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Kentucky’s largest state contract is with a non-profit corporation providing medical services to Medicaid recipients in the Louisville area. But a scathing state audit is raising serious questions about the contract.

Medicaid was created in 1965 to provide medical services for the poor and disabled. It’s a federal/state partnership, with Washington putting up most of the money. But Medicaid costs have skyrocketed, and even with the federal match, Kentucky now spends over $5 billion per year on Medicaid services.

In 1997, hoping to control some of the costs, Kentucky contracted with a Louisville-based, managed-care provider called Passport Health Plan. Passport now provides medical services to 164,000 Medicaid recipients in 16 Louisville-area counties. No other region in the state has a similar service.

But State Auditor Crit Luallen believes Passport has lost sight of original cost control goals.

“Auditors found that Passport staff traveled frequently, stayed in luxury resorts, used limousine services, ate expensive meals and purchased numerous gifts – all with funding received from Medicaid, and many without a clear business purpose,” said Luallen.

Revealing the contents of a 229-page state audit, Luallen says Passport amassed cash reserves of almost $77 million – even after distributing $30 million to its original investors, including the University of Louisville, Jewish Hospital and Norton Healthcare.

“I believe this organization, as it grew and as it achieved more financial success – generating excess reserves – treated itself more like a business model than a public agency,” said Luallen.

In recent years, the non-profit spent $14 million on consultants, $1 million on lobbyists, and gave two executives huge salaries and bonuses. And that’s not all, says Luallen.

“There are sponsorships for a Kentucky Derby Festival 2009 inflatable character sponsor – $10,000,” said Luallen. “Our point is, this is an organization that receives money to provide medical services to the poor and disabled.”

But Luallen says the audit found no criminal wrongdoing. Passport’s parent company, University Health Care, agrees with some parts of the audit, disagrees with others, but says it receives the report “in a spirit that strives for improvement.”

Health and Family Services Secretary Janie Miller promises the cabinet will do a better of job of overseeing the $800 million annual contract.

“What’s important to us is that Medicaid dollars be spent wisely,” said Miller. “The taxpayers deserve that these dollars be used to support health care services to Medicaid recipients.”

Gov. Steve Beshear agrees.

“Those are all taxpayer dollars, every last one of them,” said Beshear. “And those dollars need to be spent where they belong, which is delivering services to Medicaid recipients. And if they’ve got extra money after they do that, then it ought to come back to the state so that we can spend it in other areas.”

Seconding that is Rep. Jimmie Lee, D-Elizabethtown, who says there should be language in the contract stipulating the return of excess funds.

“All Medicaid comes out of a finite pot,” said Lee. “And for every dollar that we spend out of that pot for anything that’s not appropriate for the acuity of those eligible’s, that means that that provider down in Maysville or somewhere, he has to do without that money.”

The audit does not evaluate the quality of healthcare services provided by Passport, but the program is ranked the 13th best Medicaid plan in the nation, in terms of access to care, overall member satisfaction, prevention services and treatment.