medicaid, said about $9.7 million has been "collected from providers and returned through the appropriate federal reporting process." The state is continuing to verify the status of the remaining amount, he said.

Barlow emphasized that the audit examined payments from 2022, before Gov. Mike Braun took office, and that the state has been addressing the findings throughout the audit process.

"While these issues originated under a prior administration, FSSA remains committed to transparency, accountability, and protecting taxpayer dollars by identifying and addressing waste, fraud, and abuse wherever or whenever it is found," he said.

Supplemental Medicaid programs like Indiana's represent a rapidly growing share of the federal Medicaid budget and have drawn concern from members of Congress.